[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                      SMUGGLING IN THE OSCE REGION



                               before the



                             FIRST SESSION


                             JULY 19, 2017


                       Printed for the use of the
            Commission on Security and Cooperation in Europe

                             [CSCE 115-1-4]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                           

                       Available via www.csce.gov

 26-481 PDF                 WASHINGTON : 2017       
 For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
  Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001                           



               HOUSE                          SENATE


CHRISTOPHER H. SMITH, New Jersey,  ROGER F. WICKER, Mississippi,
Co-Chairman                        Chairman
ALCEE L. HASTINGS, Florida         BENJAMIN L. CARDIN, Maryland
ROBERT B. ADERHOLT, Alabama        JOHN BOOZMAN, Arkansas
MICHAEL C. BURGESS, Texas          CORY GARDNER, Colorado
STEVE COHEN, Tennessee             MARCO RUBIO, Florida
RICHARD HUDSON, North Carolina     JEANNE SHAHEEN, New Hampshire
RANDY HULTGREN, Illinois           THOM TILLIS, North Carolina
SHIELA JACKSON LEE, Texas          TOM UDALL, New Mexico
GWEN MOORE, Wisconsin              SHELDON WHITEHOUSE, Rhode Island



                      Vacant, Department of State
                     Vacant, Department of Commerce
                     Vacant, Department of Defense



                      SMUGGLING IN THE OSCE REGION

July 19, 2017


Hon. Roger F. Wicker, Chairman, Commission on Security and 
  Cooperation in Europe..........................................     1


Dr. Louise Shelley, Director, Terrorism, Transnational Crime, and 
  Corruption Center, George Mason University.....................     3
David Sweanor, Adjunct Professor of Law, University of 
  Ottawa.........................................................     5
Marc Firestone, Senior Vice President and General Counsel, 
  Phillip Morris International, Inc..............................     8


Prepared statement of Hon. Roger F. Wicker.......................    21
Prepared statement of Hon. Christopher H. Smith..................    23
Prepared statement of Dr. Louise Shelley, Director, Terrorism, 
  Transnational Crime, and Corruption Center, George Mason 
  University.....................................................    24
Prepared statement of David Sweanor, Adjunct Professor of Law, 
  University of Ottawa...........................................    29
Prepared statement of Marc Firestone, Senior Vice President and 
  General Counsel, Phillip Morris International, Inc.............    31



                      SMUGGLING IN THE OSCE REGION


                             July 19, 2017

           Commission on Security and Cooperation in Europe

                                             Washington, DC

    The hearing was held at 9:30 a.m. in room 106, Dirksen 
Senate Office Building, Washington, DC, Hon. Roger F. Wicker, 
Chairman, Commission on Security and Cooperation in Europe, 
    Commissioners present: Hon. Roger F. Wicker, Chairman, 
Commission on Security and Cooperation in Europe; and Hon. John 
Boozman, Commissioner, Commission on Security and Cooperation 
in Europe.
    Witnesses present:  Dr. Louise Shelley, Director, 
Terrorism, Transnational Crime, and Corruption Center, George 
Mason University; David Sweanor, Adjunct Professor of Law, 
University of Ottawa; and Marc Firestone, Senior Vice President 
and General Counsel, Phillip Morris International, Inc.

                     COOPERATION IN EUROPE

    Mr. Wicker. This hearing of the Helsinki Commission will 
come to order. Welcome, and good morning to everyone.
    The Commission is mandated to monitor the compliance of 
participating states with the consensus-based commitments of 
the OSCE. Today's hearing of the Commission focuses on the 
multidimensional issue of illicit cigarette smuggling in the 
OSCE region.
    Illicit cigarette smuggling is a significant transnational 
threat. I would say again it is a significant threat: ongoing 
illicit trade helps fund terrorist activities, it fosters 
corruption, and it undermines the rule of law.
    European Commission and KPMG studies estimate that around 
$11.64 billion is lost every year to this criminal activity in 
the European Union alone, where counterfeit cigarettes are 
particularly prevalent and account for nearly 30 percent of the 
articles detained by EU customs.
    This issue involves two of the three dimensions of the 
Helsinki Final Act, the first being hard security and the 
second being economic issues.
    Illicit cigarette smuggling's link to hard security is 
evident in a recent report issued by the Department of State in 
conjunction with the Departments of Treasury, Homeland 
Security, Health and Human Services, and Justice. The report 
emphasizes what I have already said in this opening statement, 
and I quote: ``Illicit tobacco provides a significant revenue 
stream to illicit actors,'' unquote, and, quote, ``fuels 
transnational crime, corruption and terrorism.'' So, for these 
reasons, it's important that we be here today. And the report 
declared that the global illicit trade in tobacco poses a 
threat to national security.
    Building upon former commitments, the OSCE established a 
Charter on Preventing and Combating Terrorism in the aftermath 
of the September 11, 2001 attacks in New York and Washington. 
That charter targeted four strategic areas for specific action: 
policing, border control, trafficking, and money laundering. I 
hope today's witnesses will consider how measures taken 
pursuant to that charter are being applied to the illicit trade 
in tobacco and tobacco products.
    With regard to economic issues, illicit trafficking in 
cigarettes is a major source of corruption. International 
criminal organizations that engage in tobacco trafficking 
generate profits that are then available to corrupt public 
officials and subvert the rule of law. The Department of State 
estimates that the worldwide tax loss from illicit tobacco 
smuggling is between $40 billion [dollars] and $50 billion 
annually. This is money that is lost to taxpayers, further 
weakening state institutions while enriching and empowering 
criminal elements that are themselves a threat to those 
institutions. These are serious challenges in many emerging-
market economies within the OSCE, and I hope we will hear more 
today from our witnesses about the scope of the threat and the 
measures that can be taken to combat it.
    Underlying all of these problems is the fact that there is 
enormous money to be made in illicit tobacco trafficking. An 
OECD report issued last year concluded that cigarettes present 
high profit margins, and are among the most commonly traded 
products on the black market due to the relative ease of 
production and movement along with low detection rates and 
penalties. The OECD cited many reasons for the growth of the 
illicit trade in tobacco. Today we will engage in an in-depth 
examination of those reasons and identify potential responses.
    To help us do that, we have three very distinguished 
    Dr. Louise Shelley is a professor and the director of the 
Terrorism, Transnational Crime, and Corruption School of Public 
Policy at George Mason University. She is a leading expert on 
the relationships among terrorism, organized crime, and 
corruption, and she also specializes in illicit financial flows 
and money laundering. I assume you specialize in the study of--
[laughter]--money laundering. Dr. Shelley serves on the Global 
Agenda Council on Illicit Trade of the World Economic Forum, 
and she was the first co-chair of its Council on Organized 
Crime. Dr. Shelley has frequently testified on Capitol Hill 
regarding issues that impact national security.
    Professor David Sweanor is an adjunct professor of law at 
the University of Ottawa. Professor Sweanor has pioneered 
efforts to reduce cigarette smoking in Canada and around the 
world. As part of those efforts, he has worked with groups such 
as the World Health Organization [WHO], World Bank, and the Pan 
American Health Organization, the latter of which honored him 
with the Public Health Hero Lifetime Achievement Award. 
Professor Sweanor has previously testified before the Canadian 
Parliament and the U.S. House, and the Senate, and is before 
the Helsinki Commission for the first time.
    Mr. Marc Firestone is the senior vice president and general 
counsel for Phillip Morris International. In that capacity, he 
helps guide the company's global response to the illicit trade 
in tobacco.
    We hope to accomplish three things at today's hearing. 
First, we hope to draw attention to the problem of illicit 
tobacco trafficking--how it helps fund terrorist activities, 
foster corruption, and undermine the rule of law--have I said 
that enough times?--and why the United States should provide 
leadership in this fight. Second, we hope to learn more about 
best practices in both the public and private sectors to 
minimize illicit tobacco trafficking, and deny the financial 
proceeds of such trafficking to terrorist and criminal groups. 
Third, we hope to increase an understanding of how illicit 
tobacco undermines public health policy.
    So thank you to these distinguished members of today's 
expert panel for joining us today, and I look forward to our 
discussion. Perhaps we can begin with testimony by Dr. Shelley.


    Dr. Shelley. Thank you for this great honor, and it's a 
great pleasure to speak again before the Helsinki Commission. 
One of my first congressional testimonies was on the issue of 
human trafficking before this Commission, and with Congressman 
Smith's support.
    I've been following this issue of cigarette smuggling and 
illicit trade for a long time, and it has taken me to many 
different locales. More than a dozen years ago I was in 
Georgia, where our research had shown that there were linkages 
between the illicit cigarette trade and Iraq. And when I talked 
about this in a public meeting, it was one of the first times 
in my research career in which I was threatened. So it tells us 
that illicit cigarette trade is not a benign activity, and 
traffickers will even go after researchers.
    More recently, I have visited the open markets in Paris 
where cigarettes are sold en masse, and France is the 
contraband capital of Europe for illicit cigarette trade. And 
it's hardly surprising that one of the Kouachi brothers, who 
murdered the journalists of Charlie Hebdo, received some of his 
income from the illicit cigarette trade.
    Also, I have visited the markets of illicit cigarettes in 
Italy, which are very much under the control of organized 
crime. So we see very different variations in this problem, but 
many, many elements of it across the OSCE region.
    I've also spoken to investigators in New York who work 
closely with their international counterparts, as there is an 
important crime-terror connection to illicit cigarette 
trafficking in the United States.
    What is important, I think, to point out, beyond your 
opening and very clear remarks, is that there has been a 
problem of a culture of impunity. As I have in my longer 
written statement, the former president of Montenegro won the 
award from the Organized Crime and Corruption Reporting Project 
as criminal of the year one year ago because of his very 
important role in the illicit cigarette trade. So it's not just 
criminals, it's not just terrorists, but it's high-level 
officials that are not just in policing or in the borders but 
at the heads of national governments, that are involved in 
    Beyond this, we need to look at the importance of hubs 
outside the OSCE region and what they're doing in facilitating 
the trade of the illicit cigarettes that move into Europe and 
also into North America. Free-trade zones like the Jebel Ali 
Free Zone in Dubai is absolutely central to this.
    Furthermore, we need to be thinking about illicit cigarette 
trade as not a standalone crime. It converges with the drug 
trade, with wildlife smuggling, trade in counterfeit goods, and 
other crimes. Illustrative of this is a case that occurred in 
the Czech Republic in which the Czech police that were 
monitoring illicit cigarette trade tipped off members of the 
customs police in the Czech Republic to the fact that a 
shipment of rhino horn was about to be arriving in the Czech 
Republic from South Africa. What this tells us is that there is 
a convergence of different crimes, and also that the cigarette 
trade often serves as what I call venture capital for other 
forms of serious crime, so that the money that you get from 
this petty trade that you can start with leads you to even 
higher revenue streams that can have very corrosive impact.
    Also, we need to be thinking about the role of companies in 
facilitating this trade. In my written statement, I cite a 
problem that British American Tobacco cited and Imperial 
Tobacco with Facebook in the U.K. where posts on Facebook were 
facilitating the delivery of cigarettes in that country, and 
the same thing has been found by PMI in France. And yet, there 
has been very limited response from the new media companies 
that are facilitators of this trade. And just as we've put 
pressure on the new media to be countering terrorist 
recruitment, we also need to be focusing on how they are 
facilitating illicit trade.
    Part of the reason that this is going on is that there is 
an absence of a law enforcement response. And in my last book, 
which was called ``Dirty Entanglements: Corruption, Crime and 
Terrorism,'' I had a whole chapter on the funding of terrorism 
through what I called underpoliced crime. And cigarette trade 
figured in that chapter because of the absence of resources and 
the absence of an adequate law enforcement response.
    So the prevalence of illicit cigarette trade reveals the 
limits of our strategies to counter illicit trade. In my 
statement, I've provided some text from my forthcoming book 
that I'm just completing on illicit trade. And in it, I show 
how there is a merger of problems that we're facing, especially 
in Europe today and in our community of the OSCE, with the 
illicit cigarette trade.
    And I start off with a case of going to the Museum of 
Immigration in Paris and listening to a broadcast on earphones 
to a migrant describing his problems in Europe. And he 
describes how he arrived illegally in Italy and can't find 
employment. He traverses Italy. He goes to France and, finally, 
winds up in Marseille, and says: ``In Marseille, I'm now 
working--I'm working as a cigarette seller.'' But what it 
doesn't say is that he's working in the illicit cigarette 
markets, where 40 percent of the sales of cigarettes in 
Marseille, a hub that also connects with terrorism, are illicit 
cigarettes. And so, as Europe fails to integrate its masses of 
illegal migrants, it is also fomenting the problem of illicit 
trade because illicit activities cluster where individuals who 
cannot work legitimately work in illicit markets.
    So what do we need to do to address this problem? First of 
all, we need to allocate more law enforcement responses to 
this, and to do the kind of network analysis, analysis of 
hybrids, following the money that is not done enough in 
relationship to this crime. We need to address not just the 
low-level corruption, but the high-level corruption that 
facilitates this trade.
    About 10 days ago, when I was talking about this in front 
of the security assembly of the Annual Security Review of the 
OSCE in Vienna, I talked about these problems of new trends 
which we're looking at. And subsequently, I went to a rollout 
of a publication called the ``Crooked Kaleidoscope--Organized 
Crime in the Balkans,'' which made the same point as I do--and 
I've cited it in my report--that high-level corruption is 
behind this trade in the Balkans.
    We need to require corporations in the new media space to 
focus more on their facilitating role, and that needs to be 
part of a larger effort to focus on public-private 
    And we need to pay more attention to the facilitating role 
of free-trade zones in illicit trade.
    And as a researcher, I suggest that we need to focus much 
more on understanding the illicit flows, the hubs of the trade, 
and the convergence of different forms of illicit trade, 
because insights from one kind of criminal activity can help in 
fighting another.
    We need to work on the harmonization of tax policies on 
cigarettes because it is the discrepancies in pricing that 
provide so many of the financial incentives for participation.
    And we need to provide serious analysis of the optimum tax 
rates on cigarettes that address state revenue concerns, but 
also do not contribute to smuggling. About 10 days ago, I was 
in France and listening to the radio, and it said they need to 
increase their taxes on cigarettes in France to reach 10 euros 
a pack. But there's no analysis of what this will do to illicit 
markets, though the radio commented that they imagine that this 
would increase the problem, where already France is number one 
in Europe.
    So we need to do serious policy analysis that will help us 
address this issue. It is not just a small-scale problem. And 
as you mentioned in the introduction, it is very crucial to 
state revenues, state capacity, and to national security.
    Thank you.
    Mr. Wicker. Well, thank you very much.
    And Mr. Sweanor, you are recognized next. Thank you.


    Mr. Sweanor. Thank you, Mr. Chairman. It's a pleasure to be 
here despite the weather in Washington in July.
    I've worked as a lawyer on public health issues around 
tobacco and nicotine for over a third of a century, and a lot 
of that time has been spent dealing with issues of tobacco 
taxation and then with the contraband trade--monitoring it, 
trying to understand it, litigating on it in order to try to 
deal with the problem. I think there are a few basic facts to 
start with.
    To date, price is by far and away the most powerful tool 
that's been used globally in reducing cigarette smoking. I 
mean, it just completely dwarfs what we've accomplished with 
our other measures. So it is a very, very powerful tool. But 
beyond the elasticity of this--there's the cross elasticity, as 
economists would say--people will move between product 
categories based on differences in price, whether it be between 
different tobacco products or, in this case, between licit and 
illicit products. That's just a reality of the market, and it's 
odd that a lot of people will deny that--either claim that 
price is the single factor dictating whether there's going to 
be a contraband trade or that price doesn't have any impact, 
tax doesn't have any impact, often depending on somebody's 
ideological or vested interest.
    But I think the way to see this is simply as a business. 
People get involved in the contraband trade in order to make 
money. And profitable smuggling really depends on pretty simple 
economics. It's a matter of what's the cost of acquisition of 
the goods, what's the cost of dealing with the goods, and 
what's the profit margin and the size of the market for selling 
those goods?
    Cigarettes create a tremendous opportunity in many places, 
and few as much as what we see in Eastern Europe, where the 
cost of acquisition is very small. If you're manufacturing 
cigarettes, you can usually do it for one or two cents per 
cigarette. There's areas in Central Europe I've been able to 
buy packages of cigarettes for 20 cents, and told by my 
interpreter that I was being ripped off because I was a North 
American. They've very inexpensive to make.
    The costs of--as we've just heard from Dr. Shelley--the 
costs of being involved in the business, the chance of 
apprehension, the penalty should one get caught can be 
extraordinarily low. And the ability to sell those products to 
a largely lucrative market is pretty much unparalleled, because 
for Eastern Europe it's a short trip into the European Union. 
And, as we've heard, the price of cigarettes can be very high.
    So there's a particular problem there. And I think the 
solution, in large part, is dealing with the business 
viability. What can we do that creates a higher cost for 
acquisition? What can we do that increases the cost of dealing 
with the product? And what can we do that reduces the market 
for the illicit products? And that's a matter of things like 
how do we limit the availability of the manufacturing 
machinery, the supplies that are used in manufacturing 
cigarettes and the people who are engaged in that? And there's 
been various measures aimed at trying to do that sort of thing.
    But also, dealing with the supply of cigarettes that are 
just sort of floating around the gray market. I mean, the--
there has been a long history of a huge difference between the 
number of cigarettes legally exported and the number legally 
imported. And that's a key issue to go after. And I've been 
involved in that, with racketeering actions here in the States 
against multinational cigarette companies for products that 
were sort of disappearing and showing up in the European Union. 
And I think that was very successful, because it largely ended 
that trade by changing the economics. It greatly reduced the 
supply of cigarettes that were available.
    We can do more, though, on increasing the cost to the 
business through things like enforcement, increasing chance of 
apprehension, track and trace technology that makes it easier 
to figure out where products came from, trace it back to the 
manufacturer. The penalties that we end up levying, making it 
easier for people to enforce actions, including U.S. law, in 
order to put up the cost for criminals being involved in this 
sort of business.
    And then finally, and in an area that I think is neglected 
and shouldn't be, is what do we do about the demand for illicit 
trade? I think that's worth expanding on, because it's--as I 
say, it's been oddly ignored that unlike most areas of illicit 
trade, the vast majority of people who are currently smoking 
cigarettes are telling us they wished they didn't smoke. 
They're not smoking because they want to. They're smoking 
through some combination of dependence, addiction, and self-
    But mainly, they're smoking because they're not given a 
viable alternative. And so they're buying--if the only 
alternative is legal cigarettes and illicit cigarettes, illicit 
cigarettes are way cheaper and widely available. But the 
challenge that we have, or the ability to address this I think 
is huge, and we're not paying attention to it. That what kills 
people from smoking is the smoke. It isn't the tobacco. It 
isn't the nicotine. It's the smoke. Cigarettes are an 
incredibly deadly delivery system.
    If we met the needs by working with consumers to give them 
better access to alternative products, non-combustion 
products--the vaping products, the heat-not-burn products, the 
smokeless tobacco products, the pharmaceutical products--we 
could probably eliminate much of the demand for illicit trade 
by giving people a viable option that not only makes much 
better economic sense to them--because it can be cheaper, 
because so much of the price of cigarettes is tax--so it can be 
cheaper, but it also can save their lives rather than kill 
    That's a huge possibility. If we made those products 
available, if we allowed people to get accurate information 
about those products, we get to change the market. You know, 
just like we can eliminate the market for snake oil medicines 
by having licensed pharmaceutical products, we could change the 
market by having products that are far harder for people to 
counterfeit and consumers are far less likely to want to buy, 
because we're giving them a viable alternative to cigarettes.
    So I think that that, going after the end consumer, working 
with consumers, would be incredibly important. And we have the 
ability to use policy tools. I co-authored an article in the 
New England Journal of Medicine a couple of years ago, and 
using differential taxes for products with differential risks--
we could be using those types of measures around the world. 
There's no reason to tax the low-risk products. We can affect 
the differentials in marketing, product standards, product 
placement. Give the people who are buying illicit products a 
viable alternative to them.
    But in looking at particular measures, I think that the use 
of existing laws, including here in the United States with the 
racketeering laws, RICO laws--which as I said I've been 
involved with before--to battle the criminal gangs, make it 
easier for the states that are--that are losing such huge sums 
of money to criminal gangs to use U.S. courts as one of their 
avenues for going after the criminal gangs.
    It's very hard for anybody to be involved in widescale 
money laundering without using U.S. banks. That brings them 
within the purview of U.S. law. Get rid of things like the 
Common Law Revenue Rule that was making it hard for any 
government to collect forgone taxes using the U.S. courts. Help 
them go after these criminal gangs. Make it possible to take 
the money away from these gangs, and they'll stop doing what 
they're doing because you've destroyed the business viability.
    Again, non-combustion alternatives. Give people 
alternatives to the sorts of illicit products that they're 
buying now. Recognize that the whole tobacco-free world 
approach that's been taken by U.S. Government agencies has 
unintended consequences. And the unintended consequences 
include that if you don't give people alternatives to 
cigarettes as a product, the alternative they're going to find 
is illicit cigarettes. We have the ability to make real changes 
in those things. And I think it takes some vision. It takes 
some creativity. But the options are available and we can do 
meaningful things to deal in a serious way with a tremendous 
problem that's affecting health, it's affecting revenue, and 
it's promoting criminality.
    Thank you.
    Mr. Wicker. Thank you very much.
    Mr. Firestone, you're recognized.


    Mr. Firestone. Yes, sir. Thank you, Mr. Chairman. Thank you 
very much for holding today's hearing on the illicit tobacco 
trade. As you've said, and as Professor Sweanor and Professor 
Shelley have said, it is indeed a significant problem. And it's 
one that merits, undeniably, this Commission's expertise, 
attention, and 
    In my role as general counsel at Philip Morris 
International, PMI, I'm ultimately accountable for the 
company's compliance programs and our anti-illicit trade 
efforts. And it's, indeed, an honor for me to appear before you 
today on this topic. PMI is the world's leading tobacco 
company. We employ 82,000 people around the world. We do not 
sell products in the United States, but we're among the largest 
buyers of American-grown leaf tobacco, and proud to support the 
livelihoods of farmers in this country.
    The battle against illicit tobacco products concerns both 
the private and the public sectors. And we welcome this hearing 
as further evidence of the determination of the United States 
Government to confront a major social issue. Cigarette 
smuggling exists on a large scale around the world. For 
criminal organizations, there are huge profits. For 
governments, there are huge losses. As you've said, estimated 
at over $40 billion per year. For PMI, we welcome competition, 
and we compete aggressively for market share, while playing by 
the rules.
    But gangs that sell smuggled cigarettes have an illegal 
price advantage versus legitimate companies. They're not 
competing based on product quality or other benefits to 
consumers. Their success comes from rank cheating. Their 
conduct corrodes lawful markets, and robs treasuries around the 
world of billions in tax revenues.
    Here's an example: Often criminals have their own brands of 
cigarettes--not counterfeit, but not legitimate either. And 
what they do is, in country A they make these brands solely to 
sell in the illicit channels in country B. And like termites, 
these illicit brands undermine country B's regulatory framework 
for tobacco products. Termite brands are a form of invasive 
species, and they make it easier for kids to buy cigarettes. 
They are out of compliance with health warning requirements. 
And they are on sale for illegally low prices.
    But smuggling does more than destroy legitimate markets. It 
generates funding for other illicit enterprises, as Professor 
Shelley has said and written, from dangerous drugs to the true 
abomination of human trafficking. So this is not about tourists 
who occasionally take a few extra carton[s] of cigarettes 
through the nothing-to-declare line at an airport. This is not 
a about casual transgressions. It is about a dangerous, high-
profit machine whose activities spread far and wide.
    Now, even as a legal and ethical business, PMI faces much 
controversy. And we certainly don't want to be anywhere close 
to the illicit trade. We've worked hard and invested a huge 
amount of money to put tight controls on our supply chain and 
run our business with keen vigilance to the risks of product 
diversion. We've continually increased our effectiveness 
through advice from leading experts, and through cooperation 
with governments, including, for example, those in Canada, the 
United Kingdom and Italy, as well as cooperation with the 
European Union and European 
    We are determined to be innovative. We are determined to 
remain at the forefront of industry in controlling a supply 
chain. But even the best possible commercial practices cannot 
change a few basic facts. PMI doesn't make or enforce anti-
smuggling laws. We don't police borders. We can't tell other 
companies what to do. So in our view, there has to be an 
integrated, cooperative, comprehensive approach. There has to 
be control of all elements of the supply chain. And this 
definitely includes raw materials to make 
    For example, if criminals can't get the cellulous acetate 
that goes into all cigarette filters, and if they have no 
access to other raw materials, they can't make these termite 
brands. Now, the pharmaceutical industry has seen success in 
controlling drug precursors, such as pseudoephedrine. And I 
believe there are many lessons from that industry in the 
present context. We also need stronger legal deterrence, such 
as those that exist against trafficking in narcotics, wildlife, 
and blood diamonds.
    Legislation on tobacco and the fight against illicit trade 
should include provisions for identifying the worst offenders, 
for freezing their assets, and for imposing far stiffer 
penalties than often exist under current law. Our views rest of 
empirical evidence. Experience in a number of countries has 
shown that aggressive, well-funded enforcement, combined with 
the right laws and sincere cooperation from business can, 
indeed, dramatically reduce illicit trade. My written testimony 
includes more detail on our recommendations, but I hope these 
examples show what we have in mind.
    Now, today's hearing focuses on the OSCE region. But we're 
actually talking about a worldwide problem. And progress 
requires cooperation among regions and nations. PMI supports 
transparent implementation of WHO's protocol to eliminate 
illicit trade in tobacco. We urge international organizations 
to welcome, rather than exclude, the views of all subject 
matter experts including manufacturers, retailers, farmers, law 
enforcement officials, and, of course, ministries of justice, 
finance and health. That's the core group to counter the 
criminality that troubles us all. And I believe the U.S. has a 
great opportunity to show--indeed to lead--the way.
    Mr. Chairman, I, again, thank you for the privilege and 
honor to appear before this esteemed Commission. And on behalf 
of PMI, I pledge our full support to the Helsinki Commission 
and the United States Government as a whole in crushing the 
illicit trade in 
    Thank you, sir.
    Mr. Wicker. Thank you. And thank you all. Without 
objection, the written statements of all three witnesses will 
be added to the record of this hearing.
    Dr. Shelley, I believe you stated that new media is 
facilitating this illicit activity, and that new media 
corporations should be held to account and more requirements 
placed on them. Could you elaborate on that suggestion?
    Dr. Shelley. Certainly. One of the things that facilitates 
deliveries is that people post ``meet at this point, a delivery 
is going to be here,'' on Facebook pages and other forms of 
communication. And I think it's very important that we not have 
criminal facilitation through media. This requires the 
construction of algorithms and other means that are being used 
now, as there has been a focus on countering statements of 
radicalization. There have been efforts by new media companies 
now to invest in this area, which they hadn't before.
    When I talk about corporate involvement, is that they 
cannot have as laissez-faire approach towards things that are 
harmful to society, like messages that recruit for terrorism, 
messages that allow for illicit deliveries. And if there was 
more monitoring of this kind of activity, some of it might go 
into the dark web, but that is not as easy to access as a 
Facebook page.
    Mr. Wicker. And who should do the monitoring?
    Dr. Shelley. I believe that this is part of what we need in 
having what Mr. Firestone talked about as a private 
partnership, because it is incumbent on the new media companies 
to be responsible about what they're posting. We can't have law 
enforcement come and force them to take this off. There have 
been efforts made previously, I know, through corporate 
channels to approach Facebook to be more careful about this 
monitoring, in this climate before terrorist radicalization. 
And this was rebuffed. And I think that we need to understand 
that our social media can be a force for good, but it also 
needs to do much more policing of itself. Just the way I talk 
about, in my book, how platforms are selling counterfeit goods 
without adequate surveillance.
    Mr. Wicker. To be clear, are you advocating a government 
role in enforcement in this--in this area of the new media?
    Dr. Shelley. I wouldn't call it government enforcement. I 
would call it public-private partnership, where the government 
sits down with the new media, just as it's done in the area of 
terrorism, in saying: We have this problem. And we need your 
help, your resources to help do this for the collective good. 
And that's----
    Mr. Wicker. And what agency of the government should do 
    Dr. Shelley. I think it needs to be a combination. I think 
it would be in part the Bureau of Alcohol, Tobacco, Firearms 
and Explosives. It would be Homeland Security. It might even be 
also FBI. It would need to be an intergovernmental working 
group, such as produced that counterterrorism--or, I should 
say--that report on cigarette smuggling and its relationship to 
terrorism that you cited, Chairman Wicker, in your opening 
remarks. That was a coalition of government officials working 
to counter this threat. And I think they need to sit down with 
the private sector, this working group, and point out the 
problems that exist.
    Mr. Wicker. Mr. Sweanor and Mr. Firestone, comments on this 
topic from either of you.
    Mr. Sweanor. I think if we look at what happened with the 
European Union challenging the cigarette companies over 
facilitating a trade, their actions are allowing product to 
become available to the smugglers, and closing that, I think it 
raises the same question that could be thrown at those who are 
facilitating the trade through information. What's their role 
in this?
    I think of a discussion with them and the possibility--I'm 
not an expert in U.S. law--in U.S. racketeering law, but I 
think it does at least raise a question of, do they have some 
responsibility for those billions of dollars that are being 
lost in those countries? Might that be enough to give them a 
wake-up call to say, we maybe don't want to be facilitating 
this. We'd just as soon not end up in court with someone trying 
to recoup that money. But they need to accept some level of 
responsibility for this, as does everybody else along the 
supply chain.
    And I would say, and as we all do, for having engaged in 
policies that prevent smokers from having viable alternatives 
to cigarettes. You know, they're moving to illicit trade 
because we're not giving them a better option.
    Mr. Wicker. And I'm going to get to that in a moment.
    Mr. Firestone?
    Mr. Sweanor. Yes, Senator, thank you. I think it's a very 
interesting and important point. And I think that for me, three 
points that come out of it. One is, it's an example of how many 
different threads there are to the illicit trade in tobacco. 
And I think that's maybe one reason that this area gets less 
focus than it merits, because if you look at each of these 
individual threads, maybe you say, well, it's a problem but 
it's not my top three priorities. But when you put them all 
together, it is. And I think that the availability of ads and 
so on for illicit products on social media is one of the 
    Second, as Dr. Shelley and Professor Sweanor have 
emphasized, I think it's important to tell everyone on the 
legitimate side of the business that you can't have, in 
Professor Shelley's words, a 
laissez-faire attitude. No, maybe one company can't control 
everything, but all of the companies have to be doing their 
best to shut down these trades.
    And third, and in respect to your question about agencies 
of the federal government, I would be optimistic that any 
agency that contacts any responsible public company--that 
company would be very responsive simply to know that the United 
States Government is aware of what's happening, and that the 
United States Government has a concern that that company or our 
company needs to address.
    Mr. Wicker. Dr. Shelley, we're here at the corner of 
Constitution and 1st in Washington, D.C. How far do I have to 
go to buy some illicit cigarettes here in town?
    Dr. Shelley. You can go to your computer.
    Mr. Wicker. OK.
    Dr. Shelley. And you can order them online and have them 
delivered to you in a shipment that will arrive either by the 
Postal Service or by UPS or FedEx, that segment their 
    Mr. Wicker. So, that's the cleanest, safest way for me to 
engage in this illegal activity.
    Dr. Shelley. Yes.
    Mr. Wicker. So what--I mean, I'm pretty technically 
challenged. What website do I go to? Come on.
    Dr. Shelley. You----
    Mr. Wicker. The cameras are rolling. [Laughter.]
    Mr. Sweanor. You're facilitating illegal activity here. 
    Dr. Shelley. That I'm not going to do. But you could go to 
many providers that you----
    Mr. Wicker. So, what would I need to click on?
    Dr. Shelley. You could look at----
    Mr. Wicker. So, what if I put in untaxed cigarettes?
    Dr. Shelley. That, I don't think would be--well, you know, 
you could try that. I would also put in, you know, cigarettes 
at low price, bargain cigarettes. And if you found you were 
media-taxed, then I would go off to--or send one of your 
assistants off to some local bar, convenience store that'll 
sell you some cigarettes under the table.
    Mr. Wicker. OK, now--so I go to a convenience store. How 
far away is this convenience store?
    Dr. Shelley. I'd say we could find you one within a mile of 
    Mr. Wicker. OK. And how----
    Dr. Shelley. Not a--you know, a small place. Not a large 
convenience store.
    Mr. Wicker. OK, so the name-brand convenience stores that 
advertise, they're going to stay away from this? OK.
    Dr. Shelley. Generally, yes.
    Mr. Wicker. So I go into--and how--and so I want some 
cigarettes, how do they know I'm cool? How--[laughter]--if I 
walk in dressed like this, they're probably going to sell me 
the taxed----
    Dr. Shelley. They'll probably sell you the taxed 
cigarettes. That's why I said send in one of your assistants 
who might be in blue jeans, because the same enterprise often 
sells, as I write about, both licit and illicit products.
    Mr. Wicker. OK, so how much is a carton of cigarettes going 
to cost me if I'm buying the right way, if I pay the tax and 
buy it over the counter?
    Dr. Shelley. Well, it depends if you buy it in D.C. If you 
buy it in Maryland, there'll be another price. If you buy in 
Virginia there'll be another price. And that's part of the 
    Mr. Wicker. OK. But typically--and so maybe, Mr. Firestone, 
I'm not leaving this line of questioning--but how much am I 
going to pay in Washington D.C. for a carton of whatevers?
    Mr. Sweanor. I can't say exactly because we don't sell 
products here, but I think if you assume that a pack may be $4 
and if there are 10 in a carton, maybe $40, $50 a carton, a 
legal product.
    Mr. Wicker. So, Dr. Shelley, how much am I going to pay for 

    Dr. Shelley. Probably about half that.
    Mr. Wicker. OK, and is--if I'm particular about my product 
and I don't want a termite brand, can I get a name brand by 
clicking on the right source and ordering it online?
    Dr. Shelley. Sometimes you can get a name brand.
    Mr. Wicker. OK.
    Dr. Shelley. Sometimes you have packages that are produced 
with even--how do I say--with counterfeit packaging, with 
counterfeit stamps put on them. There's a whole supporting 
industry that goes with this to falsify products. And there's 
also a problem of diversion. We've had terrorist cases in the 
United States of funding for terrorism done by diverted 
cigarettes, where cigarettes have been taken from low-income 
states, low-taxation states like North Carolina, and shipped to 
New York or Michigan that have much higher tax rates. So then 
you would get a real cigarette that's been diverted from a 
market in another state.
    Mr. Wicker. And I do this illegal thing, they ship it to my 
condo in Maryland--which I don't have a condo in Maryland--
[laughter]--but what is my penalty and who's going to catch me?
    Dr. Shelley. There's very little chance that you're going 
to be caught. The Postal Service is so busy monitoring 
shipments of opioids that are coming through the mail, that 
they hardly have any chance to be looking at other illicit 
products that are coming through.
    Mr. Wicker. You're not really blaming the Postal Service, 
are you?
    Dr. Shelley. No.
    Mr. Wicker. What about UPS and FedEx, do the same thing?
    Dr. Shelley. The problem is that we have such a new 
business model from illicit traders that they're segmenting 
their markets, that it's just putting an enormous pressure on 
our delivery services to monitor these fragmented shipments of 
illicit items. It's a real national concern. And they're 
stepping up to the plate. They're not avoiding this issue, but 
it's just a massive problem to try and find the needles in the 
    Mr. Wicker. And you mentioned harmonization of tax 
    Dr. Shelley. Right.
    Mr. Wicker. So tell us--what ought to be done there?
    Dr. Shelley. I think that when you have such low taxes, 
such as you have in North Carolina--I'm not faulting North 
Carolina, I'm just saying we have those--and very high taxes in 
Michigan, there's an incentive to move cigarettes in bulk.
    Mr. Wicker. But if we didn't tax cigarettes at all, this 
wouldn't really--we wouldn't have this problem of illicit 
trafficking of cigarettes?
    Dr. Shelley. Right, but we need revenue. And cigarettes are 
a very good way to achieve revenue. So I don't think we want to 
de-tax cigarettes, both for a public health reason--as Mr. 
Sweanor will tell you more--and also for a revenue reason. But 
one of the things that we need to do is find what I call a 
balance between what provides revenue, what deters consumption, 
but what does not encourage movement to an illicit market.
    Mr. Wicker. OK. And this is a global problem, which is why 
we're having an OSCE Helsinki Commission hearing on this.
    Dr. Shelley. Yes.
    Mr. Wicker. So what can be done at the OSCE level, at the 
EU level, at the international consultation and treaty level to 
address this harmonization of tax policies?
    Dr. Shelley. I think----
    Mr. Wicker. And you're advocating that, are you not?
    Dr. Shelley. I'm advocating that we begin to have, you 
know, research and analysis--such as Mr. Sweanor is 
suggesting--and then that is applied in ways that help 
construct more rational and harmonized policy. One of the 
things that I talked about, at the OSCE there's an annual 
symposium for the ambassadors on the latest trends and 
tendencies and threats. And I was asked to speak on 
transnational threats, as opposed to many other issues that 
    discussed before. This year they decided that illicit 
trade, along with cybercrime, was a priority for them. And this 
was quite new to the OSCE, to think about these issues as 
central problems for them. But there was a lot of receptivity. 
And I think that's important. We didn't get into all of the 
nitty gritty, but I think that's 
    Mr. Wicker. Why is this a recent problem and phenomenon? Or 
have I misunderstood you on that?
    Dr. Shelley. It's not a recent problem, but it's 
certainly--it's growing. And the fact that there are many more 
people in Europe who are not working in the legitimate economy 
either through the recession or through migration, are not 
integrated into the legitimate economy. It's been shown that 
this illicit trade had funded terrorism in Europe, which 
Europol was not looking at until about two, three years ago.
    Mr. Wicker. Really?
    Dr. Shelley. Two, three years ago, they were not looking at 
the crime-terror relationship. In fact, I had discussions with 
the head of Europol, who headed this working group at the World 
Economic Forum, when I released my last book that looked at 
these relationships. And he said: We don't perceive this is a 
great problem. But illicit cigarettes is one of the unifying 
points between the criminals and the terrorists, because it is 
such an under-policed area of activity. And now Europol has 
totally switched and is focusing multiple times an hour in 
their databases of reviewing these linkages between crime and 
terrorism. And I understand, from my discussions in France 
earlier this month, that the new minister of interior is very 
much focused on doing more network analysis of looking at these 
relationships and that there is going to be a real shift in 
    Mr. Wicker. Whose minister of interior?
    Dr. Shelley. Macron's new minister of interior has begun to 
focus on these issues of crime and terrorism relationships 
because France, as we've seen, is the champion of the moment of 
this illicit trade in cigarettes.
    Mr. Wicker. If we stamp it out in France, it'll probably 
move someplace else.
    Dr. Shelley. It may move someplace else, but it's also 
related--as Mr. Sweanor has said--to larger economic issues.
    Mr. Wicker. OK. Well--now, I'm going to let you take a 
    Dr. Shelley. Thank you.
    Mr. Wicker. ----and ask if either panelist would like to 
weigh in on anything you've talked about so far. And then we're 
going to get to Mr. Sweanor's point about alternatives.
    Mr. Sweanor. Well, sir, I would just add to what Dr. 
Shelley is saying. I think one reason that this topic gets 
maybe less attention is, as the title of this hearing calls it, 
``A Hazy Crisis.'' And there is haziness to it.
    Mr. Wicker. We like that. I thought that was pretty clever. 
    Mr. Sweanor. Well, I will compliment you, sir, as the 
chairman, on having come up with it. I don't----
    Mr. Wicker. Oh, I have a good staff.
    Mr. Sweanor. Yeah, the good staff.
    But to all the creators of that phrase, I think it really 
does capture one of the great challenges here; it is a hazy 
crisis in that there are so many thousands and thousands and 
thousands of people involved at different levels in the supply 
chain, in making the termite brands and transshipping them, et 
cetera, et cetera.
    Another challenge--where there are solutions is the 
transnational nature of the problem, where by definition--well, 
it turns out most of the time we're dealing with transnational 
shipments, smuggling from country A to country B, and there are 
often questions about who has jurisdiction, even within the two 
countries, and how do those two countries integrate their 
enforcement efforts, how do they share information, et cetera, 
et cetera. So I would say that there are a lot of those process 
aspects that can make the enforcement more effective.
    And then, third, I would add to the points you made in your 
hypothetical. If you had a condo in Maryland and were receiving 
cigarettes there illicitly, what would the penalties be? I 
think a problem to address is to raise consumer awareness 
because ultimately all of these products in the illicit trade, 
whether termite brands or counterfeit, are going to actual 
individuals, and there needs to be a much greater sense among 
those individuals that this is not something to do, and that 
when you do this maybe you do save $20, $30 on your carton but 
those $20-$30 in savings are funding this enormous criminal 
activity around the world. And that's another aspect of demand 
reduction, along with Professor Sweanor's very interesting and 
important ideas about demand reduction by shifting people to 
better policies.
    Mr. Wicker. OK, well, let's shift to that, then. Mr. 
Sweanor, tell us what you mean. I made a note here: it's the 
smoke that kills, not the nicotine. That just gets you 
addicted. The tobacco itself doesn't kill you. Although I guess 
it could give you throat cancer. But you suggest that there are 
viable tobacco alternatives to smoking and we ought to look at 
that. So would you enlarge on that for us, please?
    Mr. Sweanor. Sure. We've known scientifically for decades, 
as the late Professor Michael Russell used to say, that people 
smoke for the nicotine but they die from the tar. They die from 
the smoke. It would be like trying to get our caffeine by 
smoking tea leaves rather than brewing them; we would get the 
same diseases. It's the smoke that's causing the cancers, the 
heart disease, the lung disease, anything that gets smoke into 
our bodies. You know, cooking over an open fire without 
ventilation, you'll get the same diseases. Firefighters get 
diseases from inhaling smoke. We have examples such as in 
Sweden, where the primary form of tobacco use is a form of oral 
tobacco called snus, with minimal health risks. It's very hard 
to distinguish between snus users and non-tobacco users in 
terms of health outcomes, whereas cigarettes will kill over 
half of their long-term users.
    Mr. Wicker. How do you consume snus?
    Mr. Sweanor. It's something that one just puts between 
their lip and their gum. It's very similar to moist----
    Mr. Wicker. They feel very relaxing.
    Mr. Sweanor. Yeah. Things like Copenhagen or Skoal, 
products that are in the United States as well, which are 
    Mr. Wicker. So is snus a snuff?
    Mr. Sweanor. Yes. It's a moist snuff product made by----
    Mr. Wicker. That's going to give me mouth cancer, isn't it?
    Mr. Sweanor. Apparently it doesn't. I mean, the best 
evidence is that it's not causing cancer. You can never prove 
something doesn't cause cancer, we just can't find evidence 
that it does.
    Mr. Wicker. OK. Do they----
    Mr. Sweanor. And that's very different than cigarettes.
    Mr. Wicker. Do they tax snus?
    Mr. Sweanor. They do, but they had the big switchover in 
the 1970s, when they had differential taxation so that a 
package of snus cost half as much as a pack of cigarettes and 
apparently lasted about twice as long, so your effective price 
is much lower. So very similar to what some countries did in 
moving from leaded to unleaded fuel.
    Mr. Wicker. So there's not as much of an incentive to cheat 
because the taxes are lower.
    Mr. Sweanor. Yes, there's a viable alternative. We see the 
same thing with----
    Mr. Wicker. A viable alternative. But theoretically, if 
we--if we aggressively taxed snus, then we'd end up with the 
same problem of being able to buy it untaxed online and fund 
    Mr. Sweanor. Well, there is--there is a difference here, in 
that if you're buying cigarettes, from a health standpoint--and 
I'm sure Mr. Firestone will agree with me--there's really no 
difference between the things that are manufactured by the 
major companies, the major brands, and those termite-type 
brands. There are reasons why if, for instance, I offered you 
an EpiPen that I've just brought back from the night market in 
Asia, that you would decide you didn't want to buy it because 
it's counterfeit. There's a reason you want something 
different. When a product's made to exacting standards and you 
know that it's much lower risk, there's a reason why you want 
the legitimate product rather than something faked. If your 
children are sick and I offer you a fake pharmaceutical product 
at a much lower price, you're probably going to tell me to take 
a hike.
    So when we come up with far safer products, there's reasons 
to buy the legitimate products, and that's working with 
consumers. And with some of these products, they're actually 
cheaper than the illicit cigarettes, as we've seen with vaping 
products in my own country of Canada, of people who have moved 
from illicit cigarettes to vaping to save money. They didn't 
even know initially that, as the Royal College of Physicians in 
the U.K. has told us, these products are likely to be at least 
95 percent less hazardous than cigarettes. It's just they're 
way cheaper. But if we gave people the information to say not 
only are these products likely to be at least 95 percent less 
hazardous than smoking, they're going to cost you less money 
than even the contraband cigarettes, we go from a problem now 
where contraband is a public health problem as well as a 
criminal problem as well as a revenue problem to something 
where we do something that gets rid of the criminality while 
solving our biggest cause of preventable death. We have a huge 
opportunity to seize here.
    Mr. Wicker. Would people acknowledge that Sweden is a 
success story in combatting illicit cigarette smuggling?
    Mr. Sweanor. Yes, I haven't been to Sweden for a few years, 
but I used to go there quite frequently. I didn't see a problem 
there, in part because, as I say, this is a business, and it's 
a matter of where's your market, how big is the market, how 
much can you sell for. Well, we just recently had data out of 
Eurobarometer that said the daily smoking rate in Sweden is now 
down to 5 percent. There just aren't a whole lot of people 
smoking cigarettes. If you're going to try to sell cigarettes, 
far better that you go to a place like France or elsewhere 
where it's over 30 percent.
    Mr. Wicker. Well, that is remarkable because I can tell 
you, you walk down the street of a major city in most European 
countries and it's graphic, the number of people that are 
walking up and down the sidewalks smoking.
    Dr. Shelley, who's doing a good job in the international 
community on this issue? Who can we look to for success 
    Dr. Shelley. I think Mr. Sweanor has given us a success 
story in Sweden in reducing consumption, which helps reduce 
illicit trade. The British and Her Majesty's Customs Service 
have allocated a lot of attention to trying to analyze the 
problem. They still have serious problems of illicit trade, but 
they do prioritize this. And maybe Mr. Firestone can give us 
some other examples that he----
    Mr. Wicker. Mr. Firestone, do you all make snus?
    Mr. Sweanor. It's a very, very small part of our business. 
We're focused on--[microphone feedback]
    Mr. Wicker. Go ahead.
    Mr. Sweanor. Yes, sir.
    Mr. Wicker. Good news; they've called a vote.
    Mr. Sweanor. Oh.
    Mr. Wicker. So this hearing is almost over.
    Mr. Sweanor. All right. No, this is--[chuckles].
    We are on a completely new strategy at PMI, which is what 
we're calling designing a smoke-free future, and that really 
focuses on some of the types of products that Professor Sweanor 
mentioned, including heat-not-burn tobacco. And we have 
applications pending before the FTA right now on that.
    In terms of countries, I wholeheartedly agree with 
Professor Shelley that the United Kingdom has been, I think, 
very focused and very thoughtful on this topic. From our 
perspective, we've also seen that Greece has been receptive to 
trying to address the problem, as well as Poland. Even though 
Poland is a source of product that goes west into the higher-
priced markets, we have had good experiences in cooperating 
with the Polish Government as well.
    Mr. Wicker. Well, let me just say this has been a real 
education to this senator, and I appreciate the testimony and 
the give-and-take with the witnesses.
    One thing that always bothers me in a hearing is, you've 
got this pesky chairman calling time on the questions. There 
was nobody to do that to me today, so we went on and on and we 
had a nice exchange.
    There have been so many conflicts with our members. We had 
four who were going to try to attend and ask questions. And 
regrettably Senator Boozman had to leave after hearing the 
testimony, but I know he appreciated the testimony.
    But the word goes out, whether there are members here to 
ask questions or not. And I think we've made a valuable point 
today. If you're out there and you think you're going to save 
$20 [dollars] or $30 [dollars] or $50 on this illegal, illicit 
product, you're engaged in something a lot bigger and you're 
funding some of the worst actors that have ever walked the face 
of the Earth. And to that extent, bringing public attention and 
understanding to this has been very helpful.
    We need to continue a dialogue on the role of government, 
the role of a legislative body and our oversight, our statutory 
pronouncements. And I look forward to hearing more from the 
three of you in the future--feel free to substitute additional 
testimony and supplement your answers--and also from the 
    And with that, and with the thanks of the Commission, this 
hearing is adjourned. [Sounds gavel.]
    [Whereupon, at 10:38 a.m., the hearing ended.]

                          A P P E N D I C E S


                          Prepared Statements


  Prepared Statement of Hon. Roger F. Wicker, Chairman, Commission on 
                   Security and Cooperation in Europe

    The hearing will come to order.
    Welcome and good morning everyone. The Helsinki Commission is 
mandated to monitor the compliance of participating States with the 
consensus-based commitments of the Organization for Security and 
Cooperation in Europe, or OSCE. Today's hearing of the Commission 
focuses on the multidimensional issue of illicit cigarette smuggling in 
the OSCE region.
    Illicit cigarette smuggling is a significant transnational threat. 
In short, ongoing illicit trade helps fund terrorist activities, foster 
corruption, and undermine the rule of law. European Commission and KPMG 
studies estimate that around $11.64 billion is lost every year to this 
criminal activity in the European Union alone, where counterfeit 
cigarettes are particularly prevalent and account for nearly 30 percent 
of the articles detained by EU customs. This issue involves two of the 
three dimensions of the Helsinki Final Act: the first being hard 
security and the second being economic issues.
    Illicit cigarette smuggling's link to hard security is evident in a 
recent report issued by the Department of State, in conjunction with 
the Departments of Treasury, Homeland Security, Health and Human 
Services, and Justice. The report states that ``illicit tobacco 
provides a significant revenue stream to illicit actors'' and ``fuels 
transnational crime, corruption, and terrorism.'' For these reasons, 
the report declared that the global illicit trade in tobacco poses a 
``threat to national security.''
    Building upon former commitments, the OSCE established a Charter on 
Preventing and Combating Terrorism in the aftermath of the Sept. 11, 
2001, attacks in New York and Washington. That Charter targeted four 
strategic areas for specific action: policing, border control, 
trafficking, and money laundering. I hope today's witnesses will 
consider how measures taken pursuant to that Charter are being applied 
to the illicit trade in tobacco and tobacco products.
    With regard to economic issues, illicit trafficking in cigarettes 
is a major source of corruption. The international criminal 
organizations that engage in tobacco trafficking generate profits that 
are then available to corrupt public officials and subvert the rule of 
law. The Department of State estimates that the worldwide tax loss from 
illicit tobacco smuggling is between $40 billion and $50 billion 
dollars annually. This is money that is lost to taxpayers, further 
weakening state institutions while enriching and empowering criminal 
elements that are themselves a threat to those institutions.
    These are serious challenges in many emerging market economies 
within the OSCE, and I hope we will hear more today from our witnesses 
about the scope of the threat and the measures that can be taken to 
combat it.
    Underlying all of these problems is the fact that there is enormous 
money to be made in illicit tobacco trafficking. An Organization for 
Economic Cooperation and Development, or OECD, report issued last year 
concluded that ``cigarettes present high profit margins and are among 
the most commonly traded products on the black market due to the 
relative ease of production and movement, along with low detection 
rates and penalties.'' The OECD cited many reasons for the growth in 
the illicit trade of tobacco. Today, we will engage in an in-depth 
examination of those reasons and identify potential responses.
    To help us do that, we have with us three very distinguished 
    Dr. Louise Shelley is a professor and the director of the 
Terrorism, Transnational Crime and Corruption School of Public Policy 
at George Mason University. She is a leading expert on the 
relationships among terrorism, organized crime, and corruption, and she 
also specializes in illicit financial flows and money laundering. Dr. 
Shelley served on the Global Agenda Council on Illicit Trade of the 
World Economic Forum and was the first co-chair of its Council on 
Organized Crime. Dr. Shelley has frequently testified on Capitol Hill 
regarding issues that impact national security.
    Professor David Sweanor is an adjunct professor of law at the 
University of Ottawa. Professor Sweanor has pioneered efforts to reduce 
cigarette smoking in Canada and around the world. As part of those 
efforts, he has worked with groups such as the World Health 
Organization, the World Bank, and the Pan American Health 
Organization--the latter of which honored him with the ``Public Health 
Hero Lifetime Achievement Award.'' Professor Sweanor has previously 
testified before the Canadian Parliament and the U.S. House and Senate.
    Mr. Marc Firestone is the senior vice president and general counsel 
for Philip Morris International. In that capacity, he helps guide the 
company's global response to the illicit trade in tobacco.
    I hope to accomplish three things at today's hearing: First, I hope 
to draw attention to the problem of illicit tobacco trafficking; how it 
helps fund terrorist activities, foster corruption, and undermine the 
rule of law; and why the United States should provide leadership in the 
fight against this illicit trade.
    Second, I hope to learn more about best practices in both the 
public and private sectors that can minimize illicit tobacco 
trafficking and deny the financial proceeds of such trafficking to 
terrorist and criminal groups.
    Third, I hope to increase an understanding of how illicit tobacco 
undermines public health policy.
    I thank the distinguished members of today's expert panel for 
joining us today, and I look forward to our discussion.

     Prepared Statement of Hon. Christopher H. Smith, Co-Chairman, 
            Commission on Security and Cooperation in Europe

    Good morning and welcome to everyone joining us this morning as we 
examine cigarette smuggling in the OSCE region.
    The volume of tobacco and cigarette smuggling is staggering--the 
WHO estimates 1 in 10 cigarettes are part of the global illegal tobacco 
trade. A former FBI agent explained it this way: ``Cigarettes are easy 
to smuggle, easy to buy, and they have a pretty good return on the 
investment. Drug dogs don't alert on your car if it's full of Camels. 
The other advantage is you don't go to jail for 50 years.''
    One of the principal reasons we are here today is that recent 
reports, including a 2015 State Department report, find that terrorists 
around the world smuggle cigarettes and tobacco to finance their 
crimes. The State Department found that this form of smuggling is 
encouraging a convergence between terrorist and organized crime 
networks, and that it facilitates other crimes, including human 
trafficking and the smuggling of illegal street drugs and weapons.
    I'm looking forward to going into the evidence for this with our 
witnesses, and discussing what should be the policy response, both from 
us as legislators and from the executive branch.
    Mr. Sweanor and Mr. Firestone, I particularly look forward to 
hearing from you about the health implications of cigarette smuggling--
how price affects smoking rates, and whether there are known 
differences between the nicotine content of smuggled tobacco and 
cigarettes versus those produced by the major cigarette 
    Dr. Shelley, welcome back to the Commission--we recall your 
testimony in 1999 at hearings I chaired on ``Corruption in the Former 
Soviet Union'' and ``Sex Trade: Trafficking of Women and Children in 
Europe and the United States''--and as the Parliamentary Assembly's 
Special Representative on Human Trafficking Issues I look forward to 
discussing what kind of evidence there might be of connections between 
the criminal rings that traffic in human beings and those that smuggle 
tobacco, which is asserted in the State Department report.

    Prepared Statement of Dr. Louise Shelley, Director, Terrorism, 
  Transnational Crime, and Corruption Center, George Mason University

Cigarette Smuggling has become such a major problem in the OSCE region 
for the following reasons:

    1) There is a long-term Culture of Impunity. This is particularly 
pronounced in the Balkans where there has been the involvement of  
high-level officials (see text and Appendix). But it also exists among 
the migrant communities that cannot find employment and and 
marginalized communities who become sellers of 

    2) Corruption is a key facilitator of this trade and involves 
officials at all levels--at borders, ports, customs, policing and even 
heads of state.

    3) Important role of non-state actors including both criminals, 
terrorists and hybrids of the two. Transfer of this much money to these 
illicit networks is a security challenge in the OSCE region. Example of 
this is one of the Kouachi Brothers, a terrorist who killed the 
cartoonists of Charlie Hebdo, sold illegal cigarettes. Other cases 
within the US and Europe.

    4) Numerous facilitators help move cigarettes including truck 
drivers, corrupt officials who let the containers and trucks with 
illicit cigarettes transit and 

    5) Importance of Hubs outside of OSCE Region. Free Trade Zones play 
a key role in the illicit trade in cigarettes, The Jebel Ali free zone 
in Dubai is key in the import of illicit cigarettes into Europe.

    6) Illicit cigarette trade is not a stand-alone crime. It converges 
with the drug trade, wildlife smuggling, trade in counterfeit goods and 
other crimes. The Czech police found an illegal shipment of rhino horn 
transiting Prague as they were tipped off by law enforcement following 
the cigarette trade of the Vietnamese diaspora community.

    7) Importance of new media. Facebook, for example, has notices on 
delivery and pick-ups of illicit cigarette loads but does not do enough 
to police content even though the issue has been brought to their 

    8) Absence of law enforcement focus on cigarette smuggling in OSCE 
region, an ``underpoliced crime''--absence of network analysis, crime-
terror analysis, they do not allocate enough law enforcement resources 
to combating what seems to many like petty trade. Criminals and 
terrorists go where there is low-risk of enforcement.

    9) Sale of cigarettes provides the venture capital for other forms 
of illicit trade. For example, members of the Vietnamese diaspora 
community became key actors in the low-level cigarette trade in Germany 
and the Czech Republic. With this initial capital, they were able to 
become key conduits for the import of counterfeit goods from Asia and 
their distribution within Western Europe. That trade gave them the 
capital and the connections to escalate to the extremely profitable 
illicit rhino horn trade.

    10) The prevalence of illicit cigarette trade reveals the limits of 
our strategies to counter illicit trade.

    The following is an excerpt from my forthcoming book under contract 
with Princeton University Press on illicit trade. It illustrates many 
of the key points that I have made above.

    At the Museum of Immigration in Paris, there are headsets where you 
can listen to immigrants recount their life stories. One especially 
moving audio that I heard was of an illegal North African migrant 
living in Southern France on the margins of society. His voyage out of 
Africa started on a precarious boat that crossed the Mediterranean 
several years before the mass transports of today. He arrived in 
impoverished Southern Italy and found no work. He worked his way 
farther north in Italy, still finding no employment. Then he crossed 
into France and made his way to Paris. There, he explained he found no 
better prospects to make a living. He moved south, this time, settling 
in Marseille. He ended his tale reporting he had found a way to 
survive. He was selling cigarettes.
    What the immigrant does not mention is that most street cigarette 
vendors of Marseille are selling illegal ones. Hardly surprising, as 
France in 2016 merited the distinction--``European champion of illicit 
cigarette sales.'' One form of illegality lies within another--
irregular migrants, without the right to work, sell smuggled 
cigarettes. These illegal products arrive through smugglers--a third of 
France's illegal cigarettes are smuggled from Algeria, and a quarter 
arrive from Spain where tax rates are lower \1\ and Barcelona is a key 
hub for the receipt of smuggled cigarettes. \2\ Cigarettes arrive in 
France from Algeria, having avoided all taxation, allowing them to be 
sold in open-air markets at substantially lower prices than legitimate 
retail products.
    \1\  Laurent Martinet, ``La France, championne d'Europe des 
cigarettes de contrebande,'' June 8, 2016. Accessed June 16, 2017, 
championne-deurope-des-cigarettes-de-contrebande_1800103.html; Bill 
Wirtz, ``Why Counterfeit Tobacco is Plaguing France,'' April 17, 2017. 
Accessed June 16, 2017, https://fee.org/articles/why-counterfeit-
    \2\  ``Spanish Customs,'' in Interpol, Against Organized Crime : 
Interpol Trafficking and Counterfeiting Casebook 2014, 36 (Lyon: 
Interpol, 2014).
    Marseille is the French hotspot for illicit cigarette sales--
approximately 40% of all sales are of illegal imports. \3\ This port 
city has long been a center of illicit trade. Think of the French 
Connection, where drugs arrived from Turkey to be shipped to the United 
States via Canada. \4\ But international law enforcement expended 
formidable resources to combat the lucrative heroin trade. In contrast, 
police allocate few resources against the petty cigarette traders even 
though these also harm human life. This inattention is not a result of 
corruption, as the sellers lack the funds and the contacts to corrupt 
French officials. \5\ Therefore, the recorded migrant, as well as many 
others at the margins of the economy, exist in this trade as France is 
the contraband cigarette capital of Western Europe. In France, over 27% 
of its sales (820 million packs) in 2016 were bought in shops or 
locales not authorized to sell tobacco. Half of the cigarettes were 
contraband and counterfeit and many of the rest were illicit whites 
produced to be smuggled. \6\ In France, cigarettes on the street sell 
for about 5 euros for diverted products and illicit whites or 
counterfeited products can be found at 4 euros. In the shops the prices 
are much higher--7 euros. The difference in price results in massive 
tax losses to the state, approximately, four billion euros of tax 
losses annually for the French economy. \7\ Moreover, the state may 
subsequently also incur greater health costs, as unregulated cigarettes 
may also be worse for individual health, as they are often produced 
under unregulated conditions and often contain components that are more 
carcinogenic. The massive tax losses also undermine funds that could be 
spent on social and health services, and invested in infrastructure.
    \3\  Anne Vidalie, ``Contrebande: le boom des marques clandestines 
de cigarettes,'' July 12, 2016. Accessed June 15, 2017, http://
clandestines-de-cigarettes_1811389.html; Francesco Calderoni, et. al., 
The Factbook on Illicit Trade in Tobacco Products-8 France, June 1, 
2016, Accessed June 15, 2017, http://www.transcrime.it/pubblicazioni/
    \4\  Ryan Gingeras, Heroin, Organized Crime and the Making of 
Modern Turkey (Oxford: Oxford University Press, 2014), 122-123 and 
Jonathan V. Marshall, The Lebanese Connection: Corruption, Civil War, 
and the International Drug Traffic. Stanford Studies in Middle Eastern 
and Islamic Societies and Cultures Series. (Stanford: Stanford 
University Press, 2012), 33-48.
    \5\  Nacer Lalam, ``France from Local Elites to National Leaders,'' 
in Corruption and Organized Crime in Europe: Illegal partnership eds. 
Philip Gounev and Vincenzo Ruggiero, 109-110. Abingdon: Routledge, 
    \6\ KPMG, Project Sun, A Study of the Illicit Cigarette Market in 
the European Union, Norway and Switzerland, The Illicit KPMG 2016 
Results. 2017, Accessed July 13, 2017, https://
    \7\  Martinet, ``La France, championne d'Europe des cigarettes de 
contrebande,'' and KPMG, ``Project Sun-Results 2015.'' Accessed June 
16, 2017, https://home.kpmg.com/uk/en/home/insights/2015/05/project-
sun-a-study-of-the-illicit-cigarette-market.html. Project Sun is a 
project of KPMG as part of the agreements concluded among Philip Morris 
International, the European Commission, OLAF and the Member States to 
tackle the illicit trade. Project Sun involves all the four major 
multinational tobacco manufacturers (Philip Morris International, 
British American Tobacco, Imperial Tobacco and Japan Tobacco 
    There are also more pernicious sellers in these illicit markets. 
One of the Kouachi who killed the cartoonists of Charlie Hebdo also 
made money by selling cigarettes. \8\ But as we will see, the higher 
levels of the illicit cigarette chain may support terrorist funding in 
more significant ways.
    \8\  Rajan Basra, Peter Neumann and Claudia Brunner, Criminal 
Pasts, Terrorist Futures: European Jihadists and the New Crime-Terror 
Nexus (London: ICSR, 2016), 44. Accessed June 16, 2017, http://
european-jihadists-new-crime-terror-nexus/; Katrin Bennhold and Eric 
Schmitt, `Gaps in France's Surveillance Are Clear; Solutions Aren't', 
New York Times, February 17, 2015. Accessed June 16, 2017, https://
    An official US State Department report provided this slightly 
bizarre case. A major illicit cigarette smuggling operation was 
revealed when al Qaeda operatives successfully launched two rockets at 
a container transporting illegal cigarettes while it was passing 
through the Suez Canal in Egypt in transit to Ireland. The subsequent 
investigation of the facilitators behind this $55 million illicit 
cigarette shipment revealed a wealthy Irishman who had made his fortune 
selling illegal cigarettes to UK and Irish markets. His clients 
included sellers known to have ties with the IRA. \9\
    \9\  ``The Global Illicit Trade in Tobacco: A Threat to National 
Security,'' US Government, 2015, 21. Accessed June 15, 2017, https://
    The public face of the illicit cigarette trade, seemingly a low 
level activity, masks a variety of actors that go up to the senior 
leadership of many countries.. The leaders of illicit trade are often 
rich and powerful politicians who escape sanctions, whereas the street 
sellers are the ones targeted by law enforcement and suffer 
    Between the top and the bottom lie a significant group of diverse 
facilitators. Sales are also facilitated by social media that largely 
lies outside regulation. The sale of almost nine billion illegal 
cigarettes in France annually points to a large group of facilitators 
between the source and the street markets. \10\ This movement of 
product is not done by ``ants'' who carry a few cartons of cigarettes 
at a time.
    \10\  KPMG, ``Project Sun Results,'' 10.
    The Algerian-origin cigarettes are produced for a legal market in 
Algeria. For millions of cigarettes to arrive in France illegally, 
there need to be factory workers, shippers and vendors in Algeria 
capable of diverting this product en masse to France. There are also 
high level Algerian officials implicated in this trade. This quantity 
of product requires containers arriving from Algeria, revealing 
corruption in the French port. Individuals must load the trucks from 
the ships and many drivers, both knowingly and unknowingly, move large 
quantities of illicit cigarettes overland from Spain to France.
    But the drivers' defense that they are not aware of what they 
transport is contradicted by examining social media. Just as false news 
can be disseminated through Facebook because it does not have the 
appropriate filters to weed out such posts, neither does it control the 
posts placed on Facebook pages to facilitate illicit trade. Despite 
official complaints by those trying to arrest this illicit trade, posts 
on Facebook continue to advise truck drivers and distributors where to 
pick up these illicit shipments. \11\ The problem in France is just the 
tip of the iceberg. \12\ In the UK, Imperial Tobacco has targeted 
Facebook as a key facilitator of illicit trade in cigarettes. \13\ The 
new media is a force multiplier for the growth of illicit trade from 
human trafficking to drugs and wildlife products.
    \11\  Interview with PMI official in France in 2015.
    \12\  C. Ben Lakhdar, ``Quantitative and Qualitative Estimates of 
Cross-Border Tobacco Shopping and Tobacco Smuggling in France,'' 
Tobacco Control 17, no. 1 (February 1, 2008): 12-16.
    \13\  ``Imperial Tobacco Targets Facebook Fraudsters,'' Scottish 
Local Retailer Magazine, July 14, 2016. Accessed June 17, 2017, http://
    France is not the only illicit cigarette hub in Europe that 
combines massive low-level street sales with significant imports. \14\ 
Huge containers of illicit cigarettes travel along with the legitimate 
commodities destined for European ports, such as Naples, where the 
Camorra sell cigarettes in the markets they control. \15\ Another 
hotspot of this trade is Germany and the Czech Republic where 
Vietnamese vendors \16\ sell ``illicit whites'', a product produced 
legally in the home country with the intent to be smuggled to countries 
with higher tax rates. In this region of Europe, the shipments emanate 
from illicit white producers in Asia and the Middle East. They 
illustrate a recurring principle, illicit trade is rarely of one 
commodity--products, routes and networks converge. A seemingly low 
level and ``victimless'' crime like the cigarette trade can provide the 
structure to facilitate the trade in one of the most endangered 
species. \17\
    \14\ Francesco Calderoni et al., ``United Kingdom. The Factbook on 
the Illicit Trade in Tobacco Products 1,'' The Factbook (Trento, Italy: 
Transcrime--Universita degli Studi di Trento, 2013). Accessed June 17, 
2017, http://www.transcrime.it/pubblicazioni/the-factbook-on-the-
illicit-trade-in-tobacco-products-1/, accessed March 6, 2017; Francesco 
Calderoni et al., ``Italy. The Factbook on the Illicit Trade in Tobacco 
Products 2,'' (Trento, Italy: Transcrime--Universita degli Studi di 
Trento, 2013). Accessed June 17, 2017, http://www.transcrime.it/
italia/,7; Transcrime, European Outlook on the Illicit Trade in Tobacco 
Products (Trento: Universita degli studi di Trento, 2015), 53, Accessed 
June 17, 2017, http://www.transcrime.it/pubblicazioni/european-outlook-
on-the-illicit-trade-in-tobacco-products/; Francesco Calderoni, ``A New 
Method for Estimating the Illicit Cigarette Market at the Subnational 
Level and Its Application to Italy,'' Global Crime 15, no. 1-2 (2014): 
    \15\  Isaia Sales, ``Droga e contrabbando, stesso affare di 
Camora,'' Il Mattino, August 1, 2016.
    \16\  Klaus von Lampe, ``The Trafficking in Untaxed Cigarettes in 
Germany: A Case Study of the Social Embeddedness of Illegal Markets,'' 
In Upperworld and Underworld in Cross-Border Crime, edited by Petrus 
van Duyne, Klaus von Lampe, Nikos Passas, 141-161. Nijmegen: Wolf Legal 
Publishers, 2002; M. Nozina, ``Crime Networks in Vietnamese Diasporas, 
The Czech Republic Case,'' Crime Law and Social Change (2010) 53: 229-
58; M. Nozina, ``The Czech Republic: A Crossroads for Organised 
Crime.'' In Organised Crime in Europe. Concepts, Patterns and Control 
Policies in the European Union and Beyond, edited by C. Fijnaut & L. 
Paoli, 435-66. Dordrecht: Springer: 2004; Miroslav Nozina and Filip 
Kraus, ``Bosses, Soldiers and Rice Grains. Vietnamese Criminal Networks 
and Criminal Activities in the Czech Republic,'' Europe-Asia Studies, 
Vol. 68, No. 3 ( 2016): 508-28
    \17\ Accessed June 17, 2017, https://www.occrp.org/personoftheyear/
    Yet the cigarette trade can reach to the top of the political 
pyramid. The Organized Crime and Corruption Reporting Project, an 
amalgamation of some of the top investigative journalists in the world, 
decided to create an award that is a dark reflection of the ``Time'' 
magazine ``Man of the Year.'' This award, given annually to the 
political figure who has done the most to facilitate organized crime 
and corruption, was presented in 2015 to Milo Djukanovic who served 
either as President or Prime Minister of Montenegro from 1991 to 2016 
as one of the nominators for the highly competitive award, ``2015 Man 
of the Year in Organized Crime,'' stated, ``Djukanovic, the last 
European dictator, has captured our country for his own private 
interests and turned it into safe haven for criminals. While he, his 
family and friends enriched themselves, ordinary people suffer from 
poverty, injustice and lawlessness, while those who dare to talk about 
the corruption become his targets.''
    Among the many cited crimes that merited this distinction was his 
major role in cigarette smuggling, for which he was particularly 
singled out in the award statement. The distinguished jury of OCCRP 
concluded that ``Djukanovic and his close associates engaged in 
extensive cigarette smuggling with the Italian Sacra Corona Unita and 
Camorra crime families. He was indicted in Bari and freely admitted the 
trade, but said his country needed money. He invoked diplomatic 
immunity to get the charges dropped.'' \18\ Furthermore, according to 
OCCRP, ``While he claims to have stopped the smuggling, OCCRP found an 
island off the coast financed by his family bank and owned by his good 
friend Stanko Subotic, a controversial businessman who was three times 
indicted but never convicted of cigarette smuggling related activities. 
The island was run by Djukanovic's head of security and was being used 
to smuggle cigarettes with some of the same organized crime figures who 
were previously involved.'' \19\
    \18\  Ibid.
    \19\  Ibid.
    The forensic evidence for this award was strong--the Italian courts 
presented wiretap-derived evidence and hundreds of thousands of 
documents to show that the Montenegrin government was making $700 
million annually from this illicit trade in the 1990s and the Italian 
mafia groups behind this trade laundered $1 billion dollars through 
Swiss banks based in Lugano. The Italian authorities showed that this 
massive illicit cigarette trade went straight to the top--Djukanovic 
was behind this enormous racket. \20\
    \20\  Leo Sisti, ``The Montenegro Connection: Love, Tobacco, and 
the Mafia,'' July 9, 2009, Accessed June 17, 2017, https://
index.php?option=com_content&view=article&id=7&Itemid=20; Calderoni, 
``A New Method for Estimating the Illicit Cigarette Market at the 
Subnational Level and Its Application to Italy.'' Calderoni cites the 
Italian investigation on this topic: DIA, Esito Attivita Di Indagine 
Svolta Sul Conto Di Djukanovic Milo + 4. N. 125/BA/2+SN. 125/BA/2+ 
Sett. Inv. Giud. /H5. 148-1/ 1379 Di Prot.ett. Inv. Giud. /H5. 148-1/ 
1379 Di Prot.,14, see online Accessed June 17, 2017, https://
www.reportingproject.net/unholyalliances/docs/Smuggling_2.pdf; Walter 
Kemp, Criminal Kaleidoscope: Organized Crime in the Balkans, (Geneva: 
Global Initiative Against Transnational Organized Crime 2017), 13-4, 
    The public face of the illicit cigarette trade, seemingly a low 
level activity, masks a variety of actors that go up to the senior 
leadership of many countries such as Bulgaria. The leaders of illicit 
trade are often rich and powerful politicians who escape sanctions, 
whereas the street sellers are the ones targeted by law enforcement and 
suffer disproportionately.What these snapshots of the illicit cigarette 
trade reveal is a diverse array of participants from the highly 
vulnerable illegal immigrant up to the heads of small countries who 
engage in this activity for their personal advantage and possibly for 
some benefit for their state. Also involved in this trade are factory 
workers eager to add to their incomes, organized crime groups making 
vast profits, terrorists in Europe, and the Middle East. These are not 
the only ones to profit from this trade, as there are truck and cargo 
transporters who move this bulky freight, and bankers laundering huge 
profits of this trade. To move this much product, to evade billions in 
taxes and generate millions in profits requires more than just 
organized crime. It requires the complicity of the powerful and the 
enablers of the legitimate world.
Addressing the Illicit Cigarette Trade:

1) Allocate more law enforcement resources to the problem to focus on 
convergence with other forms of illicit trade, the problem of hybrids 
(criminal/terrorists) engaged in this activity. Focus on network 
analysis of the participants, facilitators and corrupt officials who 
promote and facilitate the trade.

2) Europol is focusing more on the connections of crime and terrorism. 
Encourage law enforcement in the OSCE region to focus on the cigarette 
trade as a security challenge.

3) Address the high-level corruption that facilitates this trade and 
end the culture of impunity for this activity, on this see the recent 
report: Walter Kemp, Criminal Kaleidoscope: Organized Crime in the 
Balkans, (Geneva: Global Initiative Against Transnational Organized 
Crime 2017), 13-4, 19-22. http://globalinitiative.net/ocbalkans/.

4) Require corporations in the new media space to focus more on their 
facilitating role in the illicit cigarette trade. Just as Facebook and 
other new media companies are being forced to focus more on the abuse 
of their platforms for terrorist recruitment, they should be required 
to do more to address the illicit trade that funds criminal and 
terrorist networks.

5) More attention needs to be paid to counter the facilitating role of 
Free Trade Zones in illicit trade. Their existence also has an 
important impact on the customs and tax revenues of OSCE member states.

6) We need research to help us understand the illicit flows, the hubs 
of the trade and the convergence of different forms of illicit trade.

7) We need greater harmonization of tax policies on cigarettes as it is 
the discrepancy of pricing in many countries in the OSCE region that 
provides the financial incentive to participate in smuggling.

8) There needs to be serious analysis of the optimum tax rates on 
cigarettes that address state revenue concerns but also do not 
contribute to smuggling. France that is already the contraband capital 
of Europe was discussing in early July raising tax rates to 10 euros a 
pack without analyzing the impact this would have on illicit trade.

    Prepared Statement of David Sweanor, Adjunct Professor of Law, 
                         University of Ontario

    My background. I led efforts to use tax-based cigarette price 
increases as a public health tool in Canada starting in the 1980s and 
worked to bring such policies to the US and elsewhere. Among other 
things, I was the primary author of the 1996 WHO World No-Tobacco Day 
materials on the the economics of tobacco and a co-author of a 2015 New 
England Journal of Medicine commentary on the importance of 
differential taxes for differential risks. For decades I have been 
actively involved in studying, monitoring, and litigating on, the 
global illicit cigarette trade.

    The price of tobacco products is a dominant driver in their use. 
Cigarette taxation has been, by far, the most powerful tool used to 
date in reducing cigarette consumption. Higher prices result in reduced 
smoking. Differential taxation of different tobacco/nicotine products 
also significantly spurs movement between types of products. But 
differential prices between licit and illicit products also spurs 
contraband. The countries of eastern Europe are a particular concern as 
a source for illicit trade due in part to significant price 
differentials with the countries of the European Union.

    The illicit traffic in tobacco products (ITTP) is a public-health 
issue, a public-safety issue, and a drain on public revenue. Cigarette 
tax increases can be a `triple win', benefiting public health while 
raising revenue and being popular. By contrast, the illicit trade is a 
`triple loss', adding to health burdens, augmenting criminality and 
reducing revenue.

    ITTP is substantial. While accurate numbers are hard to establish, 
because of both the inherent difficulties in measuring illicit 
activities and the frequent lack of interest in quantifying the 
problem, ITTP currently appears to generate billions of dollars per 
year in illicit earnings, and an even larger volume of taxes not paid.

    Understanding the business model. Profitable smuggling depends on a 
significant profit margin between cost of acquisition plus cost of 
doing business (including the likely penalties and probability of 
apprehension) and the selling price.

    Cigarettes are inexpensive to manufacture (1-2 cents per stick) and 
the market for them is huge; measured in the hundreds of billions of 
dollars and over a billion customers worldwide. Due to high 
manufacturer margins and high taxes licit products sell at a huge 
multiple of manufacturing costs, creating the enormous profit potential 
for illicit products. Effective interventions need to focus on changing 
the business viability of this trade.

    Within OSCE countries the business conditions for this illicit 
trade can be particularly favorable. Cigarettes can relatively easily 
enter the illicit category; the costs and overall risks of the trade 
are often manageable and there is a very large and high-price market 
easily accessible in the European Union.

    Changing the business viability. Measures such as impediments to 
acquiring manufacturing machinery and supplies can raise the price of 
manufacturing illicit cigarettes. As will measures that constrain the 
supply of untaxed cigarettes, such as the agreements the European Union 
reached with international tobacco companies as a result of civil RICO 
actions launched in the United States.

    Measures that increase the likelihood of apprehension, such as 
effective product track and trace technology, cooperation with 
businesses harmed by ITTP and greater resources for enforcement can 
combine with significant penalties to raise the cost of engaging in the 

    Finally, reducing the potential selling price of illicit cigarettes 
further constrains the viability of the contraband business.

    Working with consumers rather than against them. Too many efforts 
to counter illicit trade see the consumers of these products simply as 
part of the problem. There is much to be gained by working with them.

    Most smokers wish not to be smoking, but are held in the market by 
issues that include addiction, self-medication and a lack of knowledge 
and availability of viable alternatives. The lack of alternatives to 
cigarettes for dependent smokers creates the basis for the lucrative 
market for illicit products. This makes illicit cigarettes different 
than most consumer products with an illicit market in that the 
purchasers express a strong desire to stop using the product in 
question. That in turn gives a huge opportunity to those seeking to 
reduce the illicit demand.

    The enormous harm to health from cigarettes is caused not from the 
nicotine nor the tobacco, but from the inhalation of the products of 
combustion. Thus, if we did far more to facilitate access to, and 
provide non-misleading information about, non-combustion alternatives 
to cigarettes we could give the consumers of illicit cigarettes a far 
better alternative. Such products already exist in the form of 
smokeless tobacco, medicinal nicotine, vaping and heat-not-burn 
products, with tremendous scope for ever better alternatives. Given the 
ability to use policy measures to set relative taxation, marketing, 
product standards, etc. the licit products that are massively less 
dangerous could be facilitated to out-compete illicit cigarettes, 
driving them from the market. We are already witnessing this in many 
markets where vaping is displacing contraband cigarettes.

    By combining these efforts to raise the cost of acquiring and 
dealing in the ITTP category, and facilitating market forces in 
replacing the consumer market for such goods, we can more effectively 
control the ITTP market. We can do it in a way that respects consumer 
rights, the rule of law and the power of market forces while stemming 
criminality and greatly improving health.

Concrete steps include:

    1) Greater resources to monitor and control ITTP within the United 

    2) The use of existing laws, including RICO actions, to battle 
illicit trade. For European and Eurasian countries, action by the US to 
ensure that foreign governments can access RICO remedies for loss of 
revenue to international criminals, and stronger efforts to prevent 
money laundering through the US, would be major positive steps.

    3) Greater resource allocation to battling ITTP globally. Such law 
enforcement can be expected to more than pay for itself while 
combatting crime and protecting health.

    4) Differentiate taxation so that licit non-combustion alternatives 
to cigarettes are both a better health and better economic choice than 
illicit cigarettes. Currently US funded anti-tobacco groups are doing 
the opposite--campaigning globally for measures that discourage smokers 
from switching to less hazardous products, thus making illicit 
cigarettes a more likely option for the nicotine dependent.

    5) Far greater access to reduced risk products that are a viable 
alternative to cigarettes. The FDA should be facilitating rather than 
constraining the entrance of such products onto the market, and sharing 
the resulting expertise globally.

    6) National and international efforts to adequately inform smokers 
of the range of low risk alternatives to cigarettes and the 
differentials in risk compared to smoking cigarettes. The CDC could 
move from an abstinence-only `tobacco free world' orientation to one 
focused on reducing both health risks and illegality.

Prepared Statement of Marc Firestone, Senior Vice President and General 
               Counsel, Philip Morris International, Inc.


    Mr. Chairman, Co-Chairman Smith, members of the Commission, thank 
you for holding today's hearing on the real and growing threat posed by 
the illicit trade in tobacco. I appreciate the opportunity to testify 
on this important issue. I am Marc Firestone, Senior Vice President and 
General Counsel at Philip Morris 
    Philip Morris International is the world's leading tobacco company, 
employing more than 80,000 people globally. We are one of the largest 
purchasers of American-grown tobacco leaf and support the livelihoods 
of American farmers in multiple states.
    Outside of the United States we own the trademarks of six of the 
world's top international brands, including the iconic Marlboro. We 
operate in approximately 180 countries outside of the United States. 
Philip Morris USA, a subsidiary of Altria--our former parent company--
owns the trademark rights to Marlboro, for example, and other brands in 
the U.S., and manufactures, distributes and sells products bearing 
these trademarks for the U.S. domestic tobacco market.
    The illicit tobacco trade is deeply concerning to our company. But, 
we recognize that we have a shared challenge with governments, as the 
illicit trade in tobacco poses a threat to safety, security and the 
rule of law in Europe, the United States and around the globe.
    I appear here today in the spirit of cooperation to describe what 
we consider industry best practices to fight illicit trade. We hope 
that this hearing will assist U.S. government leadership to prioritize 
this issue within the OSCE member nations, partners for cooperation, 
and global security community.
    Within PMI's structure, I am ultimately responsible for our 
company's anti-illicit trade efforts, which are organized in a 
department we call Illicit Trade Strategies & Prevention (ITS&P). Our 
ITS&P group is a dedicated team of over 70 professionals around the 
world, including forensic specialists, logistics experts, researchers, 
intelligence analysts, businessmen and women, lawyers, government 
relations and communications specialists. This commitment of resources 
to fighting illicit trade is warranted, we believe, because of the 
magnitude and complexity of the problem.
    According to the most recent estimate conducted by the World Health 
Organization in 2006, and echoed by the U.S. State Department in 2015, 
illicit trade represents 10-12% of global tobacco consumption, 
constitutes an illicit volume of approximately 600 billion sticks, and 
robs governments of USD 40-50 billion annually. This makes the value of 
the illicit tobacco trade greater than the value of illicit trade in 
oil, wildlife, timber, arts and cultural property, and diamonds 
    The global auditing firm KPMG has published similar figures and 
identifies an illicit volume of more than 48 billion cigarettes in the 
E.U. alone. Aside from the risks to consumers from purchasing illicit 
and unregulated cigarettes, the effect on European tax revenues is 
substantial. KPMG estimates EUR 10.2 billion is lost in the E.U. every 
year to this criminal activity.
    In addition to the macro-economic impact of the illicit tobacco 
trade, other negative implications are also significant and include:

      Threats to national security by providing a major source 
of illegal income for transnational organized criminal groups;

       Encouragement of corruption and threats to the rule of 
law in countries where illicit trade is rampant;

      Reduced effectiveness of public health policies;

      Threats to the sustainability of the legal supply chain; 

      Impact on the legitimate industry's business.

    PMI has a clear business imperative to combat this problem and 
ensure our products are legally sold in the market for which they are 
intended. We lose significant revenues and market share because of 
illicit trade. For example, we earn as much as three times less revenue 
every time an adult smoker in a high-price market buys PMI-branded 
cigarettes smuggled from low-price markets instead of buying the 
cigarettes through legal sales channels. Illicit trade also damages the 
reputation and value of our iconic brands.
    However, the threat posed to safety, security, and the rule of law 
in Europe, the United States and around the globe is where the 
interests of our company and the concerns of this Commission most 
pointedly intersect. The concern for this issue is shared by multiple 
agencies within the U.S. government, including the State Department, 
which released a December 2015 interagency report entitled, ``The 
Global Illicit Trade in Tobacco: A Threat to National Security.'' In 
this report, the State Department described the problem as follows:

        ``Like other forms of illicit trade, the illicit trade in 
        tobacco products, commonly referred to as cigarette smuggling, 
        is a growing threat to U.S. national interests. 
        Internationally, it fuels transnational crime, corruption, and 
        terrorism. As it converges with other criminal activities it 
        undermines the rule of law and the licit market economy, and 
        creates greater insecurity and instability in many of today's 
        security `hot spots' around the world.'' i


    In the past, anti-illicit trade efforts were focused on fighting 
counterfeits, intellectual property violations and trademark 
infringement. Criminals have shown their agility, however, and we now 
fight a more diverse range of illicit tobacco activities. Research 
shows that contraband and excise tax avoidance schemes make up the vast 
majority of illicit trade in the tobacco industry.
    This is a critical distinction. Counterfeiting and related 
trademark and other intellectual property violations, have been 
directly addressed in U.S. and foreign legal codes. In most countries, 
the law is clear on this point, and provides for severe penalties. 
Trademark owners can pursue remedies to support a case for prosecution 
and punishment.
    However, smuggling is a much more diffuse and difficult criminal 
activity to 
tackle--and this is where many criminals have found safe haven. Cross-
border smuggling, by definition, introduces jurisdictional challenges. 
The capacity to operate beyond national borders is an important 
advantage for organized criminal groups, which can quickly change their 
modus operandi or trafficking routes. Cross-border smuggling is also a 
substantial challenge for national law enforcement, because it requires 
obtaining evidence from multiple jurisdictions and effective exchange 
of information between law enforcement worldwide. Unfortunately, 
practice shows that legal tools or mechanisms for such exchange are 
insufficient. As a result, even if law enforcement agencies seize 
illicit shipments, criminal investigations rarely dismantle cross-
border networks, and criminal groups continue to operate with impunity. 
The problem is made worse by certain manufacturers, which knowingly 
produce for markets in which they lack legal distribution or behave 
recklessly in their approach to supply chain control.


    A major driver of the growth in illicit trade is the substantial 
profits to be made by criminal organizations from selling illegal 
cigarettes, but other factors also contribute to the problem.

Price disparities encourage smuggling

    The price of legitimate cigarettes varies substantially across 
countries (and sometimes within states or provinces of the same 
country) because of often vastly different tax rates and consumer 
disposable income levels. These large disparities motivate smugglers to 
target high-price countries with product from lower-price countries. 
The increased free flow of people and goods across national borders in 
areas such as the European Union brings many benefits but significantly 
reduces the risk for criminal gangs by providing easier access and 
transportation links between 

Excessive taxation and regulation

    Taxation and regulation play an important role for governments as 
part of a public health policy to reduce smoking rates. However, when 
taken to an extreme, a heavily taxed and over-regulated market makes 
the unregulated and untaxed black market attractive for criminals. Tax 
increases on cigarettes that go well beyond inflation rates give 
smokers the incentive to seek out less expensive products. Criminals 
have taken advantage of this trend by offering illegal tobacco products 
at a significant price discount compared to legal products.

Criminals make huge profits

    In China, counterfeiters produce approximately 190 billion 
counterfeit cigarettes annually. Just one 40-foot container of 
counterfeit cigarettes produced in China could generate up to USD 2.3 
million in profit when sold in Europe. If all 190 billion Chinese 
counterfeit cigarettes were exported and sold in Europe, this criminal 
trade could be worth up to USD 44 billion a year.ii

Inadequate penalties and overstretched enforcement authorities

    While the profits may be comparable, the penalties for smuggling 
cigarettes in some countries are far lower than for crimes such as 
smuggling drugs or firearms.
    For example, in Germany, criminals caught and convicted of 
smuggling drugs regularly face a minimum prison term of two years, 
whereas convicted cigarette smugglers may get away with only a monetary 
fine. Coupled with the often limited government resources to combat the 
illegal tobacco trade, it is easy to see why cigarette smuggling has 
become an attractive proposition for criminals.
    Poland, for example, has numerous border crossings with Russia, 
Ukraine and Belarus. High pedestrian and vehicle traffic at these 
borders combined with limited enforcement resources make it difficult 
to control the flow of goods. These borders are routinely used by 
smugglers to move cigarettes into Poland and from there the goods are 
transported to other EU countries without further border controls.


    Among its many destructive consequences, the illicit tobacco trade:

      Robs governments of tax revenues;

      Exposes consumers to unregulated products often 
manufactured in unsanitary conditions;

      Poses threats to security by providing a major source of 
illegal income for transnational organized criminal groups;

      Encourages corruption and threatens the rule of law in 
countries where illicit trade is rampant;

      Reduces the effectiveness of public health policies;

      Makes it easier for minors to access tobacco products; 

      Undermines the legitimate industry's business.

Threats to Security

    The increasing threat to security was recently illustrated by the 
European Commission:

        ``The illicit tobacco trade has long been recognized as a main 
        source of revenue for organized crime, and, in some cases, 
        terrorist groups. The new European Agenda on Security adopted 
        by the European Commission on 28 April 2015 recognizes the 
        importance of fighting cigarette smuggling as a means of 
        cutting off criminal groups from this revenue source.'' 

Illicit tobacco trade as a threat to the national security of the 
United States:

    The past two decades have provided a number of cases demonstrating 
the direct link between cigarette smuggling and serious organized 
criminal and terrorist activity in the United States. Illicit cigarette 
tax stamps helped to fund one of the convicted bombers in the first 
World Trade Center bombing in 1993, and U.S. government reports have 
found that illegal cigarette smuggling networks here in the U.S. are 
being used to fund terrorist networks in the Middle East like 
Hezbollah, Hamas, and al Qaeda. As an American company, we are 
particularly troubled by these cases and supportive of any efforts the 
U.S. government takes to shine a light on this problem.

Security threats in other parts of the world:

    At the 2009 International Law Enforcement Intellectual Property 
Crime Conference, Ronald K. Noble, INTERPOL Secretary General, stated:

        ``Paramilitary groups and organized crime rely on 
        counterfeiting--especially of cigarettes--to reap huge profits 
        and even to fund terrorist activities.''

    Experts have also said illegal cigarette trafficking is a source of 
funding for terrorist group Islamic State (ISIS). According to one of 
the witnesses appearing before this commission today, Dr. Louise 

        ``Oil is not ISIS' only source of revenue . . . Still more 
        funding comes from the sale of counterfeit cigarettes, 
        pharmaceuticals, cell phones, antiquities and foreign 
        passports.'' -- Foreign Affairs Magazine, 2015

    Christian Eckert, France's Minister of Budget, also recognized the 
link between terrorism and illicit trade in an interview in 2014, where 
he stated the following:

        ``What is clearly evolving is to involve Customs in the fight 
        against terrorism. It is demonstrated and known that many 
        jihadists are involved in petty crime (counterfeit, contraband 
        of tobacco, drugs).''

Damage to legitimate business

    A study conducted by Frontier Economics, a leading European 
economics consultancy, reported that 2.6 million jobs have been lost in 
the G20 countries due to counterfeiting and piracy of a wide range of 
consumer products, including brand name luxury goods and 
    In the legal tobacco supply chain, manufacturers, suppliers, 
wholesalers, distributors, and retailers are all affected by illicit 
trade. Manufacturers suffer considerable financial losses, and long-
term damage to their brands, which they have invested time and money to 
build. Wholesalers, distributors, and retailers lose because reduced 
demand for legal products leads to fewer sales. Small retailers not 
only lose cigarette sales, but also the sale of other items adult 
smokers usually buy when in their shops. To illustrate, in the two 
Canadian provinces of Ontario and Quebec, 2,300 convenience stores 
closed down in 2009, largely because they are unable to compete with 
the low prices of contraband cigarette offerings.v
    Illicit trade in tobacco is a threat to our business and to the 
entire legal tobacco supply chain. We welcome competition from 
competitors that respect the law. The problem we are discussing at this 
hearing is unlawful competition, which is inherently a threat to the 
entire lawful market. Moreover, the loss of legitimate sales to the 
black market results in fewer jobs and less taxable income for 

Billions in lost tax revenue

    As previously stated, the World Health Organization (WHO) estimated 
in 2006 that global illicit trade costs governments USD 40-50 billion 
annually in lost tax revenues. These resources could have been used to 
fund other services such as public safety or education programs. The 
European Commission estimated that in 2015 the illicit trade in 
cigarettes resulted in tax loss of EUR 11.3 billion within the European 

Minors have access to illegal tobacco

    PMI's unequivocal position is that children should not smoke or use 
products containing nicotine. Criminals who deal in and profit from the 
illicit trade in tobacco simply cannot say the same. By the very nature 
of their criminal activities, they do not differentiate between 
consumers on any basis. Independent experts and government authorities 
agree that the illicit tobacco trade--by operating outside lawful and 
regulated channels--provides easy access to tobacco products to youth.
    In July 2010, the European Anti-Fraud Office (OLAF) stated:

        ``Illegal trade in tobacco undermines public health initiatives 
        to curb tobacco consumption by making cheap cigarettes 
        available in an unregulated environment where they may be sold 
        to vulnerable groups such as minors.''

    Furthermore, a study by the Canadian Centre for Addiction and 
Mental Health reported that 43% of secondary school smokers in the 
province of Ontario smoked contraband cigarettes.vi


    Over the last few decades, PMI has led the industry by investing 
considerable resources to maintain strict controls over our supply 
chain. PMI products are sold in more than 180 countries to more than 
900,000 direct customers, of which approximately 2,000 sell more than 
25 million cigarettes per year. Supply chain control is not easy, but 
our efforts to maintain strong and robust control measures of our 
supply chain help prevent criminals from defrauding governments, 
legitimate businesses and consumers.
    In each country where we sell our products, our business presence, 
trade dynamics, size of the retail universe, geography of the country 
and legal constraints differ. Thus there can be no uniform distribution 
model. In some countries we operate through a direct sales and 
distribution model, meaning that a PMI representative delivers the 
product to a local retail shop. In others, we sell to customers via 
third-party distributors or through wholesalers. Where a longer 
distribution chain is warranted, there will be some increased risk 
involved. However, we have developed supply chain tools and processes 
to mitigate that risk, which we have detailed in the following pages.
    Supply chain control aims to ensure that our products are sold 
legally in the market for which they are intended, which makes sound 
commercial sense for us. Fighting against the diversion of our 
products, and more generally against illicit trade in tobacco products, 
is a key component of our sustainability program and supports our 
commitment to the United Nations Global Compact--of which PMI is a 
member. Fighting illicit trade links directly to fighting corruption, 
contributing to improving human rights, labor rights and environmental 
standards, principles that organizations involved in illicit trade 
surely ignore or violate.
    Over the years, our supply chain controls have been improved 
through our cooperation with regulators and other governmental agencies 
with whom we have specific commitments and obligations. PMI's 2004 
signing of the Anti-Contraband and Anti-Counterfeit Agreement and 
General Release (``EC Agreement'') and our commitments to, and 
cooperation with OLAF and the Member States under that Agreement have 
helped us to develop a better understanding of the evolving nature of 
the illicit trade in tobacco products and the potential solutions to 
this complex problem. Further to this point, we:

      apply Know-Your-Customer and Know-Your-Payment 
requirements in all PMI markets;

      have made large investments in state of the art tracking-
and-tracing technology and developed other tools to effectively reduce 
the diversion of tobacco products from our supply chain; and

      use the information gathered from seizure inspections to 
identify the points of diversion with the aim of preventing 

    The supply chain control measures developed through the EC 
Agreement have become part of the way we do business. We view these 
controls as global best practices, are committed to continuing them, 
and encourage others to adopt similar 
    We have learned more about how to increase the effectiveness of our 
supply chain controls through our compliance with country-specific 
regulations, like the UK's Tobacco Products Duty Act 1979, and our 
ongoing cooperation with national customs and similar officials, such 
as the UK's HM Revenue & Customs (HMRC). During the course of 2014, 
HMRC conducted a review of our supply chain controls and recommended 
that PMI initiate a more formal global body to oversee coordination in 
the area of anti-diversion. We took this recommendation seriously, and 
launched a process that led to the creation of the Anti-Diversion 
Governance Committee and a review of the entire supply chain control 
    The Governance Committee's key objective is to ensure that PMI has 
the best possible approach to preventing the illicit flows of our 
products. The Committee's members are drawn from PMI's senior 
management. The creation of a global governance body comprised of 
senior company officials is further recognition that addressing product 
diversion requires effective coordination across countries, regions and 
departments. The Governance Committee is supported by an Anti-Diversion 
Working Group that includes representatives from Finance, Compliance, 
Law, Communications and ITS&P departments, reflecting the many PMI 
departments involved in supply chain control.
    Under the Governance Committee's direction, we further refined our 
diversion strategy and moved to a risk-based approach for our supply 
chain controls. We believe that a risk-based approach will enhance our 
efforts and efficacy by focusing resources and controls where they are 
most needed.
    We classify markets from high to low risk into four risk 
categories. In a ``high risk'' market, profit opportunities and 
enabling factors make diversion of our products likely if not already 
evident. A ``low risk'' market, on the other hand, is a market where 
lack of profit opportunities and other factors make diversion of our 
products unlikely. For example, for a market with a simple distribution 
network and a high retail price, such as the U.K., the market risk 
profile would indicate limited or no incentives to smuggle product out 
of the country, and therefore, the U.K. would be classified as a ``low 
risk'' market. We continuously re-examine and adapt our supply chain 
control tools to fit the risk profile of the market.


    Each Philip Morris International employee, department, affiliate 
and region is aligned on our anti-diversion efforts. For us, alignment 
means common knowledge and a shared understanding of the 
interrelationships between the issues affecting different markets, as 
well as a shared commitment to the goal of preventing the diversion of 
our products.
    The following is a list and brief description of the tools and 
processes we believe are critical for a tobacco company to control its 
supply chain:

      Order Controls

      Enhanced Volume Monitoring for higher risk markets

      Reporting Suspected Compliance Violations

      Training for Our Employees

      Tracking and Tracing

      Seizure Follow-Up

Order controls

    We have a control system in place to monitor customer orders. In 
markets with significant risk of diversion, this control often involves 
benchmarking, in each customer order, brands at most risk for smuggling 
against the total order. In other words, when we receive an order from 
a customer, the ratio of high-risk brands is compared to the total 
ordered volume. If the ratio is higher than a benchmark based on 
average market demand, we take appropriate action, which may include 
reducing or declining the delivery of the high-risk brand volume.

Enhanced volume monitoring

    Where markets are identified as having a higher risk of product 
diversion, in addition to the standard requirements of PMI's Know-Your-
Customer program, we introduce enhanced volume monitoring processes. On 
a monthly basis, as part of our Know-Your-Customer program, each PMI 
affiliate is required to analyze sales to Significant Volume Customers 
in an effort to identify any unusual activity or trends. When there is 
a higher risk of product diversion we work to extend our volume 
monitoring further into the supply chain to increase our ability to 
detect unusual purchasing patterns that may reflect diversion somewhere 
down the supply chain. This means that when significant and recurrent 
volume variation is reported, we can, as appropriate, decide to take 
action and limit the volumes provided to that customer.

Training for our employees

    Well-informed and properly trained employees are a key pillar of 
our Know-Your-Customer program. In 2016, PMI affiliates trained 9,483 
employees in the Fiscal Compliance Program and Supply Chain Controls. 
PMI Duty Free business also conducts regular anti-diversion training 
for employees in the field, marketing and finance functions.

Reporting suspected compliance violations

    PMI employees must report any suspected violation of the law or of 
our compliance Principles & Practices, and have a number of options for 
how to report. Under our Know-Your-Customer and related anti-diversion 
policies, employees are required to report suspected compliance 
violations of a potential diversion occurring in our supply chain.

Tracking and tracing

    We have made large investments to implement a broad range of 
measures and technologies that meet and exceed our historic EC 
Agreement contractual commitments and current regulatory requirements. 
These measures and technologies are effective solutions to prevent the 
diversion of genuine products from the legal supply chain.
    Our tracking and tracing systems operate successfully across our 
global supply chain. Today, we have more than 700 tracking locations in 
133 markets, an effort that has required an investment of more than EUR 
100 million.
    PMI's tracking and tracing technologies have proven instrumental in 
helping law enforcement identify the origin of seized cigarettes. Our 
sales conditions make clear to all PMI customers that tracking and 
tracing data may be shared with law enforcement. Whenever a PMI 
customer is identified as having been involved in a transaction that 
eventually led to a seizure of PMI cigarettes in contraband channels, 
our affiliates are required to perform prompt follow-up through a 
variety of actions, including warning letters, additional training, 
face-to-face meetings to thoroughly investigate the issue and enhance 
volume and order monitoring, along with volume caps, if appropriate.

Seizure follow-up

    Our seizure follow-up processes ensure that our customers are 
informed of seizures involving products they purchased and that, 
together with them, we take the necessary actions to sell in volumes 
commensurate with consumer demand in the intended market of 
distribution. Our customers, in turn, must performing fulsome Know-
Your-Customer follow-up with their own customers.
    For example, in 2015, the UK Customs authorities informed us of a 
seizure of Polish domestic PMI cigarettes. PM Poland analyzed the 
tracking and tracing data collected and identified three customers as a 
potential point of diversion. Discussions with those direct customers 
identified a subsequent customer that was potentially involved in the 
diversion of products. Having already been warned and subjected to 
quotas because of potential involvement in a previous seizure of 
diverted products, our customer decided to terminate its business 
relationship with the downstream buyer under suspicion of diversion.

Law enforcement cooperation

    As a private company there is a limit to what we can do to thwart 
the activities of serious organized crime groups who exploit the high 
profitability and relatively low risk of smuggling of tobacco products.
    In this complex situation, we need, seek, and welcome cooperation 
with law enforcement and government authorities. In our ongoing 
cooperation with law enforcement authorities and in public-private 
partnerships we strive to be as transparent and effective as possible.
    During 2016, PMI cooperated on many levels with authorities 
worldwide, including inspecting 392 seizures in 31 countries and 
delivering training to over 2,418 law enforcement officers on anti-
illicit trade across all PMI regions. We are eager to continue and 
enhance such cooperation in the future, which can be achieved, for 
example, by direct cooperation agreements between PMI and each 
individual country and or authorities through a Memorandum of 
Understanding (MoU).
    Currently, PMI has more than 50 MoUs in force in 40 countries 
related to the fight against the illicit trade of tobacco products. In 
some countries we have multiple MoUs, given the various departments 
within a single country that could--and many times do--contribute to 
this fight.

PMI IMPACT Grant Program

    Launched in May 2016, PMI IMPACT is a global initiative for which 
PMI has pledged USD 100 million to support public, private, and non-
governmental organizations to develop and implement projects against 
illegal trade and related crimes, such as corruption, organized crime, 
human trafficking and money laundering. We consider this a leading 
private sector initiative.
    The program is overseen by a council of seven external independent 
experts from the fields of law, anti-corruption and law enforcement, 
who review and select funding proposals for projects to enable 
innovation in three key areas in the fight against smuggling and 
related crimes--research, education and awareness, and action. 
Proposals can come from private, public, or non-governmental 
    For its first funding round, PMI IMPACT called for projects that 
have an impact on illegal trade and related crimes in the European 
Union, even if implemented elsewhere.


    In our view, key elements for private industry to be effective in 
controlling the illicit tobacco trade include:

      Use of research and intelligence to better understand the 
problem and its 

      Effective supply chain controls;

      Tracking and tracing systems based on open standards that 
can be used by all relevant stakeholders in the supply chain, across 
different technological platforms, geographies and industries, to 
prevent product diversion;

      Control of all elements of the supply chain--including 
the supply of the key components for manufacturing cigarettes, such as 
cellulose acetate tow;

      Education campaigns that raise public awareness of the 
problem and its effect on society;

      Innovative programs, such as the PMI IMPACT USD 100 
million grant program, to fund innovative solutions to fight against 
illicit trade; and

      Cooperation between brand owners and shipping and 
transport companies that generates best practices and self-regulation; 
one example is the Declaration of Intent to prevent the maritime 
transportation of counterfeit goods to which PMI is a signatory.

    But one company or even an industry alone cannot stop illicit 
trade. We need partners in government and law enforcement, and believe 
those efforts will be most successful if they are focused on the 

      Well-funded and fully staffed law enforcement teams, with 
a clear mandate to take action against illicit tobacco as a key 
government priority;

      Transnational legal tools and mechanisms ensuring 
effective exchange of information between national law enforcement and 
judicial authorities to investigate, punish and deter cross-border 

      Transparent implementation of the World Health 
Organization's Framework Convention on Tobacco Control's Protocol to 
Eliminate Illicit Trade in Tobacco Products, with the inclusion of true 
subject matter experts, such as members of the legal industry, tobacco 
farmers, law enforcement agencies, and Ministries of Justice and 

      Regulation of tobacco operations in Free Trade Zones 
(FTZs), starting with basic common-sense measures such as enhanced due 
diligence, annual licensing of tobacco operators, and the ban of cash 
payments above USD 10,000.

      A policy framework that regulates the legal supply chain 
and severely penalizes those involved in illicit trade;

      Properly trained officers who are knowledgeable about the 
issue and with the right tools, such as container scanners, mobile 
scanners for trucks and sniffer dogs;

      Clear ethics policies and fair compensation for 
enforcement authorities to overcome corruption;

      Funding intelligence efforts, enabling law enforcement to 
investigate criminal networks;

      Deterrent legislation, such as asset forfeiture laws and 
laws that provide for deterrent prison sentences for convicted illicit 
tobacco traders; and

      Public-private partnerships with the legitimate industry, 
which are critical for sharing information, yet often unfairly 


    Chairman Wicker, Co-Chairman Smith, thank you again for the 
invitation to testify before the Helsinki Commission and share our 
thoughts and what we at PMI believe are industry best practices. We 
value the opportunity to work with this Commission and the US 
government in the fight against illicit trade. I look forward to your 
questions and our discussion here today.


i) https://2009-2017.state.gov/documents/organization/250513.pdf
iii) http://ec.europa.eu/transparency/regdoc/rep/10102/2016/EN/SWD-
iv) http://www.inta.org/Communications/Documents/2017_impact_study.pdf
v) http://www.csnews.com/product-categories/tobacco/black-market-
vi) http://tobaccocontrol.bmj.com/content/20/2/173


This is an official publication of the
Commission on Security and
Cooperation in Europe.

< < < 

This publication is intended to document
developments and trends in participating
States of the Organization for Security
and Cooperation in Europe (OSCE).

< < < 

All Commission publications may be freely
reproduced, in any form, with appropriate
credit. The Commission encourages
the widest possible dissemination
of its publications.

< < < 

http://www.csce.gov     @HelsinkiComm

The Commission's Web site provides
access to the latest press releases
and reports, as well as hearings and
briefings. Using the Commission's electronic
subscription service, readers are able
to receive press releases, articles,
and other materials by topic or countries
of particular interest.

Please subscribe today.