Minsk under pressure to take action against ‘illicit whites’

"Minsk" illicit whites seized at the Polish border. [Sarantis Michalopoulos]

Belarus should take measures against its illicit tobacco trade with Europe, lawmakers and stakeholders warn.

Minsk claims that the EU decision to impose sanctions on the country “prevented” dialogue over issues like the illicit tobacco trade, but that now the situation has improved. The removal of most of the sanctions and the recent establishment of an ongoing dialogue with the Customs and Anti-Fraud office is paving the way for a more constructive collaboration between the EU and its neighbour.

At the “EU-Belarus cooperation: Can it help in fighting illicit trade?” event organised by euractiv.com last week (8 February), several stakeholders stressed the need for the Belarusian government to show political will and cooperate in the fight against the illicit tobacco trade, which has severely impacted member state revenues.

The illicit tobacco trade is a global issue accounting for an estimated 10.4% of the cigarette market worldwide. In addition to being a major funding source for organised crime, the cost to European tax revenues is estimated to amount to €11.3 billion a year (see background).

Traditionally, the illicit tobacco trade has been dominated by counterfeiting, but “illicit whites” are an emerging trend. These cigarettes may be legally produced in a country but are then smuggled and traded illegally.

According to Project SUN, an annual study estimating the scale of the illicit cigarette market in the EU and commissioned by the four major tobacco manufacturers, a large proportion of the illicit cigarettes consumed in Europe originate from Eastern Europe, including Belarus.

The report found that the total illicit cigarette volumes accounted for 9.8% of all cigarettes consumed in the EU in 2015. In addition, illicit whites continue to represent over one-third of the illicit cigarettes in the EU while 28% of illicit whites brands flows were cigarettes with Belarusian labelling.

The price issue

Nick Hodsman, associate director and SUN Report project manager at KPMG, said that Ireland, the UK, France and eastern countries were experiencing a higher consumption of illicit products. This could be attributed to a high price difference, which creates an incentive for smugglers.

Hodsman noted that in countries like Poland, Slovakia and Romania, the price of a pack of cigarettes is on average €3 while in Russia, Belarus and Moldova the price is less than €1. Belarus has an average price of 58 cents and it is now the largest country sourcing cigarettes to the EU, representing 6 billion cigarettes and about €1 billion of lost taxes.

“Most of these products are going to Poland but also to other countries, like Italy, Germany and the UK. This is just not an issue of some cigarettes going across the border. Brands that are coming from Belarus like Fest, NZ, Minsk, Premiere, and Queen, are the cheapest brands you can get,” he emphasised.

Need for legal gateways

Howard Pugh, a senior specialist in Serious and Organised Crime Business Area at the EU’s law enforcement agency, Europol, stressed that law enforcement cooperation and partnerships were vital if we are to combat organised crime and excise fraud.

“We need legal gateways to exchange information,” he said. Referring to the KPMG’s Sun report, he emphasised that the illegal cigarette market in the EU was 53 billion cigarettes per year, which is “equivalent to 5,300 shipping containers full of untaxed cigarettes”.

“Europol is an intelligence and analytical agency, but we aren’t a statistical agency,” he noted.

Europol’s actions are determined by the information sent by member states as well as third parties and this data has to involve organised crime and concern two or more member states. Currently, two of the most common excise frauds Europol is examining are the diversion of cheap white cigarettes under excise duty suspension and the organised crime groups setting up illegal factories.

KPMG has indicated that a lot of cigarettes come from Belarus, but these trends keep on changing and the current main source countries are Belarus and the United Arab Emirates. The report also noted that these cigarettes are legally manufactured there but are smuggled into the EU. Many of the cigarette brands seized are producing by the Neman factory in Grodno.

“Belarus is part of the problem, but also the solution, so I’m glad to have a representative around the table. One way to solve this problem is to have collaboration,” the Europol official stressed, pointing out that track and trace has its limitations in identifying cigarette supply chain leaks because it will only identify the first customer. Organised crime groups will set 4 or 5 fake companies to disguise the responsible party.

In July 2016, the European Anti-Fraud Office (OLAF) and the State Customs Committee of Belarus signed an Administrative Cooperation Arrangement, with the aim of facilitating investigative cooperation between the two services in general.

“The Arrangement should help OLAF and Belarusian authorities work together more effectively on the ground in the fight against illicit tobacco trade,” OLAF director of policy Margarete Hofmann recently told EURACTIV.

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

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.

For Pugh, in order to better cooperate with Belarus, MoUs need to be dynamic, not just a signed piece of paper for the cupboards.

“For example, to make a real difference it should allow a Polish Border Guard to phone Belarusian authorities, to verify companies declared on paperwork associated with suspicious loads,” he said.

Belarus is causing damage

Laima Andrikiene, a Lithuanian LT party MEP (EPP), analysed the current state-of-play of EU-Belarus relations, saying that the release of political prisoners in August 2015 was an important step.

“In February 2016, the EU lifted most sanctions against Belarus and since then it has been intensifying the implementation of a number of measures, which will enhance EU-Belarus relations in economic, trade and assistance related fields,” Andrikiene said.

EU lifts almost all sanctions against Belarus

EU foreign ministers agreed on Monday (15 February) to lift nearly all sanctions on Belarus, including against strongman President Alexander Lukashenko, after what is considered to be an improvement in the country’s human rights record.

“Our philosophy is clear, EU is an honest broker: intensified EU-Belarus trade relations could be a vector for modernisation of Belarusian economy and promotion of EU’s core values, thus bringing about the long-due societal changes in Belarus,” Andrikiene added.

Referring to the illicit tobacco trade from Belarus, the Lithuanian MEP noted that the largest local manufacturer – Grodno Tobacco Factory Neman – was state-owned and the illicit whites of Belarusian origin consumed in the EU originate almost exclusively from it.

“Belarus regulates the market through the Council of Ministers, supervises the market through Customs Committee, has a monopoly on cigarette imports through Belarustorg, controls a big portion of domestic distribution, and has 100 percent ownership of the dominant local manufacturer Grodno Factory,” Andrikiene emphasised, adding that Belarus is playing a game which in the long run is counter-productive to the country itself.

She continued, saying that the illicit trade in cigarettes might help to solve economic problems in a short run, bringing fresh cash in foreign currency, but Belarus approving illicit trade at the highest level – as everything is controlled by the state – is causing damage to its neighbour the EU.

“So, the EU should implement its well-known principle when it comes to our bilateral cooperation: more for more and, vice versa, less for less,” the lawmaker concluded.

“Stick and carrot” approach

CPP lawmaker Tomáš Zdechovský, who is also a Czech EPP member, pointed out that there was an opportunity to find a solution with key players for the illicit market for tobacco products.

“For the EU, the illicit tobacco trade poses a threat to legal trade and national budgets that cannot be underestimated,” he said, adding that one tenth of the total EU illicit tobacco products and almost 28% of illicit whites sold in the EU come from Belarus with Poland, Latvia and Lithuania being more targeted.

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.

“There is a massive production of tobacco in Belarus which is cheap to produce, unregulated and dangerous,” he stressed, underlining that there is an insufficient exchange of information among member state on Belarusian smugglers.

For Zdechovský, an effective solution to the problem would be for the EU to put more pressure on Belarus.

“Belarus must not get anything for free: we need to make it clear if they want to boost economic ties with the EU, we need more support from Belarus and government should send the message that they want to end the illicit tobacco trade,” he said.

“A sort of carrot and stick towards Belarus is, therefore, necessary,” Zdechovský concluded.

Belarus: Now there is dialogue

Dmitry Yarmoliuk, counsellor for the Mission of the Republic of Belarus to the EU, said that the security of the country’s western border has increased recently, and that the government was discouraging Belarusians from participate in illegal trafficking in the EU.

“The Belarusian border with the EU is one of the safest external borders. It does not mean that we can sit back and do nothing […] Today’s debate shows that there are serious concerns on the EU side and that they need to be taken into account,” the diplomat noted.

Yarmoliuk added that in the past these matters were being discussed with EU member states bilaterally due to the political decision of the EU to impose sanctions against his country.

“Now we start to discuss issues with the EU as a whole directly with a frank and constructive dialogue,” he said.

“A year ago, our relationship with the EU was very specific. In the absence of a legal framework, we had to establish routines and channels of communication and sectoral collaborations were on an ad hoc basis and this was then the biggest impediment,” Yarmoliuk emphasised.

“Take the example of the partnership agreement. Belarus is not part of it. An additional Protocol between the EU and Belarus with customs cooperation was never ratified. This could have been a useful tool. This was not the case due to a political decision made by the EU. In the absence of routine channels, no collaboration was possible,” the diplomat added, stressing that the current reality is completely different.

“The bilateral customs dialogue launched last year; OLAF agreement signed last year; the Action Plan between Belarus customs and EU has been signed as well and is concentrating on urgent issues [like the illicit tobacco trade]”, he stated.

“All this happens in less than a year when most of the EU sanctions were taken down. This is the result of the growing trust between the EU and Belarus and very promising to give concrete results on the ground […] Better to engage than coerce,” the Belarusian official stressed, emphasising that the conference could be viewed as an incentive for more collaboration between the EU and Belarus on the illicit tobacco trade.

“Dialogue should not be seen as a gift; it is a natural tool for collaborating. Sanctions are not an incentive. Time for stick and carrot is over and other forms of partnerships should begin.”

Asked about the overproduction of the state-owned Grodno factory, Yarmoliuk admitted that it was over-producing for the Belarusian market, but that a lot of factories are export oriented.

“A large share of these products are being exported to Russia. The intention is not to export the products illegally in the EU. If you are looking at the facts, there is no criminal intention behind this over production. Only on the basis of these facts, you can establish a dialogue,” he said.

Yarmoliuk added that the overall policy of the Belarusian government was “zero tolerance” for border crime, trafficking and smuggling because it is damaging the Belarusian economy and economy of partners.

“It is not a matter whether our government is serious about combatting illicit tobacco trade, it is a matter of the efficiency of the measures that have already been taken and on what else it can be done,” he stressed, adding that Belarus is not using the case as a leverage toward the EU, as dialogue is not a way to punish someone or reward for something but “a natural way to work on specific issues to address these matters”.

“I mentioned how EU policies towards Belarus prevented a relationship. It left our customs authorities without a suitable, convenient framework where such issues could have been discussed. It is not a matter of punishing someone in order to engage politically through sectorial moves, but making politics work for the sake of concrete results,” the diplomat concluded.

Positions

Dirk Schubel, head of division on Eastern Partnership bilateral at the European External Service Action (EEAS) said the relations have come a long way between EU and Belarus in the last year. “The sanctions against Belarus were lifted in February 2016 and that was due to noteworthy developments: the release of political prisoners; Belarus constructive stand in the Ukrainian conflict with the Minsk agreement.”

“There are joint interests to seize the moment to increase bilateral relations. Increasing engagement with all sides of the Belarusian society with incremental pace: A step-by-step approach in the Eastern partnership framework. This critical issue should be agreed. We stand ready and wait for Belarusian cooperation.”

Robertas Bruzilas, an EEAS expert in relations with Ukraine, Belarus and Eastern Partnership, stressed, “Since last year we have been engaging on a different format of collaboration with Belarus […] including customs and tobacco smuggling which have been already discussed last April and last November”.

“In EEAS, you can be sure that the topic will be brought back to the next meeting.”

Joseph Chetcuti, Director General Customs Department in the Ministry of Finance of the Republic of Malta, said, “Smuggling has been around for ages. Despite the recent EU measures, the new Tobacco Products Directive, new Customs code, EU Strategy for Customs, this phenomenon remains extremely high. In order to remain relevant, we need to adjust our strategy to take measures”.

“We are more and more focused on cooperation with our immediate neighbours. We welcome the cooperation agreement between OLAF and Belarus to unit forces in collaborating. This agreement underlines recent Belarus efforts that have resulted in a rapprochement with the EU,” he added, stressing that there are some elements that should be taken into account.

“A key driver of illicit trade of tobacco products is taxation and price differentiation; Belarus taxation system makes the price difference attractive for smugglers […] In addition some member states are often left alone for the storing, seizing and, destroying of illegal products and this weight should be shared among member states by putting in place financial mechanisms”.

Background

The illicit tobacco trade is a global issue with a major impact on the EU, accounting for an estimated 10.4% of the cigarette market worldwide. In addition to being a major funding source for organised crime, the cost to European tax revenues is substantial, estimated to be €11.3 billion a year.

Traditionally the illicit tobacco trade has been dominated by counterfeiting, but “illicit whites” are an emerging trend. These cigarettes may be legally produced but are smuggled and traded illegally.

For some, tackling this problem requires innovative solutions that address a problem largely originating beyond EU borders.

The European Commission is addressing the issue as part of the Tobacco Products Directive (TPD), while also ratifying the World Health Organisation’s Protocol to Eliminate Illicit Trade in Tobacco Products (FCTC). But there is no single solution, and a response requires debate and knowledge sharing.