Written evidence  from Japan Tobacco International [TOB15]

Organisation name

Japan Tobacco International (JTI).

JTI is part of the Japan Tobacco group of companies, a leading international tobacco product manufacturer.

JTI’s UK headquarters is in Weybridge, Surrey, and its manufacturing facility is in Lisnafillan, Northern Ireland, where it has a long-standing and significant presence. JTI’s cigarette brand portfolio includes Benson & Hedges, Silk Cut, Winston, Camel, Mayfair, Sterling, Sovereign and more, as well as a number of other tobacco products including cigars (such as Hamlet), roll-your-own tobacco (such as Amber Leaf) and pipe tobacco (such as Condor).

Gallaher Limited is the registered trading company of JTI in the UK.

Confidentiality

JTI is happy for this response to be made public

Introduction

1. JTI welcomes the Home Affairs Committee’s (the Committee) inquiry into tobacco smuggling and the illicit trade in tobacco within the UK (the Inquiry).[1]
2. The illicit trade in tobacco directly threatens the jobs of more than 1,800 people who work for JTI in the UK.  This threat strengthens our resolve in the fight against the problem. In that regard, we are committed to partnering HM Revenue & Customs (HMRC) through its Tackling Tobacco Smuggling strategy.
3. JTI agrees with the Rt Hon Keith Vaz MP that tobacco smuggling is a significant threat to UK tax revenues. We also consider that the illicit trade in tobacco is a threat to the viability of many retailers, and undermines efforts to prevent sales of tobacco products to the underage.
4. Our assessment of non-UK duty paid (NUKDP) cigarette consumption, of which smuggling is one element, is that it is on the rise across the UK.[2] JTI estimates that NUKDP cigarette consumption increased from 17% in 2011 to 21% in 2012. NUKDP hand-rolling tobacco (HRT) decreased from 50% of total consumption in 2011 to 47% in 2012. Overall, we estimate that the total NUKDP figure for tobacco consumption (including cigarettes and HRT) rose from 29% in 2011 to 31% in 2012.
5. The smuggling of cigarettes and HRT across the whole of the UK leads to a substantial loss of revenue to the Government - as much as £34 billion in the last 10 years according to HMRC.[3] In addition, over this period there is an implied revenue loss through cross-border shopping in tobacco products of up to £14 billion.
6. It has long been understood that the high level of taxation on tobacco, the differential in duty rates between neighbouring countries and the role of organised criminal gangs (OCGs) are significant factors in encouraging the illicit trade in tobacco in the UK.  For example, the 1999 Taylor Report on Tobacco Smuggling found that “[t]he principal cause of the smuggling, of course, is the high level of duty in the UK”.[4]
7. JTI sets out its answers to the Committee’s stated lines of inquiry below.[5]

Why the number of arrests, prosecutions and convictions for tobacco smuggling have fallen over the past three years

8. The number of prosecutions for tobacco related fraud in 2012/13 has in fact reached its highest level in recent times.[6]  Nevertheless, JTI does not believe that enough prosecutions are pursued given the scale of the tobacco smuggling problem, and we agree with both Lin Homer (Chief Executive, HMRC) and Sir Charles Montgomery (Director General, UK Border Force) that more could be done in this regard.[7] If the Government wants to better tackle tobacco smuggling, it should make available additional funds that will allow HMRC and UK Border Force to pursue the more costly option of seeking criminal prosecutions.
9. JTI is encouraged by HMRC’s use of VAT and Excise wrongdoing penalties to deter and punish those involved in smuggling illicit tobacco. We recommend a greater application of such penalties for the lowest level of offences because they are the most cost and deterrent effective options (as opposed to arrests and prosecutions). We hope, however, that adequate resources are being committed to the collection of such fines. 

Why Border Force failed to meet its operational targets for tobacco seizure in 2012–13

10. JTI agrees with the following reasons suggested by Sir Charles Montgomery:[8]

(a)               Methods of smuggling tobacco into the UK are varied and variable, making detection and seizure a challenging process.

(b)               Seizures outside of the UK have gone up and Sir Charles suggests that this should mean less illicit tobacco is making its way into the UK.  In this regard, we note that work undertaken by HMRC outside the UK through its network of Fiscal Crime Liaison Officers has prevented illicit tobacco products from reaching UK borders. Overall cigarette seizures, regardless of where they take place (e.g. inland, border and overseas), have remained consistently high at between 1.7 and 1.9 billion cigarettes per annum over the past five years.  There has also been an upward trend in the amount of HRT seized over the same period.

(c)               Two UK Border Force initiatives failed to deliver as anticipated.

11. Further, we note that due to the very nature of the illicit trade in tobacco, it is difficult to predict how much illicit tobacco will be detected and seized by whom and in what locations for any given period.

Whether the current sanctions and penalties for tobacco smuggling are appropriate

12. OCGs are attracted to tobacco smuggling as it is considered a high profit, low-risk activity incurring less severe sentences than other forms of illegal activity. Nevertheless, the maximum penalty for excise fraud (up to seven years imprisonment) is severe, and JTI’s concern lies in the small number of convictions for serious cases of tobacco related excise evasion and the high percentage of non-custodial sentences for such offences in the UK.[9]
13. JTI believes that the serious criminal nature of the illegal importation and sale of illicit tobacco should be brought to the attention of sentencing judges, to the extent that is not already being done, through formal channels (such as by prosecution evidence and submissions and in the course of judicial training).
14. We note that the Department of Justice for Northern Ireland has recently consulted on adding offences involving excise evasion in relation to fuel and tobacco to the list of offences which can be referred from the Crown Court to the Court of Appeal where the Director of Public Prosecutions considers the sentence to be unduly lenient. We support this proposal.
15. We also welcome the introduction of tougher penalties for those caught selling tobacco products to children. Evidence indicates that the illicit market is a major source of tobacco products for the underage.[10] We also believe that retailers caught selling illicit tobacco products should be banned from selling tobacco.
16. Trading Standards also have an important role to play in combating the illicit trade in tobacco. Currently, they are unable to impose fines on those involved in the illicit trade in tobacco and instead rely on prosecuting infringements of the Trade Marks Act 1994, advertising regulations, requirements for health warnings on tobacco packaging and product safety issues. In many cases, these avenues are not appropriate or proportionate, or Trading Standards are not adequately resourced to pursue them. We suggest Trading Standards be empowered to issue a ‘penalty notice’ in appropriate circumstances to quickly and effectively punish those caught selling illicit tobacco.

The similarities and differences in patterns of tobacco smuggling in the UK and Ireland, how they affect each other, and the implications of the restrictions on National Crime Agency operations in Northern Ireland

17. The UK and Ireland both have high levels of tobacco smuggling and cross-border shopping because they each have high-tax led prices - this is nothing new. As far back as 1995, the European Commission noted that: “The United Kingdom and Ireland have experienced significant increases in the quantities of hand-rolled tobacco being brought back from other Member States (typically Belgium and the Netherlands) and ultimately being resold illegally on their domestic markets. This occurs because the difference in retail prices between the UK and Ireland on one the hand and their near neighbouring Member States is such that duty-paid products can be purchased in those neighbouring Member States and resold at a price well below the normal (duty-inclusive) retail price in the UK and Ireland.”[11]
18. In that regard, the Cross-Border Organised Crime Assessment 2012,[12] produced with the help of, among others, the Serious Organised Crime Agency and HMRC, states that OCGs take advantage of the rising price of cigarettes and HRT in the UK and Ireland by smuggling illicit tobacco. The Assessment also notes that OCGs on both sides of the border are known to work closely together in the trafficking of counterfeit/contraband cigarettes.
19. Once fully operational, we consider that the expertise of the National Crime Agency would likely assist in providing an overarching framework for fighting the criminal activity linked to the illicit trade in tobacco. In this regard, it is regrettable that the National Crime Agency will not be working at full capacity in Northern Ireland.

The possible impact of the introduction of standardised packaging in Ireland on the quantity and availability of illegal tobacco in the UK

20. JTI considers that it is difficult to accurately predict the magnitude of this threat given that:

(a)               Illicit trade is inherently difficult to measure (both in terms of existing levels, changes over time and the causes of those changes).[13]

(b)              Australia is the only country in the world which has plain packaging in place and it is too early to assess in a meaningful sense the impacts of plain packaging there.

              (c)               There is, as far as JTI is aware, no established/recognised research base on the actual impacts (in terms of illicit trade or otherwise) on a neighbouring state of another having such a measure in place. It is right therefore that this Committee has called for evidence in respect of "the possible impact" of the introduction of plain packaging in Ireland on the illicit trade in tobacco in the UK and JTI has provided below its best assessment of such impacts.

Reduced costs burdens for illicit traders

21. As JTI has recently drawn to the attention of the Irish Taoiseach, plain packaging will create economies of scale in production for criminal gangs: once one plain pack brand is faked, the counterfeiter can reproduce packaging of each brand on the market with minimum effort since the only difference on each pack is the brand name, which can only appear in a mandated font/size.
22. A uniform pack design in Ireland removes the need to keep up with manufacturers’ evolving pack innovations and developments and, therefore, reduces the cost burden on counterfeiters since there will be no additional investment necessary until there is a further change in the law. 
23. The 2012 report of Professors Zimmerman and Chaudhry entitled “The Impact of Plain Packaging on the Illicit Trade in Tobacco Products”[14] (the Zimmerman Report) explains that plain packaging for tobacco products will worsen the illicit trade in tobacco products as it would open a number of new opportunities for illicit traders while making it more difficult for consumers, retailers and law enforcement agencies to differentiate between genuine and fake packs.  It goes on to conclude:

“[P]lain packaging is highly likely to aggravate the existing negative impacts of the already serious and socially damaging trade in illicit tobacco. Since illicit products are often more accessible to those underage and those from low income groups, plain pack laws risk undermining a key objective of plain packaging: to reduce smoking by these groups.”[15]

24. A senior HMRC official has expressed similar concerns.[16]

The pre-existing impact of Irish illicit trade on the UK

25. The high level of tax on tobacco in the UK already renders it vulnerable to the illicit trade in tobacco. The land border between the UK and Ireland (which has the highest tobacco prices in the EU and 28% of cigarettes in Ireland were non-Irish duty paid in 2012[17]) is one of various avenues that smugglers use to smuggle illicit tobacco into the UK.
26. The trade in illicit tobacco is already a crime of choice for Ireland’s OCGs as a result of the perceptions set out in paragraph 12 above.  Further, it is generally accepted that criminals are using the revenue generated from illicit tobacco sales to fund further criminal activity such as terrorism, gun and drug crime and human trafficking. 
27. UK government authorities have long recognised this problem.  In giving evidence to another Parliamentary Committee of this House, the Assistant Chief Constable of the Police Service of Northern Ireland (the PSNI) stated:

“[Crime groups] have already recognised a porous land border, and that is a weakness that we in law enforcement have to eradicate. We have a huge challenge on the island of Ireland as a whole, particularly around organised crime and serious harm, be it drugs or human trafficking in all its guises.”[18]

28. The Head of the PSNI Organised Crime Branch explained to that Committee:

“… once you have established a route that you are confident you can use, in essence it does not much matter what the commodity is. Whether it is people, firearms, cigarettes or fuel, if the route is secure, then anything can be smuggled.”[19]

29. As a result, near perfect market dynamics are already in place which will be exploited further by criminal gangs on both sides of the border if, as expected, plain packaging worsens the illicit trade in Ireland. 

Anticipated impact on the quantity and availability of illegal tobacco in the UK

New smuggling opportunities for criminals

30. For the reasons explained above, plain packaging in Ireland will open up paradoxical marketing opportunities for counterfeiters at all levels of sophistication.  For instance, those counterfeiters with fewer financial resources will benefit because the cost of their operations will be reduced for counterfeiting plain packs.  The counterfeiters who already possess the skill to manufacture existing branded packs will continue with their illicit operations.
31. The illicit tobacco products manufactured to satisfy market demand in Ireland are at risk of ending up in the UK, either because the porous border between these neighbouring countries makes this inevitable or certain criminal groups decide upon a ‘cross-border’ sales strategy.  The likelihood of this happening will increase if the comparative price of lawful product between Ireland and the UK shifts (for example as a result of FX changes between EUR/GBP), such that legitimate product becomes comparatively even more expensive in the UK. The Zimmerman Report notes[20] in this context:

“In December 2009, the Irish Minister of Finance announced that the government: “decided not to make any changes to excise on tobacco in this Budget because [the Minister of Finance] believe[s] the high price is now giving rise to massive cigarette smuggling”.”

Increased consumer complicity

32. An increase in consumer complicity in illicit trade in Ireland driven by plain packaging cannot be ‘ring fenced’ and it will almost inevitably impact on societal norms outside Ireland.  There are two obvious reasons why this poses a real risk to changing attitudes about illicit trade in the UK which are not just more tolerant of it, but demonstrate increased complicity in it. 
33. First, some of those willing to purchase illicit trade products will move elsewhere (even if only temporarily).  There has always been a significant movement of people from Ireland to the UK (whether to Northern Ireland or the mainland) to take advantage of, for example, job opportunities and this is likely to have only increased given the serious economic difficulties in Ireland since the ‘Celtic tiger’ period.[21] 
34. Second, the ‘normalisation’ of illicit trade in Ireland will have an indirect impact (irrespective of emigration issues) as social media, which has no regard for national borders, is used by those perpetuating the myth that the purchase of illicit tobacco is a victimless crime, as popular opinion suggests.  As noted in the Zimmerman Report, it has been said that, for many smokers, buying the product without paying duty casts the seller in the light of a benefactor rather than a criminal - ‘the Robin Hood syndrome’.[22] 
35. Put simply, if Irish smokers will become more immune to/complicit in this illicit trade, they might be more inclined to seek them out in the UK and perhaps even introduce their friends to such products as the stigma about illicit trade erodes.

The impacts of increased criminality in the UK

36. Even if none of the illicit tobacco product manufactured for sale ends up in the UK (as unlikely as that is), there remains serious risks of negative impacts on the UK.  One obvious example of this is the potential for increased criminality in the UK as a result of criminal gangs based in/operating out of the UK seeking to satisfy the Irish demand for illicit tobacco after plain packaging.  This is particularly so given the recent trend (a recent NAO report stated: “Illegal products are also manufactured in the UK, primarily counterfeit hand-rolling tobacco”[23]).
37. The negative impacts of any increase in criminal activity in the UK (or it being used as a staging post for criminal activities elsewhere) will be very familiar to this Committee, but JTI has specific concerns about children and young people being left exposed to criminality as a result, noting, for example, that:

“Children who buy cheap tobacco can come into contact with criminals. Some children are talked into selling cheap cigarettes on to school mates. People selling cheap tobacco are more likely to be selling other things illegally (DVDs, alcohol), exposing our children to more dangers.”[24]  

The relationship between tobacco smuggling, organised crime and paramilitary activity

38. Further to paragraphs 26 to 29 above, we agree with the observation in the Organised Crime Task Force’s latest report that: “local criminals operating in this area [i.e. illicit trade] will have links to international OCGs and it is not unusual for these established importation networks to be used to import other goods as well, such as drugs or firearms”.[25] 
39. The 2012 Cross-Border Organised Crime Assessment recognises that such criminal networks extend to paramilitaries.[26]
40. JTI finally notes in this regard that the links the illicit trade has to broader illegal activity, including terrorism, demand that government policy in this area is firmly focussed on tackling the existing problem and not, as plain packaging would, providing improved opportunities for further criminal enterprise.

Conclusion

41. We hope that the Committee will take into consideration our concerns about this problem during the course the Inquiry.  We would be happy to provide the Committee with further details regarding these concerns in the form of oral evidence or further written submissions.

JTI

29 August 2013