Smoking out illegal tobacco manufacturers
In just three years more than twenty producers of clandestine cigarettes have been rolled up. And recently we had another hit. Following a large-scale investigation by FIOD and Customs, at the end of October we dismantled a criminal organisation that produced large quantities of knock-off brand name cigarettes. Customs has put the fight against this kind of illegal manufacture and trade in excise goods high on its agenda, while working in close collaboration with FIOD, Europol, and the European anti-fraud agency OLAF.
More and more illegal tobacco products are being produced in the Netherlands. In 2018 about 160 million illicit cigarettes and 100,000 kilos of illicit tobacco were seized. Excise fraud committed with tobacco products is an international problem. According to OLAF’s research, the annual loss to excise revenue in Europe amounts to 100 billion euros. One in ten cigarettes on the European market is illegal. The total turnover from unlawful tobacco production in this part of the world runs to tens of billions of euros each year.
Within Europe, Poland is the frontrunner when it comes to the production of fake cigarettes and so-called ‘illicit whites’: no-name cigarettes or cigarettes with an imaginary or unregistered brand name. In that country about 35 underground tobacco manufacturing workshops are uncovered each year. “And yet we are seeing a transfer of the production of tobacco products to Western Europe”, says Gert Vorsteveld, policy advisor for excise duties at Dutch Customs. “The Netherlands is an attractive country for setting up shop because the cigarettes can be smuggled out by land and sea in every direction. A lot of these illegal smokes are transported to England and Ireland, where excise taxes are relatively high.”
Besides combatting illegal production, Customs is also actively fighting the traditional smuggling of cigarettes via seaports and airports. “In recent years we often saw entire containers loaded with this type of contraband, for example from Asia”, Vorsteveld explains. “Nowadays we are increasingly seeing more cigarettes shipped here in smaller quantities. Another phenomenon our service is encountering is the growing trade in illegal cigarettes via the Internet. By offering the supply online, the bar for buying illegal tobacco products has been significantly lowered.”
Track & trace
Since 2013 the European Commission has published various directives regarding the negative effects of smoking on human health as well as the fight against illegal import, export and transit shipment of tobacco products. A crucial component of the most recent European tobacco directive of 2018 (TPD-2) is the introduction of a track and trace system for tobacco products that have been produced in Europe or are destined for the European market. Starting on 20 May 2019, every pack, carton, mastercase or pallet of cigarettes or cut tobacco will be given a code with information about the location and date of production and the destination. This requirement applies to every entrepreneur in the European tobacco chain, from the first point of supply to the last link in the chain – the retail trade. Traceability is particularly intended to make it easier to trace illegal commercial traffic.
According to Vorsteveld, there is no doubt that the directives issued by the European Commission have increased awareness about tobacco fraud as an urgent problem requiring rigorous counter measures. “Illegal tobacco products are hugely damaging to legitimate companies, governments and public health. Legal entrepreneurs are severely disadvantaged by unfair commercial practices, and the European member states are missing billions of euros in excise tax. Research has shown that clandestine cigarettes have higher concentrations of nicotine, tar and cadmium than legally produced tobacco products. Tackling criminal production and trade aligns seamlessly with Customs’ strategic goals: promoting the payment of tax revenue, protecting our society, and strengthening the competitive position of European trade and industry.”
Partners in Smoke
In order to more effectively deter tobacco fraud, Customs, FIOD and the Netherlands Public Prosecution Service are working closely together. At the end of 2015 a joint project was set up called Smoke. “In this context we aim at attaining a number of objectives”, project leader André van Duinen of FIOD explains. “Stopping the production of illegal drugs and the illegal drug trade, dismantling organised criminal rings, getting a grip on those who are facilitating tobacco fraud, uncovering the cash flows and appropriating illicitly earned assets: for all these approaches international collaboration is essential.”
In 2019 the working method devised by Smoke was structurally imbedded in the organisation of FIOD. The investigative service set up a Smoke cluster, which is primarily devoted to information and analysis. This team generates and investigates signals that expose the risk of tobacco fraud and develops them into investigations worthy of further research, in collaboration with the FIOD regions. Whether or not these (criminal) investigations are actually pursued is decided using an established weighting procedure. If a case receives the go-ahead, then the designated FIOD regions go into high gear. “The Smoke cluster fulfils a special role in guiding and advising the investigations”, Van Duinen explains. “In order to achieve a strong information position for the Smoke cluster it is crucial that we continually exchange the results of our research. Without a strong information position we can’t make an appropriate contribution to the joint operations with our European partners in the chain.”
The current Smoke cluster consists of 14 staff members. Customs is represented by one data analyst and one contact person. “Participation in the Smoke cluster really brings a lot of added value to our service”, declares customs officer Martin Saelman, who has taken the role of liaison. “With our improved information position we can enforce excise laws more effectively. In dealing with signals of tobacco fraud within the Smoke cluster, we always weigh the options when deciding between a criminal-law approach or a fiscal-law approach which levies extra duties and fiscal penalties.”
High Value Targets
In recent years European collaborations in the area of combatting fraud have received a tremendous boost, including at the operational level. For example, Europol has set up a taskforce that is exclusively focused on fighting tobacco fraud. This taskforce is occupied in defining High Value Targets: companies and persons who are guilty of producing and dealing in tobacco products illegally. Quite often foreign criminal rings play a large role here, even if in the past there have also been Dutch networks involved.
The cross-border nature of tobacco fraud is not the only reason the Dutch government is seeking European cooperation. Hidden behind clandestine tobacco production is a whole secret world of human trafficking and exploitation. Not infrequently people from South America, Eastern Europe and Asia are discovered at illegal tobacco workshops, sometimes living and working in miserable circumstance. Action is then also taken against such illicit practices.
Together with the international partners in the chain, the Smoke cluster is also working on the final development of the so-called barrier model. Saelman: “Our goal is to map out the entire production chain: from harvesting tobacco leaves to the production, distribution and dealing in of illegal tobacco products. As soon as all the links have been brought into focus we take a look at what kind of barriers we can erect in order to frustrate the entire process. Customs’ efforts are particularly directed at smuggling, sales points for excise goods, and production locales. The focus of the Smoke cluster is on criminal associations, their money flows and assets.”
The World Health Organisation is also closely involved in the fight against tobacco fraud. As long ago as 2005 the international WHO Framework Convention on Tobacco Control (FCTC) entered into effect. This was followed in 2018 by the Protocol to Eliminate Illicit Trade in Tobacco Products. It is expected that the Netherlands will sign this treaty in 2020. The FCTC is provided with a licensing requirement for equipment used to manufacture tobacco products. “This requirement will help us in tracking down and dismantling illegal tobacco workshops”, Vorsteveld explains. “In order to apprehend someone in a fiscal or criminal offence, the machines have to be operating and in production at that moment of discovery. By instituting a licensing requirement it is no longer necessary to catch someone red-handed. That means we will have more legal means available to tackle illegal tobacco producers.”
Report suspicious shipments
The business world can also make a contribution to tackling wrongdoing, Vorsteveld and Van Duinen assert in unison. “Wherever possible we are already working in partnership with the legitimate tobacco sector in the fight against illegal trade and brand fraud. But companies that, for example, store or transport tobacco products can also make a contribution. What we’re calling for is this: be watchful and alert, and always report suspicious shipments to Customs. Our service will then immediately come by to investigate what is going on.”