During the summer of 2021, I looked at the illicit trade that had started to spin out of control in Australia in the wake of the pandemic.
In my August 2021 article ‘Illicit Tobacco Trade Down Under Goes Local’, I discussed how the combination of a high tax and high regulation environment, coupled with existing strong domestic illicit tobacco growing operations and supply chain disruptions, had created the perfect storm, inadvertently fueling the growth of the illicit tobacco market. Increasingly, criminal syndicates are seizing on this opportunity, capitalizing on the vast profit margins and the demand for cheaper cigarettes.
The latest data at the time showed that illicit trade had grown to over 20% by 2020. In response, the Australian government established the Illicit Tobacco Taskforce (ITTF), a multi-agency group combining the operational, investigative and intelligence capabilities of the Australian Border Force, Australian Tax Office, Department of Home Affairs, Australian Criminal Intelligence Commission, Australian Transaction Reports and Analysis Centre, and the Commonwealth Director of Public Prosecutions.
But, as I have discussed previously and across various articles, once an illicit market has been created it becomes very hard to suppress. This article is intended as an update to the Australian illicit tobacco market, law enforcement activities, notable seizures, and recent developments in the fight against illicit tobacco in Australia.
The illicit market continues unabated
Since my last article, Australia continues to grapple with a relentless battle against illicit tobacco activities. With criminal networks exploiting the high tobacco taxes and strict regulations, the illicit tobacco trade has flourished, posing significant challenges to law enforcement agencies.
In a recent report, the Australian Border Force (ABF) advised that the illicit tobacco market continues to still account for over 20% of all tobacco consumed in the country. This is corroborated by a recent news report stating that illicit trade in Australia is still well above 20%, and even as high as 25% in Queensland.
The illicit tobacco trade in Australia therefore continues to evolve. Not only do criminal syndicates distribute chop-chop (which is illicit whites or unbranded product made locally in Australia), but they are also – now that borders have reopened – trafficking significant quantities of illicit cigarettes from China into the country.
The ABF investigation did not specify if the cigarettes were produced in China or simply transshipped, however investigative reports by The Organized Crime and Corruption Reporting Project have shown that the massive annual production volume of 2.3 trillion cigarettes of the Chinese Tobacco Monopoly Administration is fueling illicit cigarette trafficking operations across the globe.
In an additional twist, local crime groups are buying grey market, illicit whites or chop-chop and repackaging them into counterfeit plain packaging, after procuring plain packaging sleeves. Until recently, Australian law had included a loophole that allowed the importation of counterfeit plain packaging sleeves legally. This loophole is now closed, but it will be interesting to see if this tactic persists.
In addition, and even more concerning, the increase in illicit activity has been accompanied by an increase in violence and other crimes. Over the last few months there have been increasing reports, especially in Melbourne, about assassinations, arson, and shoot-outs in connection with the illicit tobacco trade. According to law enforcement, several transnational crime organizations from the Middle East and Asia – and even local bike gangs – are all involved in these activities.
Recognizing the urgency to curb this growing criminal enterprise, law enforcement agencies across Australia have stepped up their efforts to dismantle illicit tobacco networks. In the past year, a series of operations and investigations have been carried out, some yielding significant results.
Australian Border Force (ABF)
The ABF has been at the forefront of combating the illicit tobacco trade in Australia. In the last 12 months, the agency has conducted numerous operations, leading to several noteworthy seizures.
One of the most significant was the interception of a shipping container at a major port, which was concealing millions of illicit cigarettes destined for the black market. The estimated street value of the seized cigarettes exceeded A$10 million ($6.5 million).
Australian Federal Police (AFP)
Collaborating closely with the ABF, the AFP has intensified its efforts to disrupt the illicit tobacco supply chain. Through targeted investigations, it has dismantled several criminal networks involved in the production, distribution, and sale of illicit tobacco products.
In one operation, a clandestine tobacco factory was uncovered, resulting in the seizure of thousands of counterfeit cigarette packets and the arrest of multiple individuals involved in the illegal operation.
State and territory police
Law enforcement agencies at the state and territory levels have also been actively involved in combating illicit tobacco activities. Joint task forces, comprised of police officers, health officials, and tax authorities, have been established to coordinate efforts and share intelligence. These task forces have conducted raids on illegal tobacco outlets, resulting in the confiscation of large quantities of illicit cigarettes and the prosecution of offenders.
Notable seizures and impact
The relentless efforts of law enforcement have led to significant seizures of illicit tobacco products, disrupting the supply chains, and denting the profits of criminal networks. Over the past year, multiple seizures have taken place across the country, showcasing the scale of the illicit tobacco trade.
In one operation in Sydney, authorities seized over 3 million illicit cigarettes, worth an estimated A$5 million. The operation not only dismantled a major criminal network but also disrupted the distribution of illicit tobacco in the region, safeguarding public health and government revenue.
As part of Operation Harvest Home, authorities dismantled a large-scale illicit tobacco syndicate operating in south- east Queensland. The ABF executed 11 search warrants across the Gold Coast, seizing nearly 3 million illegal cigarettes. The law enforcement actions included raids on storage sheds and rural safe houses allegedly used to stockpile chop-chop. They also seized A$5 million worth of illegal nicotine vapes.
In Melbourne, a joint operation between the AFP and state police resulted in the closure of an underground factory capable of producing millions of counterfeit cigarettes each month. The factory was equipped with sophisticated machinery and employed a large workforce. The closure dealt a significant blow to the illicit tobacco market and prevented the circulation of potentially dangerous counterfeit products.
In a recent breakthrough, law enforcement agencies made significant progress in dismantling an illicit tobacco delivery driver syndicate. Two individuals were arrested, and multiple search warrants were executed across several locations. The syndicate allegedly operated by recruiting delivery drivers to transport illicit tobacco products to retailers and consumers.
The investigation revealed that the syndicate had been operating for over a year, distributing large quantities of illicit tobacco throughout the country. The arrested individuals were suspected of being key players in the network, orchestrating the logistics and coordinating deliveries. During the operation, law enforcement officers seized a substantial amount of illicit tobacco products, including cigarettes and loose tobacco, along with documentation and electronic devices that may provide further evidence of the syndicate’s operations.
Lessons to be learned and the way forward
As I have discussed before, Australia is one of the most heavily regulated tobacco markets in the world. In its efforts to curb tobacco consumption, Australia has implemented almost all tobacco control measures recommended or prescribed by the World Health Organization (WHO), resulting in a nearly perfect WHO MPOWER score. (MPOWER is a policy package intended to assist in the country-level implementation of effective interventions to reduce the demand for tobacco, as ratified by the WHO Framework Convention on Tobacco Control.)
However, and unfortunately, Australia has sparked a significant illicit market as an unintended consequence of these measures, and as a result has one of the highest illicit trade markets of developed nations.
In my previous criticism of the MPOWER model, I have pointed out that the lack of accounting for illicit trade is a major flaw in the model. Tobacco control policies are only effective if they do not spark significant illicit markets. Illicit markets undermine established and desired public health controls, including the undermining of underage access or establishment of reduced risk products.
Other nations are well advised to review their taxation and tobacco control policies to ensure that the intended effects of discouraging tobacco use are balanced to minimize the unintended consequence of the significant increase or creation of a robust black market.
Because Australia did not take a more measured approach, it now has to execute an aggressive law enforcement suppression strategy. Australia has implemented a suite of enforcement tools, it established the ITTF to provide a comprehensive and cohesive enforcement strategy, and it increased various penalties and prohibited the cultivation of domestic tobacco. Law enforcement units across Australia are aggressively enforcing against all forms of illicit tobacco, from homegrown tobacco (chop-chop) to illicit imports of counterfeit and illicit whites.
However, Australia has still not implemented a tobacco excise tax stamp regime. While 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 quickly verify the authenticity of products. In combination with effective penalties, these become an increasingly powerful tool.
Even more concerning, the Australian government, apparently unwilling to examine or understand the unintended consequences of Australia’s tax policy, announced that tobacco taxes would be raised by 5% a year over the next three years, starting from September. While this increase is intended to fund a public health campaign to reduce smoking and vaping, it is likely to have limited impact in the illicit market. On the contrary, based on history, the illicit market is likely to increase, offsetting any consumption reductions in the legal market.
The initiation, evolution and continued increase of the illicit tobacco market in Australia continues to be a troubling case study on well-intentioned tobacco control strategy gone awry. Not only does the illicit market deprive Australia of billions in tax revenue every year, but it also undermines public health policy.
With 20-25% of the market being illicit, one in 4-5 smokers did not only not quit but are now exposed to product that is being produced in a much less regulated and less controlled environment and that is potentially even more harmful. Illicit trade also undermines crucial tobacco youth prevention efforts by creating new shopping avenues for the underaged.
Australia will be well advised to tackle the illicit market with a multi-pronged strategy to:
Continue enforcement efforts across all levels of law enforcement. As stated before, once an illicit market is firmly established or greatly expanded, it becomes very difficult, very costly, and very lengthy to combat and it will require continuous enforcement pressure.
Australia should look at implementing a stricter licensing scheme for tobacco sellers. Currently there is no license required to sell tobacco products at the retail level, making the sale of illicit tobacco easier and even harder to combat. Australia would likely benefit from a robust licensing scheme.
Finally, and most controversially, Australia should consider a reduction in taxes of the most widely trafficked products, to lessen illicit demand.
To assist Australia in its battle against illicit tobacco, it will be important for the technology industry, government, and law enforcement to develop new joint publicprivate partnerships to constantly examine, adapt, and implement enforcement models, tactics, and technologies to combat the ongoing rise in illicit trade.
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.