Tackling the smuggling epidemic on Europe’s eastern borders

Thursday, 24 January 2019 16:08
Mark Steen

Mark Steen is a Brussels based analyst and writer.
Contraband smokes cost the EU an estimated €11 billion a year in tax revenue Contraband smokes cost the EU an estimated €11 billion a year in tax revenue

Last week, Lithuanian border police underscored the enormous problem Europe faces with smuggled cigarettes.
They revealed that smugglers from neighbouring Belarus are strapping cartons of contraband to blocks of ice, attaching GPS blockers and floating them down cross-border rivers to evade customs patrols. Facing such sophisticated tactics, it’s unsurprising that the number of illicit cigarettes crossing the Lithuanian border increased by 45% in 2018, despite the government’s attempts to stem the flow by raising taxes and beefing up patrol units.

As well as creating a nightmare for Lithuania –where one out of six cigarettes smoked comes from illicit stocks—the smugglers are leaving their footprint across Europe. Contraband smokes cost the EU an estimated €11 billion a year in tax revenue, and account for a considerable proportion of the 700,000 smoking-related deaths every year. The EU hopes to stamp out this deadly trade with a brand-new traceability system, tracking each cigarette from factory to consumer. But the major tobacco manufacturers, who have contributed to the illicit trade for years, are now trying to control track-and-trace using their own technology – potentially rendering the entire project worthless.

Until an effective system is put in place, it seems inevitable that smuggling in Eastern Europe will increase. The region presents the ideal conditions for smuggling to thrive: low incomes and high unemployment push people to engage in risky enterprises, and the prevalence of the ‘shadow economy’ means smuggling is normalized. Cigarettes are drastically cheaper on the other side of the EU frontier (a packet costs up to five times as much in Lithuania as in Belarus), and the borders remain extremely porous, with myriad rivers and waterways providing plenty of gaping holes to exploit.

While recent media attention may have fallen on the Belarusian racket, Ukraine has emerged as an even bigger source of illicit tobacco. The conflict-ridden country supplies nearly 5 billion smokes a year to the West; its traffickers have reacted to tougher border checks by using drones and hang-gliders to drop their cargo behind EU lines. In neighbouring Romania, which loses over €600 million a year to tobacco smuggling, participants in the illicit tobacco market talk of earning €1,500 a week - 15 times higher than the country’s minimum wage. With so much money to be made, the smuggling trade will never struggle to find willing couriers.

Easy profit

Far from attempting to stop these traffickers, the major tobacco manufacturers— Philip Morris International (PMI), Imperial, British American Tobacco (BAT) and Japan Tobacco—have actively encouraged them, seeing an easy way to boost market share and undercut the case for higher taxes. Having bought up old Soviet cigarette factories after the fall of communism, they now flood local markets with billions of cigarettes, far outstripping the local population’s ability to smoke them. In Ukraine, for example, manufacturers such as Philip Morris have actually increased production despite a significant drop in the number of Ukrainian smokers. Analysts suspect the manufacturers simply sell their surplus product to wholesalers, fully aware that it will end up on the black market. 

The industry—which has been found actively complicit in smuggling before—naturally claims it has changed its ways. The various manufacturers have previously agreed smuggling-related settlements with Brussels worth around €3bn, pledging to make “seizure payments” whenever their supplies are stopped at customs. They’ve paid millions to anti-smuggling enforcement agencies such as Interpol, and even provided intelligence to help the EU’s anti-smuggling campaign.

But the manufacturers’ true intentions are revealed by the way they have reacted to the EU’s track-and-trace plans. Announced in the Tobacco Products Directive of 2014, the system is mandatory under the World Health Organization’s Framework Convention on Tobacco Control. Proponents believe a global network of traceability systems, independent of industry, can help secure the tobacco supply chain, but the manufacturers have vehemently criticized them. In fact, they’ve sought to impose their own “solution”, Codentify, as the bedrock of the EU system.

Red flags

Critics believe Codentify is woefully inadequate. For one thing, it isn’t designed to store or track product codes, undermining the entire purpose of the system. More importantly, Codentify is intrinsically tied to the tobacco industry. It was initially designed by PMI, before being licensed—for free—to the rest of the ‘Big Tobacco’ quartet. Although it has now been sold off to a Swiss firm, Inexto, the technology is protected by patent and PMI retains much of the intellectual property, preventing any effective due diligence. The WHO does not regard Codentify as being in any way acceptable.

Despite these red flags, the manufacturers insist Codentify is perfectly fine and any alternative system would be both costly and unpredictable. They’ve spent fortunes pushing the scheme through a network of third parties, selecting their own ‘independent’ organizations to lobby for the system’s effectiveness. Even Inexto, critics claim, is a front, set up by former PMI employees to ensure Codentify remains under their control.

After months of debate, it appears that the industry might be about to get its way. Last month the European Commission appointed Swiss firm Dentsu Aegis Network to provide a secondary data repository in its new track-and-trace system, a key role which will require the company to set up exchange specifications for the whole traceability chain. In 2017 Dentsu acquired digital communications firm Blue Infinity, which has worked with three of the leading tobacco manufacturers and even developed its own traceability system – modelled on Codentify.

With the first tranche of track-and-trace set to come into effect in May, EU officials have just five months to put this right. They need to push back against the industry and build a genuinely independent tracking system, as required by the WHO. With smugglers sending drones, gliders and ice packs into the EU, the bloc needs to adopt a united front against them.
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