13A.3.1 Exaggerated industry estimates
British American Tobacco (BAT) in collaboration with the other major tobacco companies operating in Australia has commissioned the production of reports that have produced alarmingly high estimates of the extent of illicit trade in Australia1-4 as well as in Aotearoa New Zealand5 and the UK.6 All of these have been a crucial component of industry campaigns opposing vigorous government action to discourage tobacco use through measures such as tax increases,7-9,10 changes in tax arrangements for roll-your-own cigarettes11,12 and plain packaging of tobacco products.13-15 Tobacco companies and company-sponsored lobby groups frequently release news statements following documented customs seizures to raise alarm about the problem of illicit trade:
'Government revenue plummets as criminals rake in $250 million’, BAT Media Release 18 December 2017
‘Roll your own tobacco tax hike to further fuel tobacco black market’, BAT Media Release 9 May 2017’
‘Excise hike to further fuel tobacco black-market’, BAT Media Release 1 September 2016
‘Tobacco black market set to boom’, BAT Media Release 4 May 2016
‘Excise hike to cause cheap cig surge’, BAT Media Release 1 September 2015
‘First counterfeit plain packs hit the streets’, BAT Media Release 17 February 2015
‘Two big busts a sign of things to come’, Alliance of Australian Retailers Media Release 1 August 2011
BAT in Europe has produced highly emotive video clips suggesting that well-meaning politicians wanting to increase tobacco taxes may be inadvertently promoting the influence of powerful criminals and increasing the likelihood of childhood prostitution.i
A number of academic papers,16 reports produced by US government research agencies,17 statements by political parties and research services18-21 and newspaper articles,22-25 allege that powerful and dangerous criminal gangs and terrorist groups are involved in counterfeiting activities on a massive scale. An advisory from the US Department of Treasury Financial Crimes Enforcement Network26 advised its overseas partner institutions in December 2005:
‘As published in the Federal Register on September 20, 2005, we found Banco Delta Asia SARL (‘Banco Delta Asia’), which is headquartered in the Macau Special Administrative Region of China, to be a financial institution of ‘primary money laundering concern’. As stated in this Federal Register notice, Banco Delta Asia has provided financial services for over 20 years to North Korean government agencies and associated front companies that are known to have engaged in illicit activities. North Korean entities are known to have engaged in currency counterfeiting, narcotics trafficking, the production and dissemination of counterfeit cigarettes, and the laundering of related proceeds, as well as weapons of mass destruction and missile proliferation.’
Such reports have been embraced enthusiastically by think-tanks with a political agenda of keeping taxes very low.19,21 The tone of these reports is often highly emotive and alarmist, and are consistent with in the interests of tobacco companies to ‘talk up’ the problem of illicit trade in general and counterfeit cigarettes in particular. Concerns about loss of revenue might discourage governments from adopting effective tobacco control policy.27 As pointed out by a study published in Journal of Law, Medicine and Ethics,28 illicit cigarettes confiscated and destroyed by law enforcement authorities increase demand for replacement cigarettes and therefore sales by tobacco companies. Raising alarm about counterfeit cigarettes may, at worst for tobacco companies, reduce the use of ‘fakes’ and have the spin-off effect of influencing perceptions of the quality of competing foreign-made budget products.
Involvement in cooperative arrangements with government agencies, such as those established between the European Union, and major international tobacco companies effectively leverages the resources of government enforcement agencies to advance the tobacco industry’s interests in protecting its intellectual property. Best of all for the tobacco industry, feigned concern about revenue and law-and-order allows tobacco companies to position themselves as legitimate and concerned corporate citizens ready and able to undertake research29 and work with governments in the pursuit of ‘reasonable’ regulation.30
13A.3.2 Tobacco industry estimates based on consumer surveys and empty pack surveys, 2013–2021
Following previous reports by PricewaterhouseCoopers and Deloitte, on 4th November 2013 Australian tobacco companies British American Tobacco Australia, Philip Morris Limited and Imperial Tobacco Australia Limited released a report31 produced by KPMG LLP Strategy Group, London entitled Illicit tobacco in Australia: 2013 Half year report.32 KPMG estimated the illicit tobacco market from 2013 to 2021 using two different primary approaches, a consumption model and empty pack survey. Based on findings from the consumer survey, a consumption model method was applied to estimate unbranded cigarettes, including loose chop-chop tobacco and unbranded tobacco supplied in pre-filled tubes. The empty pack survey was an investigation of abandoned cigarette packs around Australia to estimate contraband and counterfeit tobacco.
A new report on illicit tobacco trade in Australia in 2021–22 was released in May 2023. Rather than KPMG for a tenth year, this report was produced by a US-based company called FTI Consulting.33 Imperial Tobacco Australia Limited (ITA), Philip Morris Limited (PML), and British American Tobacco Australia (BATA) provided the guidelines and the scope of work for the preparation of this study, which was created specifically for their use. FTI closely replicated KPMG’s methodology to estimate illicit tobacco consumption, and the report was structured and formatted in an almost identical way. Additionally, FTI estimated ‘domestic illicit plains consumption’—illicit products designed specifically for the Australian market, mimicking Australia’s plain packaging regulations—using empty pack survey results.
Reports on estimated illicit tobacco consumption in Australia by the tobacco industry since 2012 are set out in Table 13A.3.1 below. Industry estimates suggest that illicit tobacco consumption as a percentage of total consumption increased from 11.8% in 2012 to 23.5% of the total tobacco market in 2022. The 2019 survey conducted by Roy Morgan Research—for which tobacco companies have provided data to KPMG for use in its estimates—found that 20% of tobacco consumers were using chop-chop tobacco. The estimates of the extent of use of illicit tobacco are substantially higher than those reported by the AIHW from the National Drug Strategy Household Surveys—see Section 13A.5.3.
13A.3.3 Critiques of tobacco industry’s documents on illicit tobacco consumption
The methodology used for the reports produced by KPMG LLP is similar to that used in earlier studies by PriceWaterhouseCoopers and Deloitte. Major weaknesses in this methodology, as described below, have been raised by health organisations.34-41
13A.3.3.1 Consumer survey
The participants in the Roy Morgan illicit tobacco survey were not randomly selected but rather were drawn from a panel of people who had taken part in the company’s well-regarded ongoing monthly household survey, and then agreed to participate on a paid basis in additional research projects, and then this project in particular. No information was provided about the numbers of respondents in the illicit tobacco survey who participated in the illicit tobacco survey in previous years. In fact, no information was provided at all about the respondents. It could be that those who agreed to participate in the study each year were more likely to be unemployed, or more likely to smoke roll-your-own (RYO) tobacco, more likely to have participated in previous years, or were more likely to possess other characteristics that predispose them to be a regular chop-chop user.
13A.3.3.2 Empty pack survey
To quantify the size of the market for illicit manufactured cigarettes KPMG LLP relied on surveys of discarded cigarette packs collected from litter in a sample of capital cities and major regional centres. Consistent with similar studies internationally, the collection company used for the Australian survey collected packs from designated locations and then examined the collected packs, noting any that looked ‘foreign’—either illicit white or foreign brands that do not comply with Australian packaging requirements.
People most likely to buy packs originating from overseas—being travellers, recent migrants and international students or special visa workers—are much less likely to be motorists and much more likely to be walking and using public transport. The packs they use are therefore much more likely to enter the litter stream in public places than are packs used by cigarette consumers who do not travel frequently overseas.
13A.3.3.3 Comparison between industry and Australian Taxation Office estimates of tax evaded
Between 2015 and 2020, estimates of the extent of illicit tobacco used in Australia prepared by the Australian Taxation Office42 were consistently substantially lower than those included in the reports produced for tobacco companies by KPMG LLP.
i See YouTube clip at http://www.bat.com/group/sites/UK__3MNFEN.nsf/vwPagesWebLive/DO6TNKVW?opendocument&SKN=1&TMP=1
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