Focus: Big Tobacco faces big EU counterfeit problem

JAPAN TOBACCO

01/06/2023 06:00

By Richa Naidu, Emma Pinedo and Emilio Parodi
       MADRID, June 1 (Reuters) - Spanish police raided three
clandestine tobacco factories early this year, seizing nearly 40
million euros ($44 million) worth of tobacco leaf and illicit
cigarettes.
    At one, in the northern town of Alfaro, they found 10
Ukrainian workers, five of them war refugees, who'd been put to
work with no contracts and scant pay, police said. They worked
all day for and lived at the factory, forbidden from leaving.
    This operation is one of dozens across the EU that regional
policing and anti-fraud agencies say have driven seizures of
illicit cigarettes to record levels. 
    Crime groups, which have traditionally mainly sourced fake
tobacco products from outside the EU, are increasingly setting
up production facilities in western Europe to be closer to
higher-priced markets, according to Reuters interviews with half
a dozen specialists in the field, including enforcement
officials, tobacco executives and industry analysts. 
    The trend was revved up by the travel shutdown of the
COVID-19 pandemic, which choked supplies from outside the bloc,
the European Anti-Fraud Office (OLAF) said. It may have been
further accelerated by the war in Ukraine, which for years has
been a production hub and transit route for illicit tobacco,
OLAF added.
    As well as the human cost, counterfeiting is a financial
thorn in the side of the world's biggest tobacco companies at a
time when they're facing a global decline in smoking that's
spurred large investments in alternative products like vapes.
    "Criminal gangs have switched from importing counterfeit
products into Europe to establishing illicit manufacturing
facilities within EU borders," said Cyrille Olive, British
American Tobacco's (BAT)  BATS.L  regional head of anti-illicit
trade.
    BAT - one of tobacco's global giants with Imperial Brands
 IMB.L , Japan Tobacco  2914.T  and Philip Morris International
 PMI.N  - has seen increased counterfeiting since last year in
France, the Netherlands, Portugal, Slovenia, Denmark and the
Czech Republic, Olive added. 
    Some campaigners have accused Big Tobacco of overstating the
size of the illicit market to help lobby against higher taxes -
something the companies deny. Nonetheless, the latest data shows
seizures of illicit cigarettes are increasing.
    A record 531 million illicit cigarettes were impounded
across the EU last year, a rise of 43% from the roughly 370
million seized in 2020, according to data from OLAF. About 60%
of the cigarettes were from illicit production in the bloc while
the rest were smuggled in. 
    Europol told Reuters that last year would also likely set a
record for the number of illegal cigarette factories that were
reported shut down by national police forces, although the
full-year data isn't yet available.

    TOBACCO INVESTIGATORS
    The industry has responded by hiring investigators to
research illicit operations and share intelligence with European
authorities, executives at Japan Tobacco, BAT and Imperial
Brands told Reuters.
    The three tobacco majors declined to put a figure on the
financial hit from the illicit trade. Japan Tobacco has, though,
spent "hundreds of millions of dollars" gathering information on
the counterfeiters which it then passes on to European
authorities like OLAF, according to Vincent Byrne, head of the
company's anti-illicit trade operations. 
    "We have a dedicated function within the company to try and
protect our assets, protect our brands, and combat illegal
trade," said Byrne, a former detective who investigated
organised crime in Ireland. 
    BAT and Imperial Brands said they also had intelligence
operations. 
    Philip Morris International declined to comment for this
article.
    
    PACK: LESS THAN A EURO TO MAKE
    Counterfeiters typically replicate popular cigarette brands,
which include Japan Tobacco's Winston, Philip Morris' Marlboro,
British America's Dunhill and Imperial Brands' Nobel.
    A packet of 20 cigarettes costs less than a euro to make,
said Byrne, but trades at several times that, depending on the
marketplace.
    Supplies from China and other parts of Asia - which used to
be the biggest sources of counterfeit cigarettes that ended up
in the EU - shrank during COVID-19 lockdowns, spurring
increasing production in Europe itself, according to Alex
McDonald, head of group security at Imperial Brands.
    Russia's invasion of Ukraine may have quickened that trend,
said Ernesto Bianchi, OLAF's director of revenue and
international operations, investigations and strategy, adding
that the agency was "analysing how the fraudsters may have
reconfigured their routes". 
    Ukraine had been a hub for the manufacturing of illicit
tobacco and a supply route for illicit and counterfeit
cigarettes made in Russia and Belarus, activities that may have
been disrupted by the war, Imperial Brands' McDonald said.
    Some counterfeiters are luring and coercing Ukrainian
refugees to be workers.
    An illegal tobacco factory was dismantled last month in Roda
de Ter, 80 km from Barcelona, Spanish police said on Thursday.
Officers seized 11,400 kilos of tobacco and 7,360 packets of
cigarettes. Six Ukrainians were found working there.
    In Italy, officials said in April last year they had found
about 82 tonnes of counterfeit cigarettes inside a factory in
the industrial area of the country's ​​Pomezia municipality.
    Investigators said they found Russian, Moldovan and
Ukrainian workers doing gruelling shifts in an unsafe
environment where walled-up windows stopped fumes escaping.
    "A good many workers from Ukraine have been found in these
illegal factories," Japan Tobacco's Byrne said about
counterfeiting operations across the EU. 
    "They're collected in a van at an airport, blacked out
windows, driven around and swapped into another van," Byrne,
said recounting a particular incident. 
    "Eventually they're delivered to the factory. Mobile phones
are taken from them. Essentially, it's a form of modern-day
slavery."
    ($1 = 0.9310 euros)

 (Reporting by Richa Naidu in London, Emma Pinedo in Madrid and
Emilio Parodi in Milan; Editing by Matt Scuffham and Pravin
Char)
 ((richa.naidu@tr.com; Follow me on Twitter https://twitter.com/Richa_Writes;
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