EU anti-fraud official: Tobacco smuggling is ‘major source’ of organised crime

"Cheap whites" produced in Belarus and seized at the Polish border. [Sarantis Michalopoulos]

Cigarette smuggling costs national and EU budgets more than €10 billion annually in lost public revenue and is a major source of organised crime, including terrorism, Margarete Hofmann told EURACTIV in an interview.

Margarete Hofmann is director of policy at the European Anti-Fraud Office (OLAF).

She spoke with EURACTIV’s Sarantis Michalopoulos.

The illicit tobacco trade has taken centre stage in the EU debate lately. What is the level of the problem exactly and how does OLAF address it?

It is very difficult to measure the size of the illicit market in tobacco products like it is to measure other clandestine activities in general and across all EU member states.

Currently, according to the available estimates, tobacco smuggling costs national and EU budgets more than €10 billion annually in lost public revenue. Information available to OLAF indicates that illicit tobacco trade has broadly stabilised over the past two or three years, albeit at a high, pre-occupying level. In some member states, the share of the illicit tobacco market is particularly worrying, especially as we know that cigarette smuggling is a major source of revenue for organised crime.

OLAF addresses this problem in a comprehensive manner from both an operational point of view under its independent investigative mandate, and from a policy-making one, providing input to the European Commission on related policy files.

For example, OLAF carries out investigations into tobacco smuggling with remarkable results. Overall, 619 million cigarettes were confiscated with the support of OLAF in 2015, or three cigarettes out of every pack seized in Europe.

Furthermore, OLAF coordinates Joint Customs Operations by the national authorities – the so-called “JCOs”. JCOs are targeted actions by the customs authorities of several countries to combat smuggling either in risky areas or on trade routes identified as problematic. In 2015, OLAF ran three such operations together with member states, which led to the seizure of 17 million cigarettes.

Cooperation with national authorities is paramount, and OLAF stays in daily contact with the customs services of EU member states. Last spring, for example, OLAF supported the Greek authorities in seizing 50 million cigarettes in the port of Piraeus. We also provided information to the Spanish Customs which led to them confiscating 22 million contraband cigarettes in Barcelona and Malaga. Some of these cigarettes were fraudulently described as coconut fibre or travel bags.

Smugglers are actually really creative when it comes to concealing the goods they are attempting to traffic. Just a few weeks ago, OLAF helped Spanish customs uncover 9 million so-called “cheap white” cigarettes hidden under a load of wheelchairs at the Barcelona harbour. Almost at the same time, at the port of Piraeus, rattan chairs were used to try and camouflage around 23 million cigarettes shipped in four containers from Vietnam. As you may know, “cheap white” cigarettes belong to brands sold illegally in the EU, by producers having no legal distribution network and who do not pay any taxes in the EU. We need thus to cooperate with our partners in the EU, but also in major source and transit countries, in order to prevent further losses of revenue for the EU budget.

‘Cheap whites’: The new trend dominating tobacco black markets

Tobacco smugglers have found new ways of expanding their illegal activities and now focus on a trend called “cheap whites”, which is raising new challenges for European regulators and Europol.

In addition to our operational work, OLAF also supports the European Commission in developing EU tobacco anti-smuggling policy. By adopting the EU Tobacco Products Directive and the Protocol to Eliminate Illicit Trade in Tobacco Products (FCTC Protocol), the EU has strengthened the legislative framework to fight the illicit trade in tobacco products.

From May 2019, the Tobacco Products Directive will introduce a new EU-wide system to track and trace cigarettes either destined for or placed on the EU market. The FCTC Protocol, in turn, contains a number of key provisions including licensing requirements for the production of tobacco products and manufacturing equipment, reinforced control in free zones as well as provisions on money laundering. In the long term, the FCTC Protocol also aims at creating a global track and trace system.

A Memorandum of Understanding was recently signed between the EU and Belarus regarding the so-called “cheap whites”. What are the details?

The Administrative Cooperation Arrangement, which OLAF and the State Customs Committee of Belarus signed in July 2016 is a technical and operational instrument. It is designed to facilitate the practical aspects of the investigative cooperation between the two services in general. The Arrangement should help OLAF and Belorussian authorities work together more effectively on the ground in the fight against illicit tobacco trade.

Czech MEP: EU should pressure Belarus over illicit tobacco trade

The European Union and its member states should pressure Belarus to combat the trade in illicit tobacco and adopt a “stick and carrot” approach with sanctions if necessary, Czech MEP Tomáš Zdechovský told EURACTIV.com.

How do you assess cooperation between EU countries and the industry on the issue considering that the EU recently decided not to renew cooperation with Philip Morris International? Can the EU tackle the illicit tobacco trade by its own means?

Under the anti-fraud agreements between the EU, the member states and the four major tobacco manufacturers (one of which, the PMI Agreement, has now expired), cooperation, on the whole, has been effective. For example, the prevalence of PMI contraband on the illicit EU tobacco market dropped by around 85% from 2006 to 2014.

However, this did not lead to an overall reduction of illicit tobacco products on the EU market. Smugglers actually found other products to smuggle onto the EU market, mainly “cheap whites,” but also counterfeit products. We have also noticed more illegal tobacco manufacturing popping up inside the EU again.

Commission vows to tackle illicit tobacco trade 'by its own means'

The European Commission will focus on the new tobacco directive, as well as accords with the World Health Organisation to fight against illicit tobacco trade, following the expiration a 12-year deal with Marlboro-maker Philip Morris.

The regulatory landscape has also undergone changes over the past years. Today, the Tobacco Products Directive coming into force, together with the FCTC Protocol on combatting illicit tobacco trade which the EU has adhered to, will be our key policy tools in fighting illicit trade, alongside robust enforcement in close cooperation with national authorities. Our hope is that an increasing number of countries will swiftly sign and ratify the Protocol. We expect the Protocol, once in force, to be particularly effective against “cheap whites”.

We are currently reviewing what worked and what needs to be strengthened in the fight against illicit tobacco trade and will be publishing a report on this matter over the coming months. What is already clear is that the illegal market is changing constantly and that we need the right mix of tools, together with reinforced cooperation at all levels, to tackle these new challenges.

Clearly, to continue being successful in fighting customs fraud in the context of a global marketplace, enforcers have an acute need for information of potential investigative interest coming from a multitude of sources.

OLAF is always trying to stay ahead of the game. For example, our specialists have developed new IT tools that record the physical movements of containers transported on maritime vessels and that gather information on the goods entering, transiting and leaving the EU. This will allow OLAF and member states to better track and trace suspicious shipments and thus better detect customs fraud, which should also prove helpful in the fight against tobacco smuggling.

Europe is preparing its own track and trace system. What form should it take in order to address the current and future situation?

This is not for OLAF to decide from an investigative standpoint, and other services of the Commission are better placed to assess such possible systems, their various strengths and weaknesses and so on.

What matters most to us is that the supply chain is controlled at every step of the way. In my view, regardless of the system chosen, the focus should be on making sure all producers utilise such systems, thus ensuring their products do not fall into the hands of criminal networks.

What’s your opinion regarding cooperation among EU member state intelligence services? Is it effective enough?

As you know, OLAF’s investigative mandate in this field focuses on protecting EU revenue and ensuring to the extent possible that customs duties are not lost. We are not best placed to rate the cooperation of Intelligence services overall in the EU.

From my position and given the general context in Europe, it seems that there is a growing awareness of the need to enhance and encourage the exchange of information between the relevant authorities at national and EU level, and to provide adequate means for sharing intelligence.

This holds especially true in relation to terrorist activities but should also apply with regard to economic crimes. It is interesting to note that the proceeds of illegal tobacco traffic have, in some instances, indeed been used to fund terrorist groups. This demonstrates the broad criminal potential of the illicit trade in tobacco. Therefore, it is all the more important to join forces at all levels in the fight against illicit trade in tobacco and to continue exchanging relevant information, across borders.