Nearly one in every ten cigarettes smoked in the EU comes from the illicit market. Criminal groups are now making them closer to their customers: factories can recoup their costs within weeks, then disappear and pop up somewhere else. Brussels auditors warn that European authorities are struggling to keep up.
Until a few years ago, the illicit cigarette trade was largely about moving cheap tobacco across borders. That picture no longer tells the whole story. Organised crime groups are increasingly setting up their own production facilities inside the European Union.
These are not small workshops turning out a few fake packets here and there. According to the European Court of Auditors (ECA), illicit production increasingly looks like industrial-scale business. “The illicit trade in tobacco products is a global criminal phenomenon which affects the financial interests of the EU and its member states,” the auditors say.
In Belgium, for example, investigators found an illegal factory with four industrial production lines running around the clock. Each machine could produce around one million cigarettes an hour. Similar operations have been uncovered in almost every EU member state in recent years.
Closer to customers
Smuggling remains a major part of the illicit cigarette trade. Criminal groups use lorries, shipping containers and smaller consignments sent through postal and courier services.
But they are also increasingly cutting out the need for long smuggling routes altogether. According to the auditors, some organised crime groups have moved production from Ukraine into EU member states in recent years. The reason is simple: a shorter supply chain and more direct access to European customers.
The EU cannot afford to let its fight against the scourge of illicit tobacco go up in smoke. — Petri Sarvamaa, ECA
Illegal factories can also be surprisingly flexible. Criminal groups can spread production across several sites, locate factories in border regions and adapt individual production lines to whichever brands they want to make.
These operations do not necessarily have to stay open for years, either. According to the auditors, investments in equipment can pay for themselves within weeks. The operation can then be abandoned and production moved elsewhere.
At the largest illegal cigarette factory ever dismantled by Spanish authorities, investigators seized around three million packets of counterfeit cigarettes. The criminal network operated across several countries. Authorities from Poland, Ukraine, Romania, Greece, Slovakia, Italy and Spain worked together to bring it down.
A lucrative business
Tobacco offers organised crime an attractive combination: high profits and relatively low risk.
Legal cigarettes in the EU carry excise duties and VAT, so prices vary widely between member states. Those differences in prices and taxes create opportunities for cross-border smuggling. High taxation also gives some producers and traders an incentive to avoid paying duties.
Illegal producers can offer lower prices, too. But the damage does not stop at the public purse. Cheap tobacco can also undermine government efforts to reduce smoking. According to the auditors, the illicit trade therefore hurts public finances, undermines health policy and threatens security by providing organised crime with a significant source of income.
“The EU cannot afford to let its fight against the scourge of illicit tobacco go up in smoke,” said Petri Sarvamaa, the ECA Member leading the audit. “If we are serious about safeguarding citizens’ health, wallets and security, the Commission and member states must up their game to fight criminal activity head-on.”
The EU is losing billions
The European Commission estimates that the illicit tobacco trade costs EU and national budgets around €13 billion a year in total. Most of that comes from unpaid excise duties, VAT and customs duties.
But this is where another problem begins. According to the auditors, the Commission does not have an independent and reliable EU-wide estimate of the size of the illicit market. It therefore does not know exactly how big the market is, how it is structured or what its real economic impact might be.
The picture so far relies heavily on data about seized goods. But the number of cigarettes authorities seize is not the same thing as the size of the market. It mainly shows what law enforcement agencies have managed to uncover.
Some member states therefore use their own estimates, while others rely on external studies. The auditors also point out that a significant share of the available data comes from studies funded by the tobacco industry.
The Commission has meanwhile launched a new study to improve how it measures the scale of the illicit market. But without better data, the auditors warn, it is difficult to know how big the problem really is or whether the measures taken so far are working.
Single market, different rules
The EU also has a weak spot in its legal framework. It regulates the production and sale of tobacco products, but some important parts of the supply chain remain outside common EU rules. These include raw tobacco and production machinery. Rules also differ for some newer tobacco products and online sales.
That creates gaps between member states. Inspections can work differently, authorities can have different powers and penalties can vary for similar offences. For organised crime, that is an opportunity. If production or trading becomes too risky in one country, a criminal group can simply move elsewhere.
The problem also goes beyond cigarettes themselves. New products such as heated tobacco and e-cigarette refills are growing rapidly. According to the Commission, the illicit market for tobacco products other than cigarettes already amounts to almost 21,000 tonnes in the EU.
Too many players
Criminal networks pay little attention to national borders. European authorities, however, still have to contend with different systems and rules. The auditors found significant differences in the quality, completeness and speed of information shared between national authorities. European Anti-Fraud Office (OLAF) and Europol help coordinate efforts at EU level, but multiple communication channels, legal frameworks and areas of responsibility remain in place.
One detail from the audit shows how this can play out in practice. In Romania, seized production machinery or raw tobacco could be sold or auctioned without a sufficiently effective system for tracking what happened to it afterwards. According to the auditors, this creates a risk that equipment or materials could eventually find their way back onto the illicit market.
The EU has a strategy, action plans and a range of institutions involved in tackling the trade. But the sheer number of players is part of the problem. Responsibility is split between the European Commission, OLAF, Europol, national customs and police authorities and other institutions.
According to the auditors, the European approach lacks clear priorities, measurable targets and systematic evaluation of results. “The illicit tobacco trade remains a major challenge for the EU,” the ECA says. It therefore wants the Commission to take a more active coordinating role, improve information about the illicit market and help member states bring their approaches closer together.
The European Court of Auditors’ conclusion is fairly simple: the EU has plenty of tools to fight illicit tobacco, but it is not making enough of them.
