Security: Smoking out the smugglers

From: Financial Times

By Jamie Smyth

UK and Ireland are hotbeds of illicit tobacco, raising fears trade is funding terrorism and denting tax take

Fruit and vegetables are piled high on the  stalls lining Dublin’s Moore Street. But listen carefully to the hawkers and you  will hear that other, less healthy wares are also on offer. Smuggled cigarettes  are as easy to buy as iceberg lettuces and shiny green apples.

It takes barely a minute to find a woman among the stalls  calling out “tobacco”. She hands her customer a gold carton ripped in half  containing five packs of Gold Classic – a brand made in Cyprus. They cost €20, less  than half the price in shops.

This scene is now commonplace across Ireland and the UK. As both countries  levy the highest excise duties on tobacco in the EU, criminals are reaping  sky-high profit margins and are fast transforming the British Isles into the  tobacco-smuggling capital of Europe.

The scale of the smuggling is a cause of grave concern to  national exchequers robbed of tax revenue and to security services who say that  the contraband is funding terrorism  and organised crime.

Customs officials estimate one in seven cigarettes smoked  in Ireland and one in 10 in the UK are illicit, costing the countries a combined €2.5bn in lost taxes in 2011. The EU estimates that the illegal  tobacco trade costs the bloc €10bn a year – a heavy drain on resources when  national budgets are stretched.

In the UK, the police say criminal gangs use the proceeds  of smuggling to fund lavish lifestyles. In Ireland, security services  calculate that the illicit trade also generates tens of millions of pounds every  year for dissident Republican groups.

Northern  Ireland’s 1998 peace accord triggered optimism that three decades of  violence were at an end but security agencies are now fearful that economic  fragility is reviving the allure of paramilitaries. While Republican  fighters have nowhere near the strength they had in the 1970s and 1980s, the  dissidents have killed several people since 2009, including two policemen, two  British soldiers and a prison guard. Late last month police foiling a dissident  attack seized a rocket launcher and two mortars.

“It takes quite modest sums of money to fund a terrorist campaign and the  profits generated from cigarette crime are significant,” says Roy McComb,  detective chief superintendent in the organised crime division of the Police  Service of Northern Ireland.

Traditional funding streams for paramilitary groups such as extortion and  protection rackets became less lucrative during the recession as businesses  struggled, making cigarette smuggling now central to dissident finances.

The line between terrorism and organised crime is blurred. Established  cigarette smuggling routes are also used to bring guns, drugs and many different  types of counterfeit products into Britain and Ireland.

“If you have the ability to evade detection while committing terrorist  activity then it is not that difficult to apply the same learning from terrorist  crime to organised crime,” says Mr McComb.

The close connections between dissident Republicans and cigarette smuggling  were highlighted in a Lithuanian court in December 2011 when convicted cigarette  smuggler Michael Campbell was sentenced to 12 years in jail for attempting to  buy rocket launchers, AK47 rifles and explosives for the Real Irish Republican  Army, which does not recognise the 1998 accord.

Michael is the brother of Liam  Campbell, who was one of four men found responsible by a civil court for the  Real IRA bomb in Omagh in 1998, which killed 29 people and was the worst  atrocity during “the troubles”. Liam Campbell won a court appeal against  extradition to Lithuania in March.

Loyalists are also involved in trafficking cigarettes but police say the  Republicans have more extensive cross-border contacts.

The narrow country lanes traversing the border between Northern Ireland and  the Republic, an area known as “bandit country” during the IRA’s 30-year  terrorist campaign, provide cover for dissident smuggling operations. Here in  2009 at Greenore Port in County Louth, Irish customs and police made the largest  seizure of illegal cigarettes in Europe, intercepting 120m cigarettes worth €50m  en route to the UK market.

“The cigarettes came from the Philippines. They were in 16 40-ft containers,  hidden in animal feed,” says Liam Irwin, head of strategic planning at Ireland’s  revenue commissioners. “That was probably dissidents and gives an indication of  their capability. Tesco would find it hard to manage a shipment like that,” he  says.

No one has yet been charged or convicted in relation to the Greenore seizure.  Difficulties in obtaining information from the Filipino authorities have  complicated the investigation while none of the top smugglers was caught with  the consignment.

A report by Northern Ireland’s Organised Crime Task Force details how  paramilitaries work with international smugglers to import both counterfeit  cigarettes and so-called “illicit whites” – cigarettes made in legitimate  factories overseas but smuggled into Europe in large shipping containers without  paying excise duty.

Tobacco companies say official statistics vastly  underestimate the global contraband operation, which reaches back to cigarette  factories in eastern Europe, the Middle East and Asia. They warn that proposals  to introduce plain packaging risk making things worse, a claim vigorously  denied by antismoking advocates.

. . .

Counterfeit cigarettes manufactured in China and other Asian countries and  illegally shipped into Ireland and the UK dominated the illicit trade until  recently. Studies on these fake tobacco products showed how they can contain  abnormally high levels of cancer-causing chemicals and are even more damaging to  health than ordinary cigarettes. Still, co-operation between EU and Chinese  customs has cut the scale of this trade.

Today, large numbers of better-quality illicit whites made in legitimate  factories in eastern Europe, the United Arab Emirates and EU states such as  Cyprus and Italy are filling the void and are being smuggled into the British  Isles.

“The illicit whites are now the dominant point of threat. They have none of  the quality problems of counterfeit cigarettes,” says Euan Stewart, deputy  director of criminal investigations at British customs. “Some of these brands,  such as Jin Ling, have become so popular with consumers they end up being  counterfeited themselves,” he says.

A report by Irish customs shows 76 per cent of seized cigarettes in 2012 were  illicit whites, up from 46 per cent in 2011. It says a significant trend is the  emergence of the UAE as a centre for manufacturing illicit-white brands – Capital, Richman, Master, Jim, Top Mountain and Hatamen – all of which were  seized in Ireland last year.

The Jebel Ali free-trade zone in the UAE is at the heart  of the fast growing illict-white trade. British American Tobacco, which employs  investigators to track down smugglers, estimates that there are at least 10  factories in Jebel Ali, with a combined manufacturing capacity of up to 63bn  cigarettes per year. Some of the factories produce “lookalike” brands that  infringe on the trademark rights of existing brands that they make.

“The production of cigarettes in Jebel Ali is a legitimate activity,” says  Tarek Najjar, Middle East head of corporate and regulatory affairs for BAT. “However, issues arise when these products are sold to unscrupulous traders who  ship these products to other countries with the intention of evading import tax  and sales duties.”

London has raised the illicit-white problem with the UAE to enlist support in  forcing manufacturers in Jebel Ali to implement supply-chain controls.

The World Health Organisation has drawn up a global treaty designed to combat  the trade in illicit tobacco, although the UAE and UK have not yet signed up to  it. The treaty, which is open for signature until January 2014, would commit all  signatories to set up global tracking systems.

The big four tobacco companies – Philip Morris, BAT, Japan Tobacco International and Imperial Tobacco – have already agreed to similar  controls within the EU. They did this when authorities discovered they were  oversupplying risky markets with cigarettes, which were later smuggled into  Europe.

Almost 9 per cent of all cigarettes seized in Ireland last year were  manufactured by companies based in Cyprus, while 4 per cent came from  Italian-based manufacturers.

The Gold Classic brand sold in Moore Street is made by the Cypriot company  Explosal, a legitimate manufacturer. Explosal did not return calls or  emails.

Customs officials say that cigarettes made by smaller EU manufacturers are  sometimes shipped by traders to the Middle East, north Africa or Asia in large  containers, given fresh paperwork and then brought back into the EU illegally  without paying excise duty. Greece is a common re-entry route. “This can make  intelligence-gathering very difficult,” says Mr Stewart.

. . .

In the UK, the fight against cigarette smuggling enjoyed considerable success  between 2000 and 2011 when customs seized 20bn cigarettes and cut the illicit  market in half. But there are worrying signs that smuggling is on the rise  again.

A survey by KPMG on behalf of Philip Morris found that the rates of illicit  cigarette consumption in 2012 were 19.1 per cent in Ireland and 16.4 per cent in  the UK in 2012.

The rate of consumption of contraband and counterfeit cigarettes increased by  6.4 percentage points in the UK between 2011 and 2012 – the biggest increase in  any European country.

The concerns were reflected in a report by the UK’s National Audit Office  published in June, which found British customs failed to meet its operational  targets in curbing tobacco smuggling in 2012-13.

The UK parliament’s home affairs committee recently started an inquiry into  the link between smuggling, organised crime and paramilitaries.

At an unmarked customs warehouse in Dublin Port, the huge number of sacks of  seized cigarettes and tobacco waiting to be destroyed by mobile shredding  machines illustrates the scale of the trafficking.

Customs officers rip open suitcases stuffed with cigarettes, some with secret  compartments. This is the work of “ant smugglers”, who fly to countries where  cigarette prices are low such as eastern Europe or Cyprus, and bring them in on  regular flights.

The “ant smugglers” illustrate how the trafficking has now shifted from the  massive seaborne consignments such as that seized at Greenore to more discreet  techniques associated with drug-running, with packs crammed in vans and the  linings of suitcases.

This has led to a drop in seizures across Europe, says Mr Irwin.

“At one stage cigarettes were simply bundled into containers. Now they are  almost taking the same care as they do with drugs,” he says.

“The biggest disappointment is the sheer amount of illicit cigarettes being  sold every single day in communities. We really need much more co-operation from  the public.”

Additional reporting by Simeon Kerr


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