10.9 The tobacco industry and the illegal tobacco market
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10.9.1 Chop-chop
Chop-chop is finely cut, unbranded 'black market' tobacco that has been grown, distributed and sold outside the government regulated and taxed system.133 Due to its affordability, some smokers have adopted chop-chop as an alternative to, or in addition to smoking manufactured tobacco.134-136 Although used on a regular basis by a small minority of Australian smokers,137 the financial losses involved for the government, due to lost taxation, and the tobacco companies, due to lost retail sales, are considerable. According to tobacco industry-commissioned estimates, one in every 17 cigarettes smoked in Australia contains chop-chop.138
Although the closure of the legal tobacco growing industry in Australia can be expected to cause a downturn in the local chop-chop market, it does not preclude the possibility that illegal growing will continue, as it does, for example, with cannabis.139 Illegal importation of leaf and other tobacco products has also increased.140
Several factors combined to accelerate the growth of the black market in home-grown tobacco in the late 1990s.133 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 over-supply. 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 2000[16] led 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.133
Chop-chop typically entered the market via individuals or groups who 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 ready-made cigarettes and presented in counterfeit tobacco packaging.133 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; and the same bale would yield $30,000 in excise for the federal government.141 Bypassing the government, tobacco companies and retailers also meant considerable savings for the end user, who could purchase 100g of illegal tobacco for about $13, compared to a recommended retail price for the equivalent legal product of about $36.142
The substantial financial consequences of the illicit tobacco trade have prompted investigation from both the government133, 142 and the tobacco industry.138, 143 In a report for the Australian Taxation Office in 2006,142 the Australian National Audit Office (ANAO)[17] stated that illegal tobacco operations were a key priority in the area of evasion and serious fraud. The ANAO estimated that in 2004?05, almost 10% of legally grown tobacco was diverted into the black market, and of this, only about 6% was intercepted.142 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.133 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.'142 p 15 Illegal trading resulted in the murder of a Victorian tobacco grower in 2002.144
In two reports commissioned by British American Tobacco Australia, the consulting firm PricewaterhouseCoopers (PwC) has also analysed chop-chop and other illegal tobacco trade in Australia.138, 143 According to the more recent PwC report, 6.4% of all tobacco consumed in Australia in 2007 was of illegal origin, representing an estimated loss of $450 million in taxes (excise and GST combined).
The cessation of legal tobacco farming in Australia is discussed in 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 Imported counterfeit cigarettes and loose tobacco leaf
Smuggled counterfeit cigarettes account for almost 11% of all tobacco sales globally.145
Tobacco products are smuggled on the international market along with other contraband such as class A drugs and alcohol by organised criminal syndicates.143
In Australia, Pricewaterhouse Coopers estimates that about 8% of the illegal tobacco market is in the form of imported loose tobacco and counterfeit cigarettes, and predicts that in line with international activity, illicit imports can be expected to increase.143
This appears to be borne out by information from the Australian Customs Service in December 2007, which reported a 14-fold increase in seizures of imported illegal tobacco compared with 2006.140 About 95 million cigarettes and 236 tonnes of tobacco were seized during 2007, representing more than $100 million in lost government revenue. Australian Customs attributed the additional haul to increased vigilance, as well as reduced opportunities for local leaf to enter the illegal market146 and a global surge in large scale, organised tobacco smuggling. Sydney and Melbourne ports were the major destinations for tobacco arriving by sea, the largest seizures of counterfeit cigarettes being from the United Arab Emirates and loose tobacco originating from Vietnam.140
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.'147 Most illicit trade in tobacco involves large-scale movement of products through channels which circumvent taxation. (Counterfeiting and bootlegging account for a much smaller proportion of the illegal market).148 The tobacco companies sell their products to distributors in the usual way, with the usual profits. Tobacco products then leak from distributors into the illegal market, where by evading tax, it is sold more cheaply than taxed goods. The only real losers, financially, are the governments which miss out on tax revenue.149
Publicly the tobacco companies have claimed to have no knowledge or involvement in smuggling activities, but internal industry documents reveal that they are complicit in these activities. Smuggling benefits the international tobacco industry in a number of ways; including by:148, 150, 151
- 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.
[16]For detailed discussion of these changes to tobacco taxation, refer to Chapter 13.
[17] 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
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