SPY EYES

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.

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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.

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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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Plain packaging: Big Tobacco ‘desperate to protect its profit’

On May 7 Enda Kenny, Ireland’s prime minister, met tobacco executives and two senior ministers. The executives handed out photographs of children selling smuggled cigarettes and warned that Ireland’s plan to become the second country in the world to introduce plain packaging on tobacco was a gift to smugglers. They urged Dublin to oppose a draft EU law, which will ban menthol cigarettes and impose new controls on the industry.

“There is no evidence plain packaging works and yet we are considering implementing it here where we already have a major issue with the scale of the illicit trade,” says John Freda, general manager of Japan Tobacco International Ireland, one of the executives at the meeting.

Industry lobbying failed in Australia, which introduced plain packaging in December. Several tobacco-producing countries have launched legal action against Canberra at the World Trade Organisation.

In June the UK postponed plans to introduce plain packs. Opposition politicians said that Lynton Crosby, a tobacco lobbyist and Conservative party adviser, influenced the government’s decision. Mr Crosby denies this.

The industry claims standardising packs will make it easier for criminals to copy them – and would also make smuggled cigarettes, which would retain their branding, more attractive to consumers.

Antismoking activists say Big Tobacco is desperate to protect its profit and prevent other countries from following Australia’s lead.

Research published in the British Medical Journal, and funded by Cancer Council Victoria in Australia, suggests plain packs affect perceptions. Almost a third of smokers in Australia felt their cigarettes had deteriorated in quality while a quarter said smoking left them less satisfied after plain packs were introduced.

There is no evidence of increased smuggling in Australia. James Reilly, Ireland’s health minister, says industry claims that plain packaging would lead more smuggling are “utter rubbish”.

Mr Reilly has persuaded Ireland’s cabinet to back his plain-packaging plan. The next battle on plain packaging will be fought at the European parliament in September when the draft tobacco directive will be debated.

By Jamie Smyth
FINANCIAL TIMES