Europol’s Serious and Organised Crime Threat Assessment 2021 (SOCTA-21) provides a detailed account of the dramatic impact that the COVID-19 pandemic has had on organized crime, illicit markets in general and the illicit tobacco market in the EU in particular.
The report is aptly subtitled ‘A Corrupting Influence: The Infiltration and Undermining of Europe’s Economy and Society by Organised Crime’, as it highlights how organized criminal groups have systemized the use of corruption and the abuse of legal business structures to advance their illicit activities.
Europol highlights in its report that criminal organizations are increasingly producing their own illicit tobacco products, rather than just smuggling genuine products. The manufacturing of these products often occurs in the EU, in modern and more professional production facilities, which often have been established to be within proximity to intended destination markets.
The illicit tobacco production facilities are often located in large warehouses in remote industrial zones within larger metropolitan areas, close to transportation hubs like motorways, border crossing points or ports. This strategic placement of these facilities allows organized criminal groups easy access to Europe’s extensive railway system, which they use to smuggle illicit products across the EU.
The production facilities have taken on increasing sophistication and are often self-contained.
For example, in 2020 the Spanish Civil Guard dismantled an illegal tobacco production manufacturing facility hidden in a bunker four meters underground. According to Europol, the facility incorporated all aspects of cigarette manufacturing and provided housing and living quarters for its workers. Over 2 million counterfeit cigarettes were seized, and the facility was believed to have been in operation for almost two years at the time of the seizure.
Spain is only one of many examples. In 2019, Dutch tax authority FIOD (Fiscale Inlichtingen en Opsporings Dienst) raided an illegal tobacco factory in West-Betuwe, south of Utrecht. The enforcement action resulted in the arrest of 13 suspects and the seizure of 3.6 million cigarettes and 32 tons of tobacco. The factory was working at full operation when law enforcement conducted the raid. The tax loss from this operation was estimated at €6 million.
This shift in the illicit tobacco trade will have a significant impact on law enforcement models, industry partners and technology providers going forward. When illicit markets shift from global systems – where an illicit or counterfeit product is manufactured overseas and illegally imported – or from global trafficking of genuine products, to localized sophisticated production facilities, the enforcement models need to be localized as well.
This shift to localized production models is a move that had been predicted by illicit trade experts, industry leaders and this author for several years when warning of the emergence of illicit, or cheap, whites – which are cigarettes that are produced by certified manufacturers but whose tax is unpaid at the moment of sale.
Illicit whites similarly are produced locally, close to their destination markets. The benefits for criminal organizations are obvious. The proximity of production eliminates the need for lengthy global smuggling operations, reduces the risk of detection at ports of entry and simplifies the raw material supply chain.
To combat this new sophisticated localized production model, enforcement will have to adapt its focus to cutting off illicit production, through:
Global track and trace of raw materials – raw materials for illicit cigarette production are widely available across the globe, but several key inputs, including raw leaf tobacco, cellulose acetate (for filters) and cigarette paper, are unique to cigarette production and should be globally monitored and tracked.
Increased funding for localized tobacco enforcement – localized intelligence to identify, investigate and enforce against localized tobacco facilities requires human asset intelligence and boots on the ground. Law enforcement across countries needs to be funded to sustain significant human intelligence.
Registration, limitation, and destruction of production machinery – cigarette production machinery is specialized, and access should be limited to registered industry participants.
Governments need to embark on efforts to catalogue and register existing equipment and then restrict the movement, sale, or disposal of obsolete equipment. Governments should require the destruction of obsolete equipment and ban the resale of old equipment. It is all too often that equipment from defunct legitimate manufacturers or old equipment falls into the hands of illicit manufacturers.
Increased asset seizure and forfeiture authorities – criminal organizations are driven by illicit profits. Disrupting the creation and accumulation of wealth by illicit trade organizations through aggressive seizure and forfeiture laws is the key to disrupting and disincentivizing criminal actors.
Europol refers to these measures as asset recovery and recommends in its report that the EU considerably strengthens its asset recovery regime.
Innovative technology deployment to aid enforcement – deployments of new technologies, such as drones, are needed to help identify production facilities, and new technologies to trace illicit money movements or investigate crypto-currency payments will need to become commonplace.
Comprehensive implementation of tobacco tax stamp programs – while tax stamps themselves won’t stop illicit actors from producing illicit tobacco products, they will provide important tools to prove excise tax evasion and help law enforcement to verify the authenticity of products. In combination with effective penalties, these become an increasingly powerful tool.
Increased penalties and fines for tax fraud, tax evasion, stamp forgery and money laundering – criminal tobacco operations will not be utilizing genuine tax stamps for their illicit operations. As such they will either not apply any tax stamps or apply counterfeit tax stamps.
Increasing and escalating penalties for crimes related to these criminal acts will provide an important deterrent, especially when paired with a strengthened asset recovery regime in the EU.
The COVID-19 pandemic has shown that illicit trade networks are very pliable, resilient, and highly adaptive or innovative. It will be important for the technology industry, government, the tobacco industry, and law enforcement to match their innovations and adaptions by constantly re-examining existing enforcement models, tactics, and technologies to combat these evolving threats.
Sven Bergmann is the founder and CEO of Venture Global and advises brand owners, technology providers and governments on anti-counterfeit strategies, programs and technologies. Send your comments to SBergmann@VentureGlobal.com.
