Countering Industry Arguments Against Plain Packaging: It will Lead to Increased Smuggling

This page was last edited on 03 February 2020, at 15:28.

As part of on-going efforts of the tobacco industry to prevent the further regulation of its products, tobacco companies claim that the implementation of plain packaging will increase the illicit trade in tobacco products, particularly counterfeiting, because, they claim, plain packaging will make this process easier. Prior to its implementation in Australia, the tobacco industry argued that, as well as increased counterfeiting, the trade in ‘illicit whites’ and non-duty paid cigarettes being smuggled into Australia will increase as a result of plain packaging legislation. However in Australia – the only country yet to implement plain packaging, peer-reviewed academic research has found no increase in the illicit tobacco trade.¹²

Tobacco Industry Complicity in Tobacco Smuggling

Internal company documents reveal that Tobacco Smuggling became an integral part of tobacco companies’ business strategy in the 1990s.³
For more information, see:

Imperial And Gallaher Involvement in Tobacco Smuggling
Gallaher versus its Cypriot distributor
BAT Involvement in Tobacco Smuggling
JTI Involvement in Smuggling
Articles in the Conversation on the unscrupulous methods used by the tobacco industry revealed over the illicit trade and a summary of the big four’s complicity in illicit trade – published on 16 March 2015.

Tobacco Company Arguments

Tobacco companies benefit from smuggling in a number of ways. One way is to use the illegal market as a justification to protect the legal market from increased taxes and other regulation.

Increasing Tax Increases Smuggling

Increased tax is related to decreases in smoking consumption and prevalence and therefore the industry tries very hard to oppose tax increases. For example, in the late 1990s at the height of the explosion of tobacco smuggling into the UK facilitated by Gallaher and Imperial Tobacco, Gallaher‘s public relations team gave a presentation to the Liberal Democrat MP Edward Davey, warning that “it is clear that Government policy on tobacco taxation is not working” and that “a new Government approach is needed that acknowledged that a fundamental review of tobacco taxes is essential.”⁴
The presentation, which took place on 15 December 1999, warned that smuggling was becoming an epidemic and ironically warned about other dangers of this illegal practice including danger to “law and order” and that it encouraged “sales to children” as there was “no control on smugglers selling to children”.⁴ Seven months later, Gallaher’s then CEO Nigel Northridge wrote to the British Prime Minister Tony Blair to complain that smuggling “was spiralling out of control … the overall strategy on tobacco taxation is not working”.⁵

Increase Tax Instead of Implementing Plain Packaging

Despite their historic complicity in the illicit trade, the rhetoric promoted by the industry and its allies is that plain packaging will lead to an explosion in tobacco smuggling.⁶⁷
In an interesting development in Australia in 2011, British American Tobacco Australia (BATA) Managing Director David Crow admitted that tax increases drive down smoking prevalence. Crow continued that the Government should focus on increasing tax rather than pursuing plain packaging policy.⁸

“We saw last year very effectively with the increase in excise. There was a 25 per cent increase in the excise and we saw the volumes go down by about 10.2 per cent; there was about a 10.2 per cent reduction in the industry last year in Australia. So there are ways of achieving the objectives that do not infringe on the property rights, do not breach the laws and the international commitments and do not mean that the Australian government would have to compensate people.”⁸

Advocates of plain packaging saw this as an admission by Crow that plain packaging was likely to drive down smoking prevalence even more than the tax increases that BAT had previously vociferously fought against and this is why Crow is now advocating tax increases rather than plain packaging.
Since the introduction of plain packaging legislation in Australia, official statistics in the National Drugs Strategy Household Survey found that smoking prevalence amongst those aged 14 and over continued to decline from 15.1% in 2010 to 12.8% in 2013.⁹

Plain Packaging Will Lead to Increased Illicit Trade

Research supporting the argument that plain packaging will increase illicit trade has been predominantly funded by the tobacco industry. The following individuals and organisations have produced reports on the illicit trade on behalf of tobacco companies, particularly in relation to Australia and the UK. The list is not exhaustive:
LECG

The impact of plain packaging of cigarettes in Australia: a simulation exercise, February 2010

The impact of plain packaging of cigarettes in UK: a simulation exercise, November 2010

Professor Alan Zimmerman and Associate Professor Peggy Chaudhry:

The impact of plain packaging on the illicit trade in tobacco products, 29 June 2012

Deloitte

Tobacco packaging regulation: An international assessment of the intended and unintended impacts. A Deloitte report for British American Tobacco, May 2011

On behalf of Tobacco companies the front group the Alliance of Australian Retailers commissioned Deloitte to produce the following reports:

Alliance of Australian Retailers: Potential impact on retailers from the introduction of plain tobacco packaging, February 2011

Alliance of Australian Retailers: Plain packaging and channel shift, June 2011

Transcrime:

Plain packaging and illicit trade in the UK: Study on the risks of illicit trade in tobacco products as unintended consequences of the introduction of plain packaging in the UK, May 2012

International Tax and Investment Center:

The illicit trade in tobacco products and how to tackle it.¹⁰

KPMG – Series of reports in the UK and Australia. Here are a select few which are critiqued in the next section:

Project Star 2010 Results, August 2011

Illicit tobacco in Australia: 2013 full year report, March 2013

Critique of Industry-Commissioned Evidence

There are a number of problems with these reports. Collectively they:

Overstate the current level of illicit tobacco;
Do not provide adequate information on the methodology used to arrive at their estimates.

Below are some analyses of some of the aforementioned documents.
The Cancer Council Australia has produced a host of critiques of industry funded reports.

Deloitte Report Pre-Plain Packaging in Australia

In 2011, in order to influence the debate on plain packaging in Australia, the tobacco industry over-stated the level of illicit tobacco trade in the country and suggested that such problems would be exacerbated by plain packaging legislation.
An industry-funded report by Deloitte suggested that in Australia all of the 15.9% of smokers who had bought illicit tobacco in the last year were using approximately 25 illicit cigarettes for 365 days of the year,¹¹ however a government survey found that only 1.2% of smokers used illicit tobacco products half the time or more.¹² Allowing for illicit smokers to smoke more than average, illicit tobacco would make up 2-3% of the tobacco market, significantly less than the Deloitte report suggested.¹³

KPMG Evaluation of Plain Packaging in Australia

Following the introduction of plain packaging in December 2012, a report by KPMG commissioned by BATA, Philip Morris Limited and Imperial Tobacco Australia concluded that the illicit trade “grew from 11.8% to 13.3% of total consumption” in Australia from June 2012 to June 2013.¹⁴
The report attributed this increase predominantly to the increase in what it referred to as “contraband”, which by its definition is described as “genuine cigarettes that are sold without the applicable excise taxes. They are manufactured legally outside of Australia adhering to local regulation and smuggled into the Australian market.”¹⁴ In addition, ‘illicit whites’ were included as contraband, described as “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.”¹⁴
There are a number of problems with the KPMG report. Firstly, concerns have been raised about the representativeness of the data collected to support KPMG’s conclusions.¹⁵ For example, industry funded Empty Pack Surveys (EPSs) collect discarded packs in particular locations (which are not disclosed), then packs are examined for any which look ‘foreign’, either illicit white or foreign brands which do not comply with plain packaging regulations in Australia.
Then, in collaboration with tobacco companies, the pack collection company judges whether any of the packs are counterfeit (i.e. illegally produced). Using all of this information KPMG estimated how much of this product was likely to have been legally brought into Australia, either from overseas or duty free. The validity of these estimates depends on representativeness of the packs collected and therefore, the representativeness of EPSs is critical.

KPMG Report on Illicit Trade in Europe

In the UK, official government figures show that the estimated illicit cigarette market (including illicit and duty not paid) accounted for 9% of the market in 2012-13 compared to 16% in 2005-6, a 7% decrease.¹⁶
However, a PMI funded report conducted by KPMG disagreed with these findings. Following a legal agreement with the European Union, PMI comissioned KPMG to produce a yearly report, Project Star, on the European illicit cigarette trade in 27 different countries.¹⁷
On 17 April 2013, the Financial Times published an article entitled “Smokers turning more to illicit tobacco”.¹⁸ The article was based on the latest KPMG study on the illicit tobacco trade and suggested that the results revealed that the level of illicit trade in the UK rose sharply in 2012, as PMI’s press release on the study claimed.¹⁹
However, this was not an accurate reflection of the data. In fact, KPMG warned that, due to a subtle change in methodology, the 2012 data cannot be accurately compared with the previous year’s data,²⁰ and that this change would lead to an overestimate in 2012 compared to 2011.
Academics conducted a review of the 2010 Project Star report and compared its data to independent data . They concluded that there was little information provided on the Project Star methodology used to produce the illicit estimates and that Project Star underestimated legal cross-border sales by using interviews and EPSs.¹⁷

Problems with Empty Pack Surveys

The primary concerns with the Empty Pack Surveys is that:

EPSs cannot distinguish between foreign packets that have had duty paid and those which have not.
No details were provided about the timing of pack surveys (apart from in Germany). Tourist seasons would see more foreign packs and so this information provides important context.
No methodological information was given to discern whether EPSs are conducted via a random selection of areas to ensure that the sample is representative of the population. No description was given of how areas were selected and only large cities were included and therefore non-urban areas were under-represented. For example, those who are more deprived are more likely to use illicit tobacco²¹²²²³ and live in urban areas.²⁴²⁵

Furthermore, there was inadequate external validation of the data. The data was mostly validated by tobacco companies who arguably have a vested interest in overestimating the illicit trade. Furthermore, the report revealed that approximately 25% of the illicit trade market in Europe in 2010 was made up of genuine Philip Morris brands. This is against the Illicit Trade Protocol, where tobacco companies are accountable for ensuring their supply chain is adequately controlled. PMI did not present this data when presenting the findings of the 2010 report to the public.¹⁷
In other words, far from showing the level of illicit trade in the UK to be rising, the figures suggest it is actually falling. This corroborates with data from Her Majesty Revenue and Customs indicating that the illicit tobacco trade has actually been declining over time. Although a small increase from 2011-12 to 2012-13 was noted in the estimated figures from 2012-13. The 2012-13 estimated figure was 9% which is the same as the 2010-11 figure.¹⁶

Tactical Use of the Illicit Trade Argument

In the UK, media coverage of tobacco industry data on illicit trade was non-existent prior to the publication of the Government’s Tobacco Control Plan in 2011, which outlined the Government’s intention to hold a public consultation on plain packaging for tobacco products.
Peer-reviewed research by the University of Bath has revealed that there has been a huge increase in the number of press articles quoting industry data or surveys on illicit. Between 2011 and March 2013 there were 52 articles in the UK media which were based on industry data. Furthermore, the majority of these articles incorrectly referred to data as representing illegal or illicit trade. However, the data also measured duty-free sales, but this information was not provided in the articles.²⁶

PMI’s media activity timeline plan, PMI Corporate Affairs Update, February 2012 (slide 36)

The use of the media by the industry to scaremonger over illicit is further revealed in PMI leaked documents which show that the illicit trade argument would be heavily publicised via third parties as part of the company’s strategy to oppose plain packaging.²⁷
Tobacco companies have also heavily utilised the third-party technique in an attempt to influence both the general public and policy makers.

A Decrease in Smuggling as a Result of Plain Packaging?

Luk Joossens, an internationally acclaimed expert on the illicit tobacco trade, has reviewed the evidence on plain packaging and illicit trade and, contrary to industry- funded reports, has concluded that the evidence actually suggests there could be a decrease in illicit trade as a result of plain packaging legislation as many counterfeit packets do not have health warnings. If counterfeiters continue to use branded packaging and omit health warnings, as they currently do, then customs will easily spot counterfeit goods.
In 2012, he argued that:

“Illegal tobacco trade is driven by the demand for cheaper products, as well as the existence of supply, facilitated by corruption, criminal networks and weak government enforcement. Research indicated that the decision to buy illicit tobacco is driven by availability and price, and has no link with packaging. Even if counterfeiter’s chose to imitate ‘plain packaging’, this would be of little consequence as according to illicit trade experts ‘the only way to combat counterfeiting and illegal trade in tobacco products is by enforcing customs control and anti-counterfeiting and traceability technology.'”²⁸

Furthermore, there is also evidence from counterfeiters suggesting that branding has no effect on the ease with which packaging can be counterfeited.²⁹