KPMG has released its latest annual study on illicit cigarettes in Europe 1, commissioned by Philip Morris Products SA. The study shows that while illicit consumption in the 27 EU member states declined by 0.6 billion sticks in 2023, to reach 35.2 billion, overall illicit consumption in the 38 markets covered by the study rose by 3%, reaching 52.2 billion sticks.
Whereas the previous KPMG study covered the EU, UK, Norway, Switzerland, Moldova and Ukraine, this new edition has extended to six more countries: Albania, Bosnia & Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia.
The study observes that the Europe- wide increase in illicit consumption predominantly came from Ukraine (+1.1 billion cigarettes), the UK (+0.8 billion) and Greece (+0.6 billion). On the other hand, 21 out of 38 markets experienced stable or declining illicit consumption in 2023, with Croatia, Germany, Italy, Latvia, Lithuania, Malta, Poland, Romania, Spain and Sweden recording the lowest volumes.
Had these illicit cigarettes been legally purchased in the markets in which they were consumed, an additional €16.6 billion in excise and VAT taxes would have been raised.
All in all, illicit consumption forms a greater share of consumption across the 38 markets (9.9%) compared to the EU27 (8.3%), primarily due to the scale of illicit consumption in Ukraine and the UK.
The study breaks down illicit cigarettes (or ‘counterfeit & contraband’ – C&C – as the study calls it) into three constituent parts:
1.Illicit whites – cigarettes usually manufactured legally in one market, but smuggled across borders to the destination market, where they have limited or no legal distribution and are sold without the payment of tax.
2.Counterfeit – cigarettes illegally manufactured and sold by a party other than the original trademark owner. As part of the study, counterfeit volumes were identified as such by the manufacturers participating in empty pack surveys (ie. British American Tobacco, Imperial Brands, JT International, and Philip Morris).
3.Other C&C – genuine products other than illicit whites, which have either been purchased in a lower tax country and exceed legal border limits, or acquired without taxes for export to a higher price market for illegal resale.
The study shows that, in 2023, illicit whites reversed a declining trend observed in previous years, increasing by 0.6% to 8.9 billion cigarettes, which represents 17% of illicit consumption across the 38 markets.
Meanwhile, counterfeit products increased by 4.8% to 20.1 billion cigarettes, or 38.6% of illicit consumption, the highest share recorded. While France remained the largest counterfeit end-market, counterfeit levels in that country declined by around 22% in 2023. The overall growth in counterfeit was instead driven by Ukraine, Greece, the UK, Italy, and some smaller markets.
Other C&C, which excludes counterfeit and illicit whites, remained the largest category of illicit consumption and increased by 2.4% to 23.2 billion across the 38 markets. As a result, other C&C now represents 44.4% of total illicit consumption.
One of the likely reasons why other C&C continues to hold the highest share is that, while illicit whites and counterfeits are typically seized in large volumes, other C&C is generally only available through legitimate sellers, often with the relevant duty paid for the original country of purchase. This means it is usually not transported in high volumes, with illicit flows into countries being volumes over and above legal allowances.
This high-frequency, but low-volume approach, sometimes referred to as ‘bootlegging’ or ‘ant smuggling’, makes detection more difficult, and seizures smaller.
There are no better ant smugglers than the French! Indeed, as the EU country with the third highest excise tax, France has by far the highest illicit tobacco consumption, at 16.8 billion cigarettes. The second highest, Ukraine, comes in at only half that quantity.
Although its counterfeit levels have dropped, France’s other C&C levels represent more than half of total illicit cigarettes consumed in the country. This is in large part due to all the cross-border ant smuggling that goes on, given that most of France’s immediate neighbours levy much lower cigarette taxes – and are very easy to travel to by car.
The UK is another huge market for illicit cigarettes, with over one quarter of consumption composed of counterfeit or contraband products. In comparison to France, however, the UK’s biggest illicit problem is counterfeits.
According to UK website Convenience Store, some retailers are now reporting daily, and more blatant, requests from consumers for illicit tobacco and vape products, and retailers are also receiving regular offers to sell illicit product in their store.
The rise in the cost of living has been identified as one of the contributing factors to the increase in illicit trade, which is not helped by the fact that the price of cigarettes in the UK is even higher than in France.
As part of the research process for the KPMG study, interviews were carried out with law enforcement representatives.
The interviews highlighted the nature of illicit cigarette consumption in Europe, and how law enforcement efforts to tackle it are evolving.
The interviews revealed that EU27-based illicit cigarette production continued to move closer to higher price Western European target markets in 2023, due to organised crime groups (OCGs) seeking to shorten and de-risk supply chains to their most profitable markets.
Ongoing geopolitical drivers were also identified as playing a role, with restrictions on the movement of people and goods across the Belarus border reducing illicit flows from a major historical source market, and the ongoing war in Ukraine continuing to disrupt flows to other European markets.
Law enforcement also advised that OCGs are increasingly counterfeiting selected legitimate brands targeting higher priced end-markets and regions. Furthermore, technically skilled OCGs are focusing more on manufacturing (in increasingly sophisticated production facilities), and leaving the distribution of the counterfeit product to other OCGs with an established presence in the end markets.
And a final observation is that several major historical consumption markets for illicit cigarettes are increasingly transforming into transit markets.
In order to tackle these different trends, law enforcement agencies continue to evolve their approach, Including shifting their focus towards preventing the transport of illicit cigarettes to other European markets. Given this change in focus, collaboration across European law enforcement agencies becomes increasingly important.
One would have thought that, given the severity of the illicit tobacco trade in Europe, governments would want to ensure that as many enforcement agencies as possible had access to the tools needed for tackling it.
However, we now hear that police in the UK do not have access to national tobacco track and trace data. Current legislation only allows HM Revenue & Customs and National Trading Standards (which investigates unfair trading practices and illegal business activities) to access the data. Such data would enable officers to immediately check where individual packs came from, thereby linking offenders to their crimes.
This begs the question whether police in EU27 states also don’t have access to track and trace data, even though such data, for each of the 27 states, is contained within a central EU repository.
The ongoing problem of illicit tobacco consumption is not limited to Europe, as demonstrated by the World Customs Organisation (WCO) in its ‘Illicit Trade Report 2023’ 2. According to the report, illicit drugs and tobacco remain the top priorities for customs authorities worldwide.
In 2023, 90 customs administrations reported 40,037 cases comprising 46,844 seizures of alcohol and tobacco products in the WCO’s Customs Enforcement Network (CEN) database. Among these, alcohol products accounted for 2,069 cases, while tobacco products comprised 38,022 cases.
In comparison, the data for 2022 indicate 5,133 cases of alcohol products and 24,693 cases of tobacco products. This represents a 59.7% decrease in the number of alcohol-related cases and a 54% increase in tobacco-related cases. Overall, there was a 35.7% increase in the total number of cases from 2022 to 2023.
These data highlight a growing trend in the number of cases and volume of illicit goods being seized, particularly in the tobacco sector, indicating a persistent and increasing threat from smuggling and other forms of commercial fraud, warns the WCO.
2 -https://www.wcoomd.org/en/media/newsroom/2024/june/wco-releases-illicit-trade-report-2023.aspx
