This report on illicit tobacco consumption in Australia (“Report") has been prepared by KPMG LLP in accordance with specific terms of reference (“terms of reference") agreed between British American Tobacco Australia, Philip Morris Limited and Imperial Tobacco Australia Limited “the Addressees”, and KPMG LLP.
KPMG LLP has agreed that the Report may be disclosed to any party on the basis set out herein. KPMG LLP wishes all parties to be aware that KPMG LLP's work for the Addressees was performed to meet specific terms of reference agreed between the Addressees and KPMG LLP and that there were particular features determined for the purposes of the engagement.From a research ethics perspective it would be interesting to see disclosure of those terms of reference.
The document goes on to state that
British American Tobacco Australia, Imperial Tobacco Australia Limited and Philip Morris Limited have commissioned KPMG LLP to conduct an independent report to estimate the size of the consumption of illicit tobacco in Australia. KPMG LLP had final decisions on all methodologies and messages contained in this report.
The purpose of this report is: 1.To provide an overview of the nature and dynamics of the legal and illicit tobacco markets in Australia, and 2.To provide an independent estimate of the size of the illicit tobacco market in Australia.
This report covers the period from July 2012 to June 2013 (H1 2013). The H2 2013 report will be published in 2014. This H1 2013 report measuring the consumption of illicit tobacco in Australia is the first of two reports that will be published focusing on 2013. KPMG has been appointed to produce bi-annual reports on the illicit trade for the industry in Australia. This report primarily shows the 2013 results based on our methodology. The result for 2013 is also presented on a basis consistent with prior reports in the appendix.Let's not look too closely at the notion of 'independent'.
KPMG argues that
in the twelve months to the end of June 2013 (LTM H1 2013), the level of illicit consumption grew from 11.8% to 13.3% of total consumption.
If all of this tobacco had been consumed in the legitimate market it would have represented an excise amount payable to Government of AUD1.0bn at current excise rates. The key driver of this growth has been a large increase in the consumption of illicit manufactured cigarettes, primarily in the form of contraband. Counterfeit also appears to have increased. ... the proportion of non-domestic cigarettes has increased from 4.3% of all manufactured cigarettes that were consumed in 2012 to 9.8% in LTM H1 2013. ....
Illicit tobacco consumption
Illicit tobacco is mainly brought into the country illegally from cheaper overseas markets. This tobacco is sold to consumers at lower prices than Australian cigarettes, avoiding Australian tax obligations or is brought into the country in amounts exceeding the allowable personal limit. The Australian Crime Commission believe that organised crime groups perceive tobacco smuggling to be low-risk and high profitability. Tobacco is often smuggled alongside other illegal substances. Penalties for smuggling illicit tobacco have recently been increased, with potential for a jail term of up to ten years.(1)
Counterfeit
These are manufactured cigarettes. They are specifically manufactured overseas in countries with large scale tobacco production and sophisticated tobacco manufacturing machinery. Once manufactured they are illegally smuggled into Australia most commonly via ports on large container freight and other channels including airmail and online purchases. These products carry branding without the consent of the trademark owner to imitate popular legitimate tobacco product brands. According to the Tobacco Industry Forum (TIF) they do not adhere to industry production standards, they pose additional serious health risks and are also known as fake cigarettes.
Contraband
These are any genuine cigarettes that are sold without the payment of applicable excise taxes. They are manufactured legally outside of Australia adhering to local regulations and smuggled into the Australian market. This includes cigarettes which are purchased legally outside Australia but exceed personal import allowances. Contraband cigarettes are legitimately manufactured by the trademark owner but avoid Australian government regulations, quarantine inspections and ingredient controls.
Illicit whites, as discussed in section 6, are also a constituent part of contraband. They are manufactured cigarettes that are not legally available in the local market. These brands are typically not sold legally anywhere,and are often made exclusively for smuggling.
Unbranded tobacco
Unbranded tobacco is sold as finely cut loose leaf tobacco in half kilogram or one kilogram amounts. TIF indicates that it may be grown illicitly without a licence in Australia but is most commonly imported. This product carries no labelling or health warnings and is consumed in RYO form or inserted into empty cigarette tubes and sold in boxes which are available from tobacco retailers. The product is then sold loose in bags or pre-rolled tubes (called Chop Chop). The Australian Crime Commission believes that the majority of unbranded tobacco is imported rather than grown in Australia. It is distributed to retailers in the same way as counterfeit and contraband products.
Australian legal domestic sales volumes gradually declined between 2000 and 2009. The 25% increase in excise duties in April 2010 coincided with a 6.8% decline in legal domestic sales volumes. However, the same period also saw an increase in illicit consumption of tobacco.And what does that all mean? The BATA media release [PDF] explains -
In BATA’s view, plain packaging, combined with our already high tobacco tax rates, and the previous government’s plan to increase tobacco excise by another 60 per cent over the next four years, could see the illegal tobacco problem skyrocket.Oh dear! But wait, it gets better, and without even the lightest allusion to public health costs.
British American Tobacco Australia (BATA) spokesperson Scott McIntyre said the future was bright for crime bosses but scary for the government and taxpayers. “Nearly 70 per cent of every dollar sold from a legal pack of cigarettes goes to the government in taxes, which is why tobacco smuggling is such a lucrative venture for gangs as they obviously don’t pay any tax and pocket the profits instead,” Mr McIntyre said.
“You don’t need to be a crime expert to see that increasing the excise rate by 60 per cent over the next few years will see gangsters profiting more than ever while smokers buying legal products are hit in the hip pocket.
“Instead of steep excise hikes, more resources for agencies and greater enforcement of plain packaging laws by the Health Department will see a reduction in illegal tobacco sales, particularly at a local level.
“Dishonest retailers are selling illegal branded cigarette packs imported from Asia and the Middle East, most without health warnings, freely and openly across Australia. They appear to have no fear of getting caught because the plain packaging laws are not being enforced at a retailer level.
“Fines for selling non-compliant product can be over $340,000 per pack, but to date we’re not aware of one retailer who has been fined for selling illegal branded packs.
“A fine that size would shut down most businesses overnight, it wouldn’t take many of them to be fined before most pulled the pin on their illegal activities due to the financial risk.
“The excise system needs to be reviewed. But enforcement needs to be ramped up immediately.”
Mr McIntyre said that while police and other enforcement agencies did a great job, the illegal tobacco problem is so big it needs greater focus and more action on compliance.
“The Australian Crime Commission believe that organised crime groups view tobacco smuggling as low-risk and highly profitable, and that they also use the proceeds to fund other illegal activities. Obviously this needs to stop,” he said.
By undertaking the report, and its own covert operations, BATA is hopeful it can help the government to better identify the illegal tobacco problem.BATA could of course help the government and taxpayer by abandoning its litigation-by-proxy over the plain paper packaging regime.
