[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
A HAZY CRISIS: ILLICIT CIGARETTE
SMUGGLING IN THE OSCE REGION
=======================================================================
HEARING
before the
COMMISSION ON SECURITY AND COOPERATION IN EUROPE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
JULY 19, 2017
__________
Printed for the use of the
Commission on Security and Cooperation in Europe
[CSCE 115-1-4]
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COMMISSION ON SECURITY AND COOPERATION IN EUROPE
LEGISLATIVE BRANCH COMMISSIONERS
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
EXECUTIVE BRANCH COMMISSIONERS
Vacant, Department of State
Vacant, Department of Commerce
Vacant, Department of Defense
[ii]
A HAZY CRISIS: ILLICIT CIGARETTE
SMUGGLING IN THE OSCE REGION
----------
July 19, 2017
COMMISSIONERS
Page
Hon. Roger F. Wicker, Chairman, Commission on Security and
Cooperation in Europe.......................................... 1
WITNESSES
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
APPENDICES
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
[iii]
A HAZY CRISIS: ILLICIT CIGARETTE
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,
presiding.
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.
HON. ROGER WICKER, CHAIRMAN, COMMISSION ON SECURITY AND
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
witnesses.
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. LOUISE SHELLEY, DIRECTOR, TERRORISM, TRANSNATIONAL CRIME,
AND CORRUPTION CENTER, GEORGE MASON UNIVERSITY
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
this.
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
partnerships.
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.
DAVID SWEANOR, ADJUNCT PROFESSOR OF LAW, UNIVERSITY OF OTTAWA
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-
medication.
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
them.
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.
MARC FIRESTONE, SENIOR VICE PRESIDENT AND GENERAL COUNSEL,
PHILLIP MORRIS INTERNATIONAL, INC.
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
authority.
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
Commission.
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
cigarettes.
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
tobacco.
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
this?
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
threads.
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
shipments.
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.
[Laughter.]
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
here.
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
problem.
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
illicit?
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
haystack.
Mr. Wicker. And you mentioned harmonization of tax
policies.
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
they've
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
important.
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
policy.
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
breath----
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.
[Laughter.]
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
also----
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
terrorism.
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
stories?
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
public.
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
witnesses.
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
manufacturers.
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
cigarettes.
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
smugglers.
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
attention.
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,
http://lexpansion.lexpress.fr/actualite-economique/la-france-
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-
tobacco-is-plaguing-france/.
\2\ ``Spanish Customs,'' in Interpol, Against Organized Crime :
Interpol Trafficking and Counterfeiting Casebook 2014, 36 (Lyon:
Interpol, 2014).
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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://
www.lexpress.fr/actualite/societe/contrebande-le-boom-des-marques-
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/
the-factbook-on-the-illicit-trade-in-tobacco-products-8-france/.
\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,
2012.
\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://
assets.kpmg.com/content/dam/kpmg/uk/pdf/2017/07/project-sun-2017-
report.pdf.
\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
International).
---------------------------------------------------------------------------
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://
icsr.info/2016/10/new-icsr-report-criminal-pasts-terrorist-futures-
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://
www.nytimes.com/2015/02/18/world/gaps-in-surveillance-are-clear-
solutions-arent.html.
---------------------------------------------------------------------------
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://
2009-2017.state.gov/documents/organization/250513.pdf.
---------------------------------------------------------------------------
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
disproportionately.
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://
www.slrmag.co.uk/imperial-tobacco-targets-facebook-fraudsters/.
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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/
pubblicazioni/the-factbook-on-the-illicit-trade-in-tobacco-products-2-
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):
51-76.
\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/
2015/.
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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://
www.reportingproject.net/underground/
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,
19-22.
---------------------------------------------------------------------------
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
business.
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
States.
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.
INTRODUCTION
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
International.
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
combined.
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;
and
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
DIFFERENT FORMS OF ILLICIT TOBACCO
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.
DRIVERS OF ILLICIT TRADE
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
countries.
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.
CONSEQUENCES OF ILLICIT TRADE
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;
and
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.''
iii
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
Shelley:
``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
tobacco.vi
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
governments.
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
Union.
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
PMI'S COMMITMENT TO ENSURE CONTROL OF OUR SUPPLY CHAIN
AND FIGHT ILLICIT TRADE GLOBALLY
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
reoccurrence.
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
policies.
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
program.
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
anti-
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.
TOOLS AND PROCESSES TO SECURE THE SUPPLY CHAIN
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
organizations.
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.
RECOMMENDATIONS
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
drivers;
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
following:
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
trafficking;
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
Finance;
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
attacked.
CONCLUSION
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
ii) http://216.55.97.163/wp-content/themes/bcb/bdf/articles/
InternationalAnticonterfetingdirectory.pdf
http://www.stopillegalcigarettes.com/the-problem/drivers-of-
illicit-trade
iii) http://ec.europa.eu/transparency/regdoc/rep/10102/2016/EN/SWD-
2016-44-F1-EN-MAIN.PDF
iv) http://www.inta.org/Communications/Documents/2017_impact_study.pdf
v) http://www.csnews.com/product-categories/tobacco/black-market-
cigarettes-killing-canadas-c-stores-0
vi) http://tobaccocontrol.bmj.com/content/20/2/173
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