Brussels, 27 September 2010
Contraband and counterfeit cigarettes: frequently asked questions
How was the agreement with ITL negotiated?
The negotiations lasted for over two years. The EU and the participating Member States were represented in the negotiations by the European Commission. The Legal Service and OLAF conducted the negotiations for the Commission. All Member States were invited to participate. During the negotiations the Commission regularly informed and consulted the participating Member States.
Why haven’t all Member States signed this agreement?
Some Member States are still conducting their review of the Agreement consistent with their internal procedures. This has prevented them from signing before today. The Commission is confident that all Member States will sign this Agreement very soon. Member States have so much to gain from such agreements, notably, the extra support in the fight against illegal trade and it should also be pointed out that neither of the previous Agreements had all of the Member States’ signatures on the day of their announcement.
Will the agreement affect the Commission's actions against tobacco consumption or general tobacco control policy?
This agreement is aimed solely at combating illicit trade in cigarettes. It will have no effect on policy to reduce and prevent tobacco consumption, nor will it hinder the Commission from continuing to regulate the tobacco industry.
What are the estimated losses for the EU and the participating Member States from cigarette smuggling?
It is estimated that around 10 billion euro are lost to the national and EU budgets each year due to the smuggling of both genuine and counterfeit cigarettes. On a single 40 foot container of smuggled cigarettes (10 million cigarettes) the average loss of customs duty, excise duty and VAT is € 1.5 million. In the UK the loss would be about three times as big because of the UK’s higher taxes.
What are the other problems linked to the illegal trade in tobacco?
As well as causing huge financial losses, the 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. In addition the illegal trade in tobacco harms the interests of legitimate businesses throughout the supply chain, particularly tobacco manufacturers and retailers.
What is the difference between contraband and counterfeit cigarettes?
Contraband cigarettes are genuine product that has been bought in a low-tax country and which exceeds legal border limits or is acquired without taxes for export purposes, to be then illegally re-sold in a market with higher prices.
Counterfeit cigarettes are cigarettes which are illegally produced and sold by a party other than the original trademark holder.
What is the level of contraband in the EU and how will this agreement affect those numbers?
In the past, a key concern was the smuggling of genuine tobacco products. However, European law enforcement efforts, coupled with the policies and technologies of manufacturers such as ITL, have succeeded in greatly reducing the amount of genuine product which enters the EU through contraband channels. However, as the problem of smuggled genuine products has been reduced, the problem of counterfeit products has increased. Annual losses of revenue in the European Union can be estimated, on the basis of seizures of cigarettes notified by the Member States, at about € 10 billion, of which about 10% would be revenue for the European Union budget. Also, it is estimated that about 65% of the seized cigarettes are counterfeit.
The initiatives in the agreement will help to reduce substantially the total amount of counterfeit cigarettes in the EU, and to reduce even further — and hopefully eliminate completely — the smuggling of genuine cigarettes.
Where do counterfeit cigarettes come from?
China is still the biggest source of counterfeit cigarettes, but they also come from countries on the eastern border of the EU (for example, Russia and Ukraine). But many illegal factories have been discovered within the Member States, and they are also a significant source of supply of counterfeit cigarettes.
Where do smuggled genuine cigarettes come from?
Genuine smuggled cigarettes come from a variety of sources. Recent trends show that the current main source countries outside the EU are Russia, Ukraine, Moldova, and Belarus. One component affecting current smuggling trends is the price differential between cigarettes in these markets compared to the prices within the EU. Large profits can be made by smuggling the cigarettes to markets where prices are higher.
Genuine production, and subsequent illegal import, of new cheap brands in countries outside the EU is also a growing problem. They are an alternative to counterfeit cigarettes, and are popular with consumers due to their low prices.
Is the smuggling of tax-paid cigarettes from one Member State to another a problem?
There is abuse in the movement of tax-paid cigarettes between Member States with lower rates of tax and Member States with higher rates of tax (“bootlegging”). Such cigarettes can move freely if they are bought and transported by a person who obtains them for his/her personal consumption. But, in practice, individuals and organised gangs arrange for large-scale purchases of tax-paid cigarettes in a lower-tax Member State and then transport the cigarettes to a higher-tax Member State and sell them there on the illegal market without paying the appropriate taxes and duties. Since taxes are in fact paid on the cigarettes, this is not covered by today's agreement.
Are cigarettes smuggled in large or small consignments?
There are many methods. Counterfeit cigarettes from China are often discovered in 40 foot containers (containing about 10 million cigarettes). But smuggling in lorries, trains, private cars, by post, and even concealed on the body of individuals is also a serious problem.
Which brands are smuggled most?
It depends on the market for which the cigarettes are destined. For example, brands which are popular with French smokers tend to be smuggled more into France. National authorities have problems with smuggling and counterfeit in all the leading brands in their Member State.
How many cigarettes are seized by the Member States each year?
In 2008, the quantity of seized cigarettes notified to OLAF by the Member States was 5.2 billion. This figure does not include the very many seizures of smaller amounts and cannot distinguish between genuine and counterfeit cigarettes.
What happens to seized cigarettes?
Seized cigarettes are normally initially stored in customs warehouses waiting for the outcome of any judicial proceedings. They are then usually destroyed in accordance with national law. All counterfeit cigarettes are destroyed.
What does the Commission/OLAF do to tackle the problem of the illicit tobacco trade?
In addition to working with tobacco manufacturers in the framework of legally binding Agreements, the Commission, in particular through the European Anti-Fraud Office (OLAF), plays a full and active role in assisting the Member States to tackle the phenomenon of international cigarette smuggling and to dismantle the criminal gangs responsible for this trade. In this context, the Commission:
Assists and supports law enforcement authorities throughout the European Union with their operational cases, as well as coordinating major fiscal and criminal investigations with the Member States and third countries.
Organises and coordinates Europe-wide and world-wide customs operations to target specific problems, such as Operation Diabolo in 2007 (aimed at intercepting counterfeit products from China which are smuggled in shipping containers to the EU); Operation Mudan in 2008 (to address the growing problem of smuggling of cigarettes by post); Diabolo II (which had the same objective as the first Operation Diabolo) which took place in September 2009; and Mathew II which took place in April 2010 (targeting road transport).
Provides intelligence to the Member States about the emerging threats and trends in cigarette smuggling to support the operational activities of EU law enforcement agencies.
Provides financial support to Member States from the Hercule II Programme for measures specifically targeting cigarette smuggling, such as the purchase of specialist x-ray scanning equipment, training and the organisation of regional actions.
Holds an annual conference for investigators and intelligence staff who work in the tobacco sector to exchange information on current and emerging threats and to cement operational relationships between the Member States, key third countries and international organisations.
What is the Hercule II programme?
The Hercule II programme is a Community programme to fight against fraud affecting the financial interests of the EU. It has been used to finance training and technical assistance, and since 2007 also contains funds which are to be used for anti-fraud purposes, including the fight against cigarette smuggling and counterfeiting. Money can be used for the procurement of anti-fraud equipment, training and grants. This programme will receive € 98.5 million over seven years.
What is being done by the Commission/OLAF to stem the flow of contraband from third countries?
The Agreements with tobacco manufacturers contain a large number of measures to ensure that the products of these companies do not fall into the hands of criminals. These measures include a requirement that the company supply only the number of cigarettes required by the legitimate market, carry out due diligence in relation to the purchasers of cigarettes and implement a tracking and tracing system to assist law enforcement authorities in the event that cigarettes are moved from the legitimate supply chain onto the illicit market.
The Commission's work on illicit tobacco highlights the international nature of cigarette smuggling and the need to work with our international partners to dismantle the organised criminal gangs involved in the illicit trafficking of cigarettes. The Commission has put in place mutual assistance agreements with 55 third countries to facilitate the exchange of customs-related information and further agreements are under negotiation.
In 2008 OLAF posted a liaison officer in China, one of the main sources of counterfeit cigarettes coming into the EU, to strengthen the protection of the EU’s financial interests and facilitate international co-working with the Chinese authorities. OLAF intends to post liaison officers in 2 other tobacco hotspots in 2010.
Through OLAF, the Commission is playing a key role in the on-going negotiations for a Protocol on the Elimination of the Illicit Trade in Tobacco Products under Article 15 of the World Health Organization Framework Convention on Tobacco Control. If the negotiations are successful, the Protocol could potentially apply to over 165 countries and will provide a real boost to international efforts to tackle tobacco smuggling and related illegal activities.
What other tobacco companies has the Commission signed such an Agreement with?
The Commission and Member States already have similar agreements to the one signed today with PMI (IP/04/882), JTI (IP/07/1927) and most recently BAT (IP/10/951). Very positive results from the first two agreements have been seen over the past few years, in terms of a reduction in the level of smuggled cigarettes from these brands. The Commission expects the same kind of success will be seen from the BAT and ITL agreements in time as the results become visible.
Will the Commission sign any other agreements with other tobacco manufacturers in the future?
The Commission is always prepared to have discussions with manufacturers who are willing to commit the necessary resources to improve ways to combat illegal trade in their products. Producers also have a responsibility to fight illegal trade in their products, in full cooperation with relevant government authorities.
The agreement and its annexes are available on: