Buying Cigarettes
I came - I saw - I bought

Europe's Smoking Problem

For a continent that spearheaded workplace smoking bans and slaps some of the highest tax rates on cigarette sales of any region in the world, Europe has a smoking problem.

In 2011, according to a report commissioned by the European Union and carried out by auditing firm KPMG, one in ten cigarettes sold in the 27-nation bloc was contraband - that's around 65 billion cigarettes. The report was part funded by Philip Morris International.

Making matters more difficult is the growing influx of so-called "illicit whites," which are legally manufactured in places like Ukraine and Russia under brand names like Jin Ling and Raquel, then illicitly smuggled into the EU duty-free, according to the report.

The influx of contraband cigarettes has implications not just for public health - cheap cigarettes are widely thought to correlate with high smoking rates - but also for tax revenues. At a time when many member states are desperate for cash, the report estimates the EU's annual losses from contraband cigarette sales at €11 billion.

While some of the findings have been questioned by independent tobacco-industry analysts, there is no denying the scale of the problem.

Here in Brussels, where the Russian border is 900 miles away and tobacco taxes relatively low, vendors outside a weekend market make their rounds, mesh bags full of contraband cartons slung from their shoulders. Your correspondent was able to purchase a pack of what appeared to be Dutch Marlboros for €3.00 ($3.69) - 40% percent off the store price.

The seller had no Jin Lings on hand, but that would seem an anomaly. Illicit whites, according to the report, make up 24% of all illegal cigarettes, up from 4% just five years ago.

The EU's anti-smuggling strategy has changed significantly over the last decade, with Brussels shifting from confrontation with the cigarette companies to something closer to collaboration.

Early last decade, Brussels sued Philip Morris for secretly encouraging the smuggling of its own cigarettes. The case was settled in 2004, with the lawsuit dropped in exchange for $1.25 billion and a pledge to cooperate with OLAF, the EU's anti-fraud office, in anti-smuggling efforts. Since then, the EU has settled with three other major tobacco companies for an additional $900 million.

These deals resulted in the annual KPMG/Phillip Morris reports as well as a host of other initiatives.

OLAF, which has taken the lead in coordinating anti-smuggling efforts in Brussels, has in the mean time launched some successful anti-smuggling stings, including a 2007 action called Operation Diabolo that saw authorities intercept 135 million illicit cigarettes.

Austin Rowan, an OLAF spokesman, said his organization was optimistic about its efforts, noting that the number of cigarette seizures had decreased in 2011, a possible indicator, he said, of a shrinking illicit market.

"For us, the real barometer is the reports of illicit seizures," he said.

But according to the report, the flood of illegal cigarettes has continued to increase, particularly the illicit whites coming from the east. As a result, it's up to customs agents on the EU's eastern frontier to seize untaxed cigarettes bound for Poland or Romania.

The border can be porous, and Russian and Ukrainian customs agencies are "pervasively corrupt," said Anders Aslund, an expert on Eastern European trade at the Peterson Institute for International Economics in Washington.

Giovanni Kessler, the head of OLAF, said his organization is "developing a cooperation strategy" on the issue of border control. Efforts include posting a liaison officer to Ukraine to work with the authorities there and an action plan for the EU's eastern border detailing the bloc's anti-smuggling strategy, which the Commission adopted last year.

Russia's imminent accession to the World Trade Organization, which the country's lower house approved last week, could give Brussels an additional forum in which to address smuggling. The Commission also hopes to convince eastern border countries to raise their own cigarette taxes. That could discourage cheap imports by forcing up prices in places like Moldova and Ukraine, where a cigarette pack can legally sell for as little as €0.18 to €0.33. The EU is currently in negotiations with those two countries, and intends to start talks with Russia soon, an EU spokeswoman said.

But this would not stop illegal imports of illicit whites, which often come to the EU straight from the factory gates, according to a 2008 investigation from the Center for Public Integrity, a U.S. non-profit organization which conducts investigative journalism projects.

The simplest solution, some say, would be to fight smoking addiction itself via a single, high EU-wide cigarette tax.

While EU member states have a veto on tax policy, Brussels has launched an initiative that would require a new minimum cigarette tax rate from 2014 within the 27-nation bloc. Countries where the tax is lowest, like Bulgaria, Greece, and Romania, will have until 2018 to implement the change.

Cigarette companies have lobbied hard against raising taxes, arguing it will feed the underground market. But public health advocates argue the gains in terms of reduced smoking rates from tax hikes outweigh the risks of increased smuggling.

In the meantime, tax revenues can actually increase. In the U.K., higher tax rates have lifted tobacco duty revenues by 23% in the last decade, while adult smoking rates have fallen about 25%, according to Cancer Research UK.

Constantine Vardavas, a public-health expert at Harvard who has advised the Greek government on its cigarette policy, said a tax increase could allow the country to recoup the millions - perhaps billions - of euros it loses every year to smuggling.

"That," he said, "is a big chunk of the deficit that's literally being turned to ashes."

Published: Tuesday, July 17, 2012

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