10.9 The tobacco industry and the illegal tobacco market

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10.9.1 The emergence of chop-chop in Australia

Chop-chop is finely cut, unbranded, 'black market' tobacco that has been grown, distributed and sold outside the government-regulated and taxed system.1 Due to its affordability, some smokers have adopted chop-chop as an alternative to, or in addition to, smoking manufactured tobacco.2-4

Several factors combined to accelerate the growth of the black market in home-grown tobacco in the late 1990s.1 The dismantling of the Tobacco Industry Stabilisation Plans after 1995 allowed Australian tobacco manufacturers to source tobacco leaf from the international market, putting downward pressure on the price of Australian leaf and leading to problems with oversupply. The abolition of individual state business franchise fees (state-levied tobacco taxes) in 1997, the change from charging federal excise on a weight basis to a per cigarette basis in 1999, and the introduction of the federal goods and services tax in 2000i lead to a uniform tax regime on tobacco throughout Australia and a significant increase in excise collections from tobacco. Obtaining tobacco illicitly, avoiding the tax and providing the product to the end user at a discount was highly profitable activity.1

Chop-chop typically entered the market via individuals or groups that purchased leaf directly from a tobacco grower, processed it for sale, and provided it to a range of retailers (such as tobacconists, market stallholders, hairdressers, newsagents and milk bars) for on-selling. The product was usually sold in half or one kilogram lots, packed into clear plastic bags in loose leaf form, but has also been found converted into readymade cigarettes and presented in counterfeit tobacco packaging.1 According to a news report just prior to the closure of the Victorian tobacco growing industry, tobacco farmers could earn up to $10 000 per bale of tobacco on the illicit market, compared to a top price of $800 the same bale would fetch on the legal market; the same bale would yield $30 000 in excise for the Federal Government.5 Bypassing the government, tobacco companies and retailers also meant considerable savings for the end user, who could purchase 100 g of illegal tobacco for about $13, compared to a recommended retail price for the equivalent legal product of about $36.6 In 2005, tobacco excise accounted for about 55% of the final retail price of a cigarette, and goods and services tax a further 10%.6

In a report for the Australian Taxation Office in 2006,6 the Australian National Audit Office (ANAO)ii stated that illegal tobacco operations were a key priority in the area of evasion and serious fraud. The ANAO estimated that in 2004–2005, almost 10% of legally grown tobacco was diverted into the black market, and of this, only around 6% was intercepted.6 In an earlier report, the ANAO estimated that 'tobacco excise revenue leakage' due to the illegal tobacco market in 2001 was likely to range from $99 million–$220 million annually.1 Tobacco smuggling has also been associated with other serious criminal activity. On the basis of Australian Taxation Office research, the ANAO observed that the organisers were 'actively involved in other forms of criminality such as drugs, money laundering, identity fraud and car rebirthing as well as tobacco smuggling' (p15).6 Illegal trading resulted in the murder of a Victorian tobacco grower in 2002.7

The end of the legal tobacco farming industry in Australia is discussed in Chapter 10, Section 10.8.2.3. For further information on the prevalence of the use of chop-chop in Australia, refer to Chapter 1, Section 1.11.2. The health consequences of smoking chop-chop are discussed in Chapter 3, Section 3.27.2.

10.9.2 The size of the illicit tobacco market in Australia in 2010

This section is drawn from a report prepared by Quit Victoria and Cancer Council Victoria.8

On 1 March 2011, British American Tobacco Australia released a report9 prepared by Deloitte, which purported to quantify growth in the illicit tobacco market in Australia.10 Deloitte claimed that the size of the illicit tobacco market in Australia is 15.9%, a figure widely quoted by tobacco companies and since included in A4+ sized newspaper advertisements aiming to discourage members of the Australian Parliament from supporting legislation to mandate plain packaging.

Methodological problems and a number of what look very much like errors of interpretation of the results of a Roy Morgan survey that provided the data for this report have resulted in a major overestimate of the extent of illicit trade in Australia.

The Australian Government's National Drug Strategy Household Survey has also examined use of illicit tobacco in Australia in its surveys conducted in 2001, 2004, 2007 and 2010, and provides a more reliable indication of the extent of use. This survey had a sample size of more than 26 000 respondents in 201011 compared with the 949 respondents for the Roy Morgan survey commissioned by British American Tobacco Australia.

Some people expected that use of unbranded tobacco may have increased between 2007 and 2010, following the increase in excise and customs duty that resulted in large increases in tobacco prices in April 2010. However the National Drug Strategy Household Survey reports published in 2004, 2007 and 2010 have indicated very low and stable levels of use across the past nine years. In 2010 only 0.3% of Australians used illicit tobacco products on a regular basis (half the time or more), not significantly higher than the 0.2% reported in 2007 and also not significantly different from the 0.4% in 2004. While quite a large percentage of smokers have tried unbranded tobacco at least once (about 24% in 2010), 80% of those who have tried it no longer use it. About 4.9% of smokers report currently using unbranded tobacco in 2010, significantly lower than the 6.1% in 2007. This is substantially lower than the 15.7% of smokers deemed by Deloitte to be currently using unbranded tobacco.

Apart from over-estimating the number of smokers currently using unbranded tobacco, the British American Tobacco Australia sponsored report on illicit tobacco in 201010 also substantially over-estimates the amount that such smokers could be purchasing. The report estimates that those using unbranded tobacco purchased an average of 344 g on an average of 15 occasions each year, making a total of 5160 g per year. Given that cigarettes weigh less than 1 g each, this quantity would be sufficient to make and smoke between 16 and 20 cigarettes per day. And yet the National Drug Strategy Household Survey reports make it clear that most smokers who use unbranded tobacco use it only occasionally. The 2010 survey reported that only 1.5% of smokers used unbranded tobacco half the time or more. It appears that Deloitte may have misinterpreted the results of the Roy Morgan survey, assuming that all the respondents who indicated that they currently smoked unbranded tobacco products in the last year still smoked them currently, and/or that those who still smoked them almost exclusively.

Estimates of use of other forms of illicit tobacco such as contraband or counterfeit cigarettes included in the Deloitte report could only be speculative, given that many people would not know whether what they were purchasing was counterfeit or not. Low price may not be an indication of contraband stock, given that some brands are substantially cheaper than others and because tax-paid cigarettes can be subject to heavy discounting.

The National Drug Strategy Household Survey shows definitively that the vast majority of smokers who have ever used illicit tobacco no longer use it, and—of those who do still use it—most used it only occasionally. Data about the generally low frequency of use among current users suggests that the size of the illicit market in Australia in 2010 would be about 2–3% of all tobacco used, orders of magnitude smaller than the 15.9% widely touted by the tobacco industry.

10.9.3 Is smuggling advantageous to the international tobacco industry?

The illicit tobacco trade markedly decreases the public health benefits of tobacco control action 'by making cigarettes cheaper, more accessible and more difficult to regulate'.12 Most illicit trade in tobacco involves large-scale movement of products through channels that circumvent taxation. (Counterfeiting and bootlegging account for a much smaller proportion of the illegal market.)13 While counterfeiting can be a serious threat to profitability for tobacco companies, as it is for many manufacturers, smuggling of tobacco products is not always detrimental to tobacco companies at the international level. Instances have been documented where the tobacco companies have sold their products to distributors in the usual way, with the usual profits. Tobacco products then leak from distributors into the illegal market where, having evaded tax, it is sold more cheaply than taxed goods. The only real losers, financially, are the governments, which miss out on tax revenue.14 The key to controlling smuggling is controlling the supply chain and this supply chain is controlled to a great extent by the tobacco industry itself.15

Publicly the tobacco companies have claimed to have no knowledge or involvement in smuggling activities, but internal industry documents reveal that there are numerous instances where they have been complicit in these activities. Smuggling benefits the international tobacco industry in a number of ways, including by:13, 16, 17

  • allowing brands to infiltrate otherwise closed markets
  • providing leverage for the tobacco industry to argue that closed markets be opened (because closed markets don't work)
  • providing a source of cheap cigarettes to fuel uptake and consumption, particularly among younger populations and in poorer regions
  • enabling the industry to lobby against tobacco control measures, especially increased taxation, by arguing that such measures increase smuggling.

Due to the size and scope of the international smuggling market, at its second session in July 2007 the WHO Framework Convention on Tobacco Control (WHO FCTC) Conference of the Parties decided to establish an Intergovernmental Negotiating Body, open to all Parties, to draft and negotiate a protocol on illicit trade in tobacco products.iii The protocol will build upon and complement the existing smuggling provisions outlined in Article 15 of the WHO FCTC. The Conference of the Parties reviewed the progress it had made at its fourth session in Uruguay in 2010. The Conference decided that negotiations on a protocol should continue at a final session of the Intergovernmental Negotiating Body to be held in 2012, and that an informal working group, composed of representatives of regional groups of Parties, will work in 2011 to facilitate negotiations at the final session of the Intergovernmental Negotiating Body.18

i For detailed discussion of these changes to tobacco taxation, refer to Chapter 13.

ii The Australian National Audit Office provides financial auditing services to the Parliament and Commonwealth public sector agencies and statutory bodies. See http://www.anao.gov.au/index.cfm

iii The reports and progress of the Intergovernmental Negotiating Body can be read here: http://www.who.int/fctc/protocol/illicit_trade/en/

References

1. Auditor-General. Administration of tobacco excise. Audit report no. 55, 2001-02 Performance Audit. Canberra: Australian National Audit Office, Commonwealth of Australia, 2002. Available from: http://www.anao.gov.au/uploads/documents/2001-02_Audit_Report_55.pdf

2. Lindorff K. Tobacco – time for action. National Aboriginal and Torres Strait Islander Tobacco Control Project. Final report. Canberra: National Aboriginal Community Controlled Health Organisation, 2002. Available from: http://www.weftweb.net/naccho/Files/NACCHO_Tobacco_report.pdf

3. Bittoun R. The medical consequences of smoking 'chop chop' tobacco. Report prepared for the Commonwealth Department of Health and Ageing. Canberra: Department of Health and Ageing, 2004. Available from: http://www.health.gov.au/internet/wcms/publishing.nsf/Content/phd-pub-tobacco-chopchop-cnt.htm/$FILE/chopchop.pdf

4. Bittoun R. 'Chop chop' tobacco smoking [Letter] Medical Journal of Australia 2002;177(11):686-7. Available from: http://www.mja.com.au/public/issues/177_11_021202/bittoun_021202.pdf

5. Edwards L. Quitting time. The Age (Melbourne) 5 October 2006:

6. Auditor-General. Administration of petroleum and tobacco excise collections: follow-up audit. Audit report no. 33, 2005-06 Performance audit. Canberra: Australian National Audit Office, Commonwealth of Australia, 2006. Available from: http://www.anao.gov.au/uploads/documents/2005-06_Audit_Report_33.pdf

7. Topsfield J. Two again found guilty of murder. The Age, (Melbourne) 5 June 2004: Available from: http://www.theage.com.au/articles/2004/06/04/1086203623885.html

8. Quit Victoria and Cancer Council Victoria. Illicit trade of tobacco in Australia. A critique of a report prepared by Deloitte for British American Tobacco Australia Limited, Philip Morris Limited and Imperial Tobacco Australia Limited. Melbourne, Australia: Cancer Council Victoria, 2011. Available from: http://www.cancervic.org.au/downloads/mini_sites/Plain-facts/CommtsDeloitte12.8.11_FINAL.pdf

9. British American Tobacco Australia. Taxpayers lose $1 billion while criminals make millions [Media release] . Maroubra, New South Wales: 1 March 2011 [viewed 1 August 2011] . Available from: http://www.bata.com.au/group/sites/bat_7wykg8.nsf/vwPagesWebLive/DO7WZEX6/$FILE/medMD8EHAKD.pdf?openelement

10. Deloitte. Illicit trade of tobacco in Australia. Prepared for British American Tobacco Australia Limited, Philip Morris Limited and Imperial Tobacco Australia Limited. Sydney: British American Tobacco Australia, 2011. Available from: http://www.bata.com.au/group/sites/BAT_7WYKG8.nsf/vwPagesWebLive/DO7WZEX6?opendocument&SKN=1

11. Australian Institute of Health and Welfare. 2010 National Drug Strategy Household Survey: survey report. Drug statistics series no. 25, AIHW cat. no. PHE 145. Canberra: AIHW, 2011. Available from: http://www.aihw.gov.au/publication-detail/?id=32212254712&libID=32212254712&tab=2

12. WHO Framework Convention on Tobacco Control. Geneva: World Health Organization, 2003. Available from: http://fctc.org

13. Lee K and Collin J. 'Key to the future': British American Tobacco and cigarette smuggling in China. PLoS Medicine 2006;3(7):e228. Available from: http://medicine.plosjournals.org/archive/1549-1676/3/7/pdf/10.1371_journal.pmed.0030228-S.pdf

14. Joossens L and Raw M. Turning off the tap: the real solution to cigarette smuggling. International Journal of Tuberculosis and Lung Disease 2003;7:214-22. Available from: http://www.ncbi.nlm.nih.gov/pubmed/12661834

15. Joossens L and Raw M. Progress in combating cigarette smuggling: controlling the supply chain. Tobacco Control 2008;17(6):399.

16. Joossens L and Raw M. Cigarette smuggling in Europe: who really benefits? Tobacco Control 1998;7(1):66-71. Available from: http://tobaccocontrol.bmj.com/cgi/content/full/7/1/66

17. Collin J, LeGresley E, MacKenzie R, Lawrence S and Lee K. Complicity in contraband: British American Tobacco and cigarette smuggling in Asia. Tobacco Control 2004;13(suppl. 2):ii104-11. Available from: http://tobaccocontrol.bmj.com/cgi/content/full/13/suppl_2/ii104

18. WHO Framework Convention on Tobacco Control Conference of the Parties. Intergovernmental Negotiating Body on a Protocol on Illicit Trade in Tobacco Products. Geneva: World Health Organization, 2011, [viewed 17 August 2011] . Available from: http://www.who.int/fctc/protocol/illicit_trade/en/

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