In just first few weeks of 2017 police over the world have been busy seizing counterfeit cigarettes. In Ireland investigators, including Detector Dog Alfie, seized 60,000 illegal cigarettes with a street value of €32,500 ($34,000 USD), just beating out the Canadian residents caught smuggling 53,600 cigarettes a few days earlier. In South Africa investigators seized 1720 boxes of counterfeit cigarettes with a street value of $19,000, and in November the small county of Nottingham in the U.K. announced seizures of counterfeit cigarettes increased threefold from the year before to nearly 500,000 cigarettes. That is nothing compared to what police will seize in Wales this year. This week police there seized 750,000 counterfeit cigarettes, with an estimated value of £427,000 ($535,671 USD), from a gang that used a false wall, hidden chute and a baby monitor to conceal their activities.
All around the world as governments intervene in the market with “plain packaging” of cigarette packs and tax hikes to discourage smoking, they are trading one evil for another. Tobacco harms the health of those who smoke and those around them, but consenting adults are responsible to bear the costs of their decisions. A system of robust property rights demand governments to honor the free exchange between producers and consumers and allow society to regulate consumption with minimal intervention.
These interventions have opened up a new criminal industry to traffic and produce fake cigarettes. Sophisticated crime syndicates, terrorists, and even the government of North Korea are skirting import controls and taxes to provide cheaper cigarettes to consumers. This robs governments of billions in tax revenue, jeopardizes consumer safety and forced the U.S. president to declare the “global illicit trade in tobacco a threat to national security.”
In Australia, where smokers are facing $40 ($30 USD) packs thanks to 12.5% annual tax increases, 14% of tobacco is bought on the black market robbing the government of 1.4 billion (1 billion USD) in tax revenue.
In the U.K., cigarettes continue to be the number 1 counterfeit product investigated by Trading Standards, involving more authorities every year. According to a 2015 strategy report the market for illicit cigarettes has been reduced to 10%, yet “tobacco smuggling costs over £2 billion ($2.5 billion USD) in lost revenue each year.”
In the EU 65% of seized cigarettes are illicit counterfeits, costing the community $10 billion euros ($10.5 billion USD) in lost tax and customs revenue a year.
In Jamaica, illicit cigarettes make up 20% of the market and rob the government of “$2 billion in revenue annually” ($15.5 million USD) which is instead going to criminals who purchase guns and ammunition. Also, Jamaica is plagued by counterfeit, illicit, plastic rice.
In Hong Kong, where a regular pack costs around $7 USD but in mainland China only $2 USD, illicit cigarettes rose to occupy 29% of the market, according to an Oxford Economics report, and a loss to the government of $377 million.
In India, where imported cigarettes are hit with a 30% customs duty as well as taxed highly in stores the smuggling rate has increased 18.3% between 2013 and 2015. The Federation of Indian Chambers of Commerce and Industry report in “Illicit Markets- A Threat to Our National Interests” that smuggled cigarettes are 8-10% of total consumption valued at $1.3 billion USD, an extraordinary amount going to criminals.
More atrocious than the loss of tax revenue, consumers of illicit and counterfeit cigarettes are oftentimes unknowingly smoking cigarettes that are worse for their health, because criminals don’t care about safety standards. But, by far the worst outcome of these market interventions is the transfer of billions in hard cash to criminals, terrorists and the North Korean regime of Kim Jong-Un to fund his nuclear program.
As far back as 2005 U.S. intelligence agencies linked North Korean produced counterfeit cigarettes to their sale in the U.S. According to Peter Prahar “there is no doubt that the government of the Democratic People’s Republic of North Korea, the Korean Workers’ Party, and the Korean People’s Army are all involved in criminal activity”. Mr. Prahar testified as the director of the State Department’s Bureau of International Narcotics and Law Enforcement Affairs before a Senate hearing titled “North Korea: Illicit Activity Funding the Regime.” He stated that, according to sources, there are between 1 and 12 factories in North Korea that produce counterfeit cigarettes of British, American and Japanese brands. These cigarettes are then smuggled to markets around the world including the U.S. where counterfeit N. Korean produced Marlboro cigarettes were identified in “1,300 incidents” between 2002 and 2005. Mr. Prahar continued, “a major source of income to the regime and its leadership, we believe is the counterfeiting of cigarettes. This is a potentially enormously lucrative business, again with a U.S. connection and, of course, these cigarettes have shown up in Asian markets, as well.”
Senator Coburn remarked that “the income from these illicit activities is substantial and provides a reliable revenue stream supporting the regime’s weapons programs.” Since then, the North Korean regime has agreed to end its nuclear program twice, yet, developed nuclear weapons, tested a hydrogen bomb, miniaturized nuclear warheads and developed long range missiles.
North Korea is only one of several bad actors raising funds by selling counterfeits, especially cigarettes. In 2002 Operation Smokescreen resulted in the first prosecution for “material support to a designated terrorist organization,” in this case Hezbollah operatives raised $8 million smuggling cigarettes from North Carolina to Michigan. The same thing happened again in 2004. Hezbollah continues to operate this way in the Western hemisphere.
Counterfeit sales continue to play such a sizable role in financing terror that it was mentioned in two reports last month – one from the White House on Intellectual Property Enforcement the other the House Taskforce on Stopping Terror Financing. The House report included a statement from General John F. Kelly of U.S. Southern Command that Hezbollah continues to raise money through “lucrative illicit activities like money laundering and trafficking in counterfeit goods and drugs” he named Brazil, Paraguay, Argentina and Panama as primary locations.
The Whitehouse report called for “renewed attention” to the nexus of crime and terrorist financing, it summarized analysis from Interpol and publicly available data to conclude:
Al-Qaeda and affiliated groups; North African radical fundamentalists terrorists in Europe; Hezbollah; Chechen separatists; ethnic Albanian extremist groups; and paramilitaries in Northern Ireland—have been linked with the smuggling and sale of a broad array of counterfeit goods, including counterfeit cigarettes; medicines; personal care products (such as shampoos, creams, cologne and perfume); auto parts; shoes and apparel; and pirated music, movies, computer software, and video games.
North Korean nukes and terrorism are a few examples of the unintended consequences high taxes and intellectual property infringement have on the society. To defend the ability of individuals to own and exchange property, even cigarettes, does not equate to approval of each exchange. Rather, property rights force governments to tolerate and respect the individual decisions of each citizen and protect the government from creating unintended consequences of ill-advised market intervention – such as diverting would-be tax revenue to terrorists.