As pointed out by a study published in Journal of Business Research in their analysis of business strategies in the counterfeit market,¹ those involved in the supply of illicit cigarettes are generally anxious to avoid detection by authorities and therefore must be careful to hide their operations. This makes it difficult for large numbers of consumers to be aware of and purchase their products. While threat of seizures is unlikely to be a major concern, fine and jail times for individuals is likely to reduce the supply of people willing to be involved and increase the costs demanded by those who are involved, thus increasing the likely cost of the product. For potential suppliers who are willing to consider trading in illicit tobacco products and have the means to do so, the decision about whether or not to actually engage in such activity is still not an automatic one. Individuals are likely to consider not simply the price they could charge for products in the illicit market but rather the profit that they could expect to make once costs are deducted from income.² The greater the expected rewards and the lower the costs, the more likely an individual prepared and able to be involved in illegal activity is to actually engage in such activity.^3-5

The prices that suppliers can charge consumers for illicit products are determined partly by the prices of products in the legal market. But the prices suppliers can charge are also affected by the perceived consistency of quality and supply of the illicit goods and the costs to the consumer in terms of time and travel and any perceived risks associated with purchase (e.g. contact with those involved in crime, fear of detection by authorities and so on).^1,6

The costs for the supplier to be involved in the illicit tobacco market include:

• Direct costs such as money required to bribe officials or other operators in the illicit trade
• Opportunity costs such as salary forgone from other possible employment and other potential use of capital (growing land, equipment, factory space, boats and the like)
• A judgment about the probability of detection in relation to the magnitude of penalties and social opprobrium of being prosecuted.

These three considerations are likely in turn to be affected by factors relating to the nature of international trade, transport and distribution channels, cultural norms relating to bribery and corruption, government diligence in record keeping, investment in law enforcement and the individual’s attitude to the prospect of jail time.³

13A.6.1 Nature of international trade

Illicit trade can be more attractive in situations where:

• Restrictions on the supply of imported tobacco (through the imposition of quotas, tariffs and other non-tariff barriers) lead to significant price differentials between imported and locally manufactured tobacco
• Tobacco products intended for export are significantly cheaper than those intended for local consumption.

Detection of illicit cigarettes is more difficult where there is a large volume of international trade with only a small percentage of cargo subject to checks.

Empirical research conducted in 2017 emphasised the importance of special economic zones, particularly free trade zones, in the illicit tobacco trade known to predominantly involve smuggling of illicit tobacco products and illicit manufacture of tobacco products within zones themselves.⁷ The Financial Action Taskforce of the Organization for Economic Co-operation and Development estimated that there were about 3000 free-trade zones in 135 countries in 2009.^8,9 In 2014, the World Customs Organization (WCO) launched its first global operation into the illicit tobacco trade, codenamed Gryphon, which confirmed the importance of free trade zones in the smuggling of cigarettes.

‘Consignments arriving in these zones are subsequently repacked into other containers, enabling the illicit cigarettes to be lost or disappear. They then leave the zone as low-value goods (e.g. textiles) either mis-declared or concealed in other shipments’¹⁰

The International Consortium of Investigative Journalists documented cases of smuggling through free-trade zones on the island of Aruba, and  in Columbia (Beelman 2000 cited by IARC)³ and the US Financial Action Task force identified smuggling through China to the US through a free-trade zone in Hawaii.⁸

13A.6.2 Logistical factors

Evasion can sometimes occur in situations where people suddenly find themselves under financial pressure and in possession of the immediate means to be involved in the illicit market. This occurred in Australia when tobacco companies reduced prices paid and then stopped buying from Australian tobacco growers, some of whom then turned to growing chop-chop.¹¹ It also occurred after China joined the World Trade Organization and the products of small regional factories in China were no longer competitive.¹²

Costs of production of cigarettes are quite small, and technological advances in printing has made counterfeiting easier than it used to be. However, obtaining raw materials (particularly the tobacco) and moving stock out of premises would be difficult to conceal in most locations.

Products that need to be cleared through major shipping ports are more likely to be scrutinized by customs officials than are products travelling by road or rail. Distribution of illicit products is likely to be easier in countries with highly developed illicit markets for other products and a well-developed network of street sellers and small market stall holders.

13A.6.3 Poor record keeping

A loose export–import recording system and lax work practices and supervision reduce the likelihood of detection of illicit tobacco.

13A.6.4 Law enforcement perceived as lax

Evidence reviewed in the International Agency for Research on Cancer³ suggests that the relationship between perceived risk of prosecution and likelihood of engaging in the illicit tobacco trade is not a linear one. Rather there may be a threshold interception rate beyond which the rate of smuggling rapidly declines.

13A.6.5 Poverty

In some developing countries and among some impoverished groups in high income countries, some smugglers may be undeterred by very high levels of risk if the return from smuggling exceeded the likely lost earnings due to time in jail. However in wealthier countries the economics of tax evasion are much more precarious.¹

13A.6.6 Political instability, corruption, war and organised crime

Criminal networks involved in smuggling operate more easily in countries where corruption is high or government controls are eroded by war or political instability, and such groups are well placed to become involved in the illicit tobacco trade. Illicit market cigarettes were an important source of income for people during periods of war in the Balkans.¹³ Using indicators of corruption based on an index created by international non-government organisations, a 2010 working paper by World Bank¹⁴ observed that contraband sales tend to increase not with tax levels or cigarette prices but rather with the degree of corruption in any country.^9,15

References

1. Staake T, Thiesse F, and Fleisch E. Business strategies in the counterfeit market. Journal of Business Research, 2012; 65(5):658-65. Available from: http://www.sciencedirect.com/science/article/pii/S0148296311001032

2. Hoek J, Graham-DeMello A, and Wilson N. Perceptions of illicit tobacco sources following a proposed reduction in tobacco availability: A qualitative analysis of New Zealanders who smoke. Nicotine and Tobacco Research, 2023; 25(7):1348-54.

3. International Agency for Research on Cancer. Chapter 8. Tax avoidance and tax evasion, in Effectiveness of tax and price policies for tobacco control. Lyon, France: IARC; 2011.  Available from: http://www.iarc.fr/en/publications/list/handbooks/.

4. Organization for Economic Cooperation and Development. The economic impact of counterfeiting and piracy. Paris: OECD, 2008. Available from: https://www.oecd.org/sti/38707619.pdf.

5. Parliamentary Joint Committee on Law Enforcement. Chapter 3: Drivers and impacts of illicit tobacco, Illicit tobacco Canberra: Parliament of Australia, 2020. Last update: Viewed Available from: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Law_Enforcement/IllicitTobacco46th/Report.

6. Goodchild M, Paul J, Iglesias R, Bouw A, and Perucic AM. Potential impact of eliminating illicit trade in cigarettes: a demand-side perspective. Tob Control, 2020. Available from: https://www.ncbi.nlm.nih.gov/pubmed/33144495

7. Holden C. Graduated Sovereignty and Global Governance Gaps: Special Economic Zones and the Illicit Trade In Tobacco Products. Polit Geogr, 2017; 59:72-81. Available from: https://www.ncbi.nlm.nih.gov/pubmed/28674465

8. Taskforce TFA. Money Laundering vulnerabilities of Free Trade Zones. Paris: OECD, 2010. Available from: https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/ML%20vulnerabilities%20of%20Free%20Trade%20Zones.pdf.

9. OECD. Chapter 5: A  brief overview of illicit trade in tobacco products. Illicit Trade: Converging Criminal Networks OECD. Paris: OECD, 2016.

10. World Customs Organization. WCO announces the results of its first global operation against illicit trade in tobacco, 2014, World Customs Organisation. Available from: https://www.wcoomd.org/en/media/newsroom/2014/october/wco-announces-the-results-of-its-first-global-operation-against-illicit-trade-in-tobacco.aspx.

11. Australian Taxation Office. Dealing with tax crime. Compliance program 2007-08. Illicit tobacco growing and trading. 2008 Canberra: ATO, 2007. Available from: http://ato.gov.au/content/downloads/87592_CP_Crime.pdf.

12. Shen A, Antonopoulos GA, and Von Lampe K. ‘The Dragon Breathes Smoke’ Cigarette Counterfeiting in the People's Republic of China. The British Journal of Criminology, 2010; 50(2):239-58.

13. Hajdinjak M. Smuggling in southeast Europe. The Yugoslav wars and the development of regional criminal networks in the Balkans. Sofia, Bulgaria: Centre for the Study of Democracy, 2002. Available from: http://unpan1.un.org/intradoc/groups/public/documents/untc/unpan016836.pdf.

14. Merriman D, Yurekli A, and Chaloupka F. How big is the worldwide cigaertte smuggling problem, in Tobacco control in developing countries.  Prabhrat J and Chaloupka F, Editors. Oxford, UK: Oxford University Press; 2000.

15. Bank W. Curbing the epidemic: governments and the economics of tobacco control. Tobacco Control, 1999; 8(2):196-201.