# EUR-Lex - 52013DC0324 - EN

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# 52013DC0324

**COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Stepping up the fight against cigarette smuggling and other forms of illicit trade in tobacco products - A comprehensive EU Strategy /* COM/2013/0324 final */**

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TABLE OF CONTENTS

COMMUNICATION FROM
THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Stepping up the fight
against cigarette smuggling and other forms of illicit trade in tobacco
products - A comprehensive EU Strategy

1........... Introduction.................................................................................................................... 4

2........... Nature and Scale of the EU
problem of illicit tobacco trade............................................. 5

2.1........ The nature of illicit trade.................................................................................................. 5

2.2........ The scale and scope of illicit
trade in the EU.................................................................... 6

2.3........ Third country origins of illicit tobacco products................................................................ 7

2.4........ Illicit EU production........................................................................................................ 9

2.5........ Seized brands and seizure locations............................................................................... 10

3........... Factors contributing to the
illicit trade............................................................................ 11

3.1........ Incentives are high and loopholes
are substantial............................................................ 11

3.2........ Supply chain control measures do
not match the threat................................................... 12

3.3........ Challenges for enforcement
authorities........................................................................... 13

3.3.1..... Customs and tax authorities........................................................................................... 13

3.3.1.1.. Risk management.......................................................................................................... 13

3.3.1.2.. Control methods, equipment,
training and IT tools......................................................... 14

3.3.2..... Other enforcement authorities........................................................................................ 14

3.3.3..... Collaboration across authorities
and EU actors.............................................................. 15

3.3.4..... Corruption.................................................................................................................... 15

3.3.5..... International cooperation with
third country authorities................................................... 15

3.4........ Low disincentives: Sanctions
imposed by the Member States are relatively low.............. 16

4........... The way forward.......................................................................................................... 16

4.1........ Measures to decrease incentives................................................................................... 16

4.2........ Measures to secure the supply
chain.............................................................................. 17

4.3........ Measures to strengthen
enforcement.............................................................................. 18

4.3.1..... Addressing challenges of EU
enforcement authorities..................................................... 18

4.3.1.1.. Risk management.......................................................................................................... 18

4.3.1.2.. Operational actions....................................................................................................... 18

4.3.1.3.. IT tools and equipment................................................................................................. 19

4.3.1.4.. Cooperation between EU authorities............................................................................. 19

4.3.1.5.. Specific problem area(s)............................................................................................... 19

4.3.1.6.. Sharing of expertise and best
practices.......................................................................... 20

4.3.2..... Enhance cooperation with major
source and transit countries......................................... 21

4.4........ Strengthening sanctions................................................................................................. 22

5........... Conclusion................................................................................................................... 23

COMMUNICATION FROM THE COMMISSION TO
THE COUNCIL AND THE EUROPEAN PARLIAMENT

Stepping up the fight against cigarette
smuggling and other forms of illicit trade in tobacco products - A
comprehensive EU Strategy

1.           Introduction

According to the estimates of the European
Anti-Fraud Office (OLAF) the illicit trade[1]
in cigarettes causes annual financial losses of over EUR 10 billion in the budgets
of the European Union and its Member States[2].
These losses come from unpaid customs duties as well as taxes, including value
added taxes (VAT) and excise duties. Cigarettes constitute the biggest share of
illicit tobacco trade, but other tobacco products (such as hand rolling
tobacco) are also traded illegally.

A decade ago, illicit trade was mainly constituted
of large-scale container smuggling of well-known brands of cigarettes. In the
last years, the relative share of smuggling of these ‘main brands’[3], has decreased. On the other
hand, counterfeiting, illegal production and, most importantly, smuggling of ‘other[4] brands’ (produced mainly
outside the EU in quantities vastly exceeding the demand on those national
markets) are on the rise.

Illicit tobacco trade is not only an
economic issue. In addition to significant damage to national and EU revenues,
the illicit trade fuels the shadow economy. In fact it is almost exclusively
the domain of organised criminal groups operating across borders. Furthermore,
from a health point of view, illicit trade undermines policy initiatives aimed
at reducing the consumption of tobacco products, particularly amongst
vulnerable groups such as young people and low income groups. Illicit tobacco
products are for the most part not produced in accordance with requirements of
EU tobacco products legislation[5].

The European Commission and Member States have already taken action to curb illegal tobacco trade. For example, legally
binding Cooperation Agreements have been concluded with four of the world's
leading cigarette manufacturers[6].
In 2011, the Commission presented an Action Plan to tackle smuggling at the
EU's Eastern land border[7]
to address problems identified in that particular geographical area. However,
the analysis of the available information[8]
shows that despite these efforts, overall the illicit trade is increasing in
the EU. The EU faces a rising illicit influx of other brands coming from
outside the EU as well as increased illicit production and distribution inside
the EU.

Furthermore, illicit trade in tobacco
products is certainly not exclusive to the EU – it is a world-wide problem. Indeed,
in November 2012, the 176 Contracting Parties to the WHO Framework Convention
on Tobacco Control (FCTC) adopted a Protocol to the Convention specifically to address
the problem of illicit trade in tobacco products[9].

The problem is significant and it is
global. It manifests itself in different modes at the borders and within the
EU. The illicit trade is influenced by demand and supply factors, and by the
lack of effectiveness of control measures. Its substantial financial impact on
the budgets of the EU and the Member States is very serious, in particular in
the current economic crisis in the EU. It is clear that a comprehensive
approach to the problem of illicit trade in tobacco is thus called for.

This
Communication outlines the nature and scale of the EU problem of illicit
tobacco trade, identifies factors that contribute to it, and proposes a
comprehensive EU Strategy to fight the problem in the EU.

The Strategy's
comprehensive approach takes into account that the fight against the illicit
trade is a cross-cutting issue that is affected by many factors and drivers and
in turn involves a broad range of EU and/or national policies.

2.           Nature
and scale of the EU problem of illicit tobacco trade

2.1.        The
nature of illicit trade

Illicit tobacco trade encompasses different
phenomena, which are to a certain extent different and require different
responses at different levels. The different forms of illicit trade include:

·
(international) smuggling of genuine tobacco
products (i.e. main brands and ‘other brands’)

·
(international) smuggling of counterfeit
cigarettes, and

·
illegal production and distribution within the
EU (no customs duties involved, unpaid VAT and excise duties).

International smuggling (of both genuine and counterfeit goods) can involve:

·
false/incorrect declarations (declaring the
wrong description/value/origin/etc. of goods – incorrect customs duties are
paid, if any, unpaid VAT and excise duties),

·
concealing goods inside legitimate cargo or
vehicles or on passengers (unpaid customs duties, VAT and excise duties), and
finally,

·
illegal border crossing, avoiding authorities
altogether (unpaid customs duties, VAT and excise duties).

Within the EU, illicit trade encompasses illicit/unauthorised production and
distribution within the EU customs territory (including across different tax
jurisdictions). Illicit distribution includes goods produced inside the EU
declared for export or for intra-EU delivery and moved under VAT and excise
suspension but never leaving the EU's customs territory or delivered to a
consignee within the EU that is indicated in the excise document in EMCS[10] or in the VAT return, and also
imported goods released into free circulation in the EU under VAT and excise
suspension, which are then distributed illegally without payment of VAT and
excise. It also includes withdrawal from transit regime of goods which are then
illegally sold inside the EU (unpaid customs duties, VAT and excise duties).

2.2.        The
scale and scope of illicit trade in the EU

Studies on the subject acknowledge[11] that it is particularly
difficult to measure illicit trade because of the illegal and
clandestine nature of the activity. However, some estimates are available[12]. Illicit cigarette consumption
in the EU has been estimated by one EU-funded study to be 8.5% in 2007[13] of the overall consumption.
The KPMG Project Star Report 2012[14]
estimated 8.4% illicit consumption for 2007, 8.6% for 2008, 8.9% for 2009, 9.9%
for 2010, 10.4% for 2011 and 11.1% for 2012. This corresponds to an increase of
30% over the last 6 years..

The seizures reported by the Member States
confirm that cigarettes constitute by far the biggest part of seizures of
tobacco products[15],
although some significant seizures of Hand Rolling Tobacco (HRT) were also
recorded. Other tobacco product types do not appear in significant numbers.

2.3.        Third country origins of illicit tobacco products

According to available data, the main
countries of provenance for smuggled tobacco products are, in the order of
importance: China, the United Arab Emirates (UAE)[16], Vietnam, Malaysia, the Russian Federation, Singapore, Belarus and Ukraine.

Chart 1. Routing information

|| Quantity (in pcs cigarettes)

Brand Type

|| Major Brands

|| Other Brands

Number of Seizures

China continues to
be the source country for the majority of seized cigarettes. Analysis of the
seized samples demonstrates that these are mainly counterfeit cigarettes.
Illicit consignments seized were shipped either directly to European seaports
or transhipped via Singapore and Malaysia, where the illicit trade is aggravated by the insufficient control
in the free zones.

Whilst in the past the UAE appeared mainly as
a point of transhipment, current information clearly points to its new role as
an important production location for other brands[17], particularly in its free
zones.

Greece appears to
be a major target for entries of shipments from China and UAE.

Consignments are often transhipped in Egypt, Turkey and other ports in the Eastern Mediterranean.

Despite measures already undertaken, the EU
Eastern border also continues to be a target for illicit trade, particularly
the Baltic region. The main countries of provenance there are Russia, Ukraine and, increasingly, Belarus. In the case of Russia (and also UAE), most of the
products seized are genuine. This means that they are produced legally, but in quantities
greatly exceeding local demand in source countries. Whether duties are paid in
their originating country or not, these products are then smuggled into the EU.
Analysis by FRONTEX confirms that cigarette smuggling is one of the main problems
affecting the EU Eastern border, and suggests a significant scale of smuggling
from the Western Balkan countries. It also suggests that cigarette smuggling
significantly affects the work of border authorities on the Eastern land
borders, including on the land borders with Turkey, and with Western Balkan
countries[18].

The modus operandi of smuggling varies
greatly. Goods arrive via shipping container, road-going vehicles (lorries,
vans, cars), by sea or river on small vessels, on trains and also in air
freight and by post. The entry of tobacco products concealed with other goods
continues to be the most important modus operandi. Repeated smuggling of small
quantities (so called ant-smuggling) is a significant problem in the border
regions. Sometimes this traffic is well organised and the small quantities are
consolidated into larger loads before being transported to other Member States
for sale on the illicit market.

It has to be underlined that organised
crime plays an important role in the illicit trade which aggravates the problem
further[19].
Illicit tobacco trade is a high profit and low risk activity and therefore particularly
attractive to organised crime groups which have the possibility to launder the
large profits derived from the illicit trade.

2.4.        Illicit EU production

Significant amounts of cigarettes are
probably also produced illegally inside the EU. The number of known
illegal factories has increased rapidly: in 2011, Member States discovered nine
illegal factories estimate to have a combined production capacity of more than
9 million cigarettes per day. In 2010, only five such factories were
discovered.

2.5.        Seized brands and seizure locations

The share of other brands seized
compared to main brands[20]
is steadily increasing and reached around 58% in 2011. The measures
implemented by the four big manufacturers under the Cooperation Agreements, such
as tracking and tracing of tobacco products, due diligence in relation to
customers and prevention of money laundering, have clearly led to a significant
reduction in the presence of these companies' products on the illicit market.

Some of the other brands[21] that were seized throughout
the analysed period were seized in quantities similar to main brands, or show
strong upward trends[22],
which is a clear indication that they are well
established on the illicit markets. Significant quantities of certain other brands[23] are produced inside the EU.

An analysis of the seizure location type/mode of transport shows that while seizures
at seaports continue to represent the highest seized quantities, inland seizures have increased and also reached a significant level in both
number of seizures and quantities seized.

Chart 2. Seizure location type

Seizure Location Type ||

SEAPORT ||

INLAND

UNKNOWN LOCATION

LAND BOUNDARY

WAREHOUSE

OTHER LOCATION

MAIL CENTRE

PORT (MARINA)

AIRPORT

FREE TRADE ZONE

INLAND PORT

RAILWAY

HIGH SEAS

INLAND WATERWAY

|| Quantity (in pcs of cigarettes) || Number of seizures

3.           Factors
contributing to the illicit trade

Trade in tobacco products is complex
because of the multitude of rules and requirements (e.g. different tax rules)
that apply. Thus dealing with legitimate trade requires application of both
standard EU customs procedures and rules and complex national tax procedures
for classifying, valuing and applying the correct tax rates. As a consequence,
also dealing with illicit trade (its incentives, disincentives and control) is
a complex affair.

The illicit trade in cigarettes is stimulated
by four drivers mainly:

(1)
high incentives and substantial loopholes;

(2)
supply chain control measures do not adequately
match the scale of the threat;

(3)
enforcement authorities face certain general and
specific challenges;

(4)
low disincentives: sanctions are low.

If a strategy is to be successful in
fighting cigarette smuggling it has to address the incentives and
disincentives, as well as the control factors, simultaneously.

3.1.        Incentives
are high and loopholes are substantial

Tobacco products are in general highly
taxed in the EU. Import duties are high, between 40 and 58%[24]. The total tax incidence
(incl. VAT) lies between 70.12% of the tax included retail selling price (TIRSP)
on cigarettes of the weighted average price (WAP) in Luxembourg and 88.97% in
the United Kingdom.

As many of these factors vary nationally, price
differences (as paid by the end consumer) regarding tobacco
products, both within the EU and in comparison to its
neighbouring countries are significant. In the area of excise
duties on cigarettes, the gap between the lowest taxing Member State and the highest one amounts to EUR 206.41
per 1000 cigarettes – over four euro per pack of 20 cigarettes - creating a strong demand and incentive also for illegitimate
distribution across tax jurisdictions inside the EU.
Similar ranges in excise rates exist for other tobacco products.

Although price gaps have narrowed between
EU countries, prices in countries on the Eastern border remain up to eight
times lower. The significant differences in the tax
inclusive retail selling prices have created an environment for purely tax
induced cross-border shopping and for smuggling and fraud. Cross-border
shopping is entirely legitimate and, indeed, constitutes one of the benefits of
the internal market provided the products are purchased by individuals for
their own personal use. However, there is a thin line with intra-EU "smuggling"
where individuals purchase tobacco in other Member States ostensibly for their
use but instead sell it without paying excise duty in the Member State of consumption.

The excise gap with neighbouring third
countries is even significantly larger.

The complexity of applicable rules
also creates incentives for illicit activities. In
particular taxation legislation concerning tobacco goods is complex in the EU
context, especially since much of it is national. The
definition of excisable tobacco products retains a high degree of complexity
and also the number of classification and definition problems is
increasing for certain products[25]. Furthermore, there are "grey
areas"[26]
and loopholes between smuggling and rightful importation of tobacco (and also
alcohol) and products within the relief thresholds on importation applicable to travellers, both coming from
third countries as well as intra-EU travelling.

Measures to restrict the release for
consumption of large/excessive volumes of tobacco products immediately prior to
a tax increase (forestalling) currently are also not sufficient. Creating
overstocks released for consumption prior to a tax increase leads to a
remarkable tax avoidance and reduces the Member States’ revenue collection.

More generally, identification and
classification of tobacco products (and their origin) can be difficult and
require specialist equipment or laboratory analysis.

These gaps and loopholes form a significant
economic incentive for smuggling and other forms of illicit trade.

3.2.        Supply
chain control measures do not match the threat

In light of the clear incentives for
criminals to engage in illicit trade, measures to control the tobacco supply
chains, either by authorities or by economic operators themselves, are largely
insufficient.

Apart from existing agreements with the main
manufacturers, there are so far no legal measures at EU level that oblige economic
operators engaged in the tobacco supply chain to conduct due diligence during
the course of their activities[27].
There is also, at this stage, no general legal obligation in place for producers
or importers to monitor the movement of cigarettes and other tobacco products
through their supply chain (tracking). In the absence of such measures, it is
very difficult (even impossible) for the authorities to determine at which
point a product was diverted into the illicit trade (tracing).

Considering the context of the trends and
incentives outlined above, the current requirements on economic operators to
control supply chains must, despite some success with regard to contraband of
main brands, clearly be considered insufficient.

3.3.        Challenges
for enforcement authorities

On the enforcement side, customs and tax
authorities are the key players in the fight against smuggling from third
countries. Border guards and police also have a role to play. Police and tax
authorities – and in several Member States also customs – are key players in
the fight against illicit EU production and distribution. All of the involved authorities
(customs, tax, police or border guards) face an important number of
difficulties. Some of these are general (e.g. challenges related to data
exchange, risk management and targeting) and some specific to illicit trade in
tobacco. Furthermore, cooperation mechanisms between authorities and EU bodies
do not always exist to allow effective collaboration between them, which
hinders the overall effort.

3.3.1.     Customs
and tax authorities

Customs authorities make use of their
staff, IT systems and control procedures and equipment to detect a host of
illicit international traffic of goods, notably including tobacco products. EU
customs authorities are, by virtue of being a customs union and having a common
legal basis, closely networked via shared IT, joint expert groups and exchange
of officials[28].
EU tax authorities also engage in various forms of administrative cooperation
to combat tax fraud and evasion across the EU. A host of IT systems and
networks managed by the Commission supports cooperation between the authorities
in this work[29].
This cooperation includes not only exchange of risk
information[30]
but also trans-European networks to control the movement of goods in suspension
of customs duties and other taxes.[31]
Nevertheless, both customs and tax authorities face a number of challenges in
fighting external and intra EU illicit tobacco trade.

3.3.1.1.  Risk
management

Customs authorities have developed in
recent years a common framework to manage risks in relation to commercial
supply chains movements of goods crossing the EU external border. As was
recently highlighted in the Communication on customs risk management and
security of the supply chain[32],
EU customs authorities face a number of challenges in terms of the
implementation of effective risk management. These relate namely to quality,
availability and sharing of data as a basis for effective risk management,
control and investigation activities.

The Communication identified specific
problems with the data provided by economic operators as basis for conducting
risk analysis, in the capacity of EU customs authorities to use and share risk
information among themselves and with other authorities, as well as a need to
improve cooperation and data and analysis sharing with both economic operators
and international partners. Proposals for further measures to improve the
capability of customs to manage supply chain risks for all goods have been put
forward including greater convergence in the use of the information, data
sources, tools and methods used by customs to pinpoint risks and analyse
commercial supply chain movements. Implementation will also impact
significantly on the ability of EU customs to combat the problem of tobacco
smuggling.

3.3.1.2.  Control
methods, equipment, training and IT tools

Controlling for certain types of smuggling
such as illicit tobacco concealed in legitimate cargo or in (passenger or
commercial transport) vehicles is also made difficult by lack of adequate types
of control equipment such as scanners and sniffer dogs. Not all Member States
dispose of adequate level of such equipment to protect their external borders. The level and quality of awareness and training
of officers can also impact on national effectiveness in dealing with
smuggling.

Within the internal market, tackling
smuggling of cigarettes requires national networks of inland detection teams aiming
at disrupting and dismantling the supply and distribution of illicit tobacco at
retail, work and private premises. This embraces the establishment of mobile control
units (second line control) and the extension of controls to inland checkpoints
and markets. Not all Member States have implemented this practice.

While a number of
specific IT tools exist to support the fight against illicit cigarette trade at
EU level, there is also evidence that certain of the existing IT systems
currently are not used to their full potential. For example, the new CIGINFO
reporting module in the Anti-Fraud Information System (AFIS) shows clear
improvements, yet despite the efforts to streamline and simplify reporting of
seizures from Member States, some crucial information is still systematically missing
or incomplete. Information in terms of movements of
tobacco products (NCTS, EMCS) is also not yet fully exploited with new
technologies such as data analytics.

3.3.2.     Other
enforcement authorities

Police and border guard authorities also have
a role to play in fighting the different forms of illicit trade in tobacco
products. The responsibility of the protection of the external borders lies
with the Member States, based on a set of common European rules and procedures.
They play a key role in detecting tobacco products illegally transported across
the EU green border. The Member States' authorities are assisted in fighting
cross-border crime by FRONTEX[33].
FRONTEX carries out risk analysis, coordinates operational cooperation
between Member States and develops and operates information systems enabling the
exchange of information, amongst other tasks.

As fighting illicit trade in tobacco products is primarily the task
of customs, the role of police authorities varies from one Member States to the
other. However, police plays a key role in fighting organised crime and
associated crimes, such as money-laundering. The European Police Office (EUROPOL)
supports the Member States police authorities in the fight
against serious crime, and in particular illegal manufacture and distribution
of tobacco products in the EU, including organised VAT fraud. EUROJUST[34] supports cooperation between
the competent authorities of the Member States in order to render their
investigations and prosecutions of serious crimes more effective.

3.3.3.     Collaboration
across authorities and EU actors

An effective
policy aimed at tackling illicit trade in tobacco products requires a targeted
cooperation among national law enforcement and investigating agencies. The creation
of designated task forces, embracing customs and finance guards, police as well
as any other law enforcement agency has proven to be successful. Nevertheless,
this is not a widespread practice within the European Union.

Also at EU level,
intelligence and information exchange among EU bodies involved in fight against
customs fraud, organised crime and cross-border crime (OLAF, EUROPOL, EUROJUST
and FRONTEX) needs to be improved.

3.3.4.     Corruption

Finally, numerous studies[35] and OLAF cases have shown that
corruption in law enforcement authorities impedes the effective fight against
illicit trade, in particular where corruption affects customs authorities[36]. Corruption of officials
actually remains one of the main methods used by the smugglers to cover their
illegal activities.

3.3.5.     International
cooperation with third country authorities

A significant dimension of the problem of
illicit tobacco trade is international. Information on risks, trends, threats
and in particular in the context of investigations requires a high level of
exchange of information and cooperation with authorities of source and transit
countries. Degree and quality of cooperation between the EU and third countries
differs widely and is sometimes very difficult. Due to
joint efforts, cooperation with Ukraine and Moldova has improved in the past
two years, contrary to the situation concerning Belarus. Operational
cooperation with Russia, China and Malaysia is good, but considerable problems
remain because of the size of illicit trade originating from these countries.
There is insufficient operational cooperation from Singapore and UAE in
relation to the free zones in these countries. Corruption
in law enforcement authorities is also an important problem in source and
transit countries outside the EU.

3.4.        Low
disincentives: Sanctions imposed by the Member States are relatively low

Despite the obvious incentives, and the huge
profits that are being made through illicit trade, smugglers face relatively
low risks in the EU, not to mention elsewhere[37]. Sanctions for cigarette smuggling
differ to a great extent across Member States. They vary in terms of the
approach to sanctioning (administrative or criminal) as well as the gravity of
the penalties. In one Member State, the maximum sentence for the most serious
cases of such offences might be imprisonment of up to one year, while in others
perpetrators can receive penalties of up to ten years. Similarly, the levels of
fines differ significantly. The significantly diverging sanctions provide an opportunity
for smugglers to choose their entry points to the EU according to where the
lowest sanctions apply.

4.           The
way forward

In the proposed way forward, actions have
been identified to address all aspects of the problem. Nevertheless, to focus
scarce resources, emphasis is put on those measures that promise the most
immediate effects, i.e. on securing the supply chain more effectively and strengthening enforcement. Actions related to
the following measures are listed in the Action Plan accompanying this
Communication.

4.1.        Measures
to decrease incentives

Currently the scope for harmonising excise
duties within the EU, not to mention with neighbouring countries, is limited.
Nevertheless, while pursuing this idea in the longer term within the EU and
with Eastern neighbours in particular, other measures can be taken in the
immediate and short term to reduce incentives and loopholes.

For example, the definition
of excisable tobacco, which retains a high degree of complexity, could
benefit from simplification by aligning it with customs definitions. A precise
definition of excisable products based on objective criteria is a pre-condition
for lowering the administrative burden on both economic operators and tax
authorities, thereby reducing loopholes and ensuring a higher degree of
compliance with excise legislation.

As far as the grey area between
smuggling and rightful importation by travellers is concerned, the Commission
is considering elaborating technical guidance to support the Member States in
using objective criteria when applying the relief thresholds for travellers.

Regarding forestalling, it needs to be explored whether basic common rules on anti-forestalling
could limit tax avoidance while avoiding competitive distortions between
economic operators established in different Member States. Anti-forestalling
measures are linked to the evidence of the payment of excise duties. Trusted operators that have entered into agreements ensuring higher
compliance standards should possibly be able to benefit from longer
transitional periods in order to prove the payment of excise duties.

Not only incentives for smugglers,
but also those for consumers need to decrease. In order to discourage
citizens from buying illicit cigarettes and other tobacco products, the
negative impact of illicit trade should be made better known to the wider
public, in particular the impact on national finances and the involvement of
organised crime, as well as the fact that illicit products do not comply with
EU tobacco products legislation, for example as regards provisions on
ingredients and the obligatory presentation of health warnings on the package.

The Commission will

- examine how to simplify the application of the excise rules, e.g.
through technical guidance;

- explore limiting tax avoidance by introducing basic common rules
on anti-forestalling;

- expand the already existing targeted actions in cooperation with
the interested and willing Member States in order to raise public awareness
about the damage caused by and the specific risks associated with the
consumption of illicit tobacco products.

4.2.        Measures
to secure the supply chain

As a first and foremost measure to better
secure tobacco supply chains the EU and the Member States have a common
interest to sign, ratify and effectively implement the FCTC Protocol,
including measures regarding licencing of manufacturing equipment, due
diligence, and provisions on the free zones inside the EU.

Most importantly, the Protocol obliges
the Parties to establish a tracking and tracing system for all tobacco
products that are manufactured in or imported onto its territory (Article 8)[38]. The key element of such a
system consists of unique identification markings which will assist in
determining the origin and the point of diversion of the products into the
illicit trade. It will enable the monitoring and control of the movement of
tobacco products and their legal status by the competent authorities of the
Parties (i.e. Member States and European Commission) and also include
information exchange with the international partners via the Global information
sharing focal point at the WHO Secretariat of the FCTC. Such a tracking and
tracing system will improve the control of the supply chain significantly and
reinforce the existing measures applied to the movement of excisable products
inside of the EU (EMCS-for EU goods or NCTS- for non-EU).

The basic features of the national tracking
and tracing systems should be determined at EU level, in order to avoid
distortions in the EU internal market of tobacco products. This would be
achieved through the adoption of the Commission's recent proposal for a new
Tobacco Products Directive (TPD)[39].
In order to ensure full traceability of tobacco products and to make sure that
there are only compliant products on the EU market, the
proposal (Article 14) foresees tracking and tracing measures at packet level
for tobacco products throughout the supply chain (excluding retail). The
proposal foresees that tobacco manufacturers shall conclude contracts with
independent third parties that provide data storage capacities for such system
ensuring full transparency and accessibility by Member States' authorities and
the European Commission.

In addition, the
proposal also foresees a security feature on all tobacco products, which should
help consumers and authorities to distinguish between genuine and counterfeit
products.

Therefore, the Commission proposal for a new Tobacco Products Directive contains, in its Article 14, provisions on tracking and tracing which are fully in line with the
FCTC Protocol as far as the EU trade in tobacco products is concerned.

The Commission will propose measures

- to sign, ratify and implement the FCTC Protocol at EU level;

- to ensure compliance with the provisions of the Protocol as far as
matters falling into EU competences are concerned.

The European Parliament and the Council should adopt the Commission
proposal for a new Tobacco Products Directive as soon as possible, including
the proposed measures on tracking and tracing.

4.3.        Measures
to strengthen enforcement

4.3.1.     Addressing
challenges of EU enforcement authorities

4.3.1.1.  Risk
management

The implementation of actions identified in
the Communication on Customs Risk Management, specifically on quality of data
to be supplied by economic operators, and its accessibility and sharing for
risk management purposes will provide a stronger and more coherent and
coordinated framework for risk management and can improve the targeting of
suspicious operations (including involving tobacco products). The sharing of
analytical information with EU customs offices and other EU actors with a role in
the fight against illicit international trade will increase the capacity of the
operational authorities. This improved framework will contribute significantly
to the fight against all forms of illicit trade, including tobacco smuggling.

4.3.1.2.  Operational
actions

Operational actions carried out under the
Eastern Border Action Plan are already suggesting promising results and should continue
to be implemented under this Strategy. As part of the EU Customs Risk
Management Framework, the area of cigarette smuggling has been assigned a Priority
Control Area (PCA) for the year 2013 to ensure more intensive EU-wide risk
based co-ordinated controls[40].
Complementing the PCA, a regional JCO is organised by the Commission and
Romanian customs, involving also Ukraine and Moldova. Following from the results
of these actions, specific recommendations will be defined and implemented to
strengthen systematic EU capacity to identify and target identified common
risks in the area of cigarettes. Following positive final analysis of the
results, it may also be recommended to organise further targeted actions
on illicit tobacco trade, possibly involving specific high-risk factors such as
consignments coming from key source countries such as the UAE or established
risk hubs.

Weaknesses in Joint Customs Operations (JCO) identified by the Council Customs Cooperation Working Party
(CCWP)[41]
should be addressed and the information sharing in the context of a JCO should
be improved.

Information on the geographical origin of
illegal tobacco consignments can be improved through technical analysis of
samples from products seized in the Member States.

4.3.1.3.  IT
tools and equipment

With regard to existing IT tools such as
CIGINFO, Member States should be encouraged to use these to their full
potential. At the same time, the Commission will increase its feedback on the
results of its analysis of the seizures. The Commission and Member States authorities could explore the use of Container Status Message (CSM) data to
target suspicious shipments related to cigarette smuggling. Possibilities for a
more effective use of other equipment such as automated licence plate and
container code recognition tool infrastructure (by sharing the information
obtained via the tool at regional or EU level) will also be explored.

The
exploitation of ATIS[42]
to gather trends based on data analytics in order to support Member States in
their operational risk targeting should be considered. A similar exercise on
the basis of EMCS transactions could also be envisaged.

Customs
modernisation, including infrastructure and
equipment, could possibly be better supported by EU structural funds in the
future if EU Member States are aware and prioritise the objective in their
national envelopes accordingly.

4.3.1.4.  Cooperation
between EU authorities

In addition to specific actions to improve
sharing of risk information and greater exploitation of supply chain data
through development of common risk management tools and methods at the EU level
as identified in the Communication on Risk Management, the planned reform of
the European Anti-fraud Office (OLAF) should pave the way for enhanced
cooperation between OLAF, EUROPOL, EUROJUST and FRONTEX in the context of
investigations[43].
The agreement found still needs to be formalised. The proposal for a reform of EUROPOL[44] has also paved the way for an
enhanced information exchange for investigations.

Shared information and intelligence among
the various authorities involved in the protection of the external borders
contributes to preventing and fighting this particular type of cross-border
crime. It is therefore important that OLAF and FRONTEX share intelligence under
the EUROSUR system at EU level, and customs authorities take part and provide
input at national level to the EUROSUR[45]
system.

4.3.1.5.  Specific
problem area(s)

The specific and acute problem of Greece as a major entry point will be addressed in the context of the Task Force
Greece[46]
and the technical assistance provided to the reform of the General Secretariat
for Public Revenue.

The Commission will

- organise further targeted actions both within
the EU and/or with third countries using the most appropriate existing tools
such as PCAs, regional and/or international JCOs;

- address the weaknesses identified in Joint
Customs Operations;

- continue its work on scientific research and analytical methods in
the fight against illicit tobacco trade;

- provide increased feedback to Member States regarding analysis of
seizures;

- propose measures to interlink and gather, at central level,
information obtained through automated licence plate and container code
recognition tool, in order to make the information available to the other
Member States;

- provide additional assistance to the customs authorities of the
Member States to identify currently available and future programmes in order to
support and modernise EU customs in terms of customs infrastructure, equipment
(including for the Customs Laboratories), systems and services;

- facilitate access as regards Member States use of available and
future funding instruments and programmes;

- address the specific problems in Greece through appropriate action
in the context of the Greece Task Force.

The Commission and the Member States should

- on the basis of the results of the PCA, define and implement recommendations to strengthen the
EU capacity to identify cigarette smuggling.

The European Parliament and the Council should adopt

- as soon as possible, the pending review of the OLAF Regulation;

- the Commission's proposal for a reform of EUROPOL.

Member States should improve reporting in CIGINFO.

4.3.1.6.  Sharing
of expertise and best practices

As a general measure, it is essential to optimise
and coordinate available resources both at national and EU levels in order
to reinforce enforcement capability and capacity. Specifically in the area of
international cigarette smuggling, successful implementation of national
strategies has contributed to the reduction of the illicit trade in a number of
EU countries.

Sharing of experience and expertise can create important synergies and allow identifying the latest and
most efficient technologies and methods both for prevention and detection
purposes. This sharing of expertise, as well as a future pooling of resources
are fundamental objectives of the future Customs and FISCALIS 2020 Programme[47]. These can also partially be
supported in the fight against fraud through the Hercules III programme. The
fight against cross-border criminal activity can also be supported through the
Internal Security Fund, Instrument financial support for border management and
the common visa policy[48].

Sharing of national practices in the fight against customs crime (mainly smuggling) is
undertaken in the Council Customs Cooperation Working Party. A specific group
has undertaken to improve the possibilities to tackle the threat of serious and
organised crime in tobacco smuggling, through new forms of cooperation and
investigative techniques[49].

A coordinated approach could also be considered
for trainings for the different law enforcement staff on the
specificities of trade in tobacco products, which is highly complex even in its
legitimate form. Specific measures and experience sharing on addressing corruption
could also be undertaken at EU level. For these purposes, the Commission
should assist the Member States to organise staff exchanges between competent
national authorities involved in anti-smuggling efforts.

The Commission will

- develop a specialised training module for law enforcement
authorities, together with the Member States, CEPOL and (in the future) EUROPOL;

- assist Member States in ensuring sharing of best practices in the
fight against customs crime and fight against corruption, including by
providing financial assistance from the Hercule programme for the purpose of
staff exchanges.

4.3.2.     Enhance
cooperation with major source and transit countries

The main source and transit countries need
to share information concerning their legal cigarette production and
distribution, threat assessments and information related to organised crime, as
well as cooperation and assistance in concrete investigations.

To this end, the EU has to make better use of
and raise the problem within the existing frameworks of cooperation with China such as the existing framework created under the Customs cooperation and Mutual Administrative
Assistance Agreement (CCMAA[50]).
The EU should also use the current and future Association Agreements with European
Neighbourhood countries and the Stabilisation and Association agreements with
the Western Balkans to their full potential. Thus, the issue should be
raised systematically at the competent ministerial meetings under the Neighbourhood
Policy as well as the High Level Seminars on Customs Cooperation. Steps should
be taken to encourage harmonised approaches to convergence of excise structures
and rates between neighbouring partner countries, through existing or newly
established multilateral fora, to reduce to the minimum incentives for
smuggling caused by disparities between countries.

Implementation of the Strategic Frameworks
for customs cooperation with Russia, Ukraine and Moldova should continue, in
particular in terms of setting up mechanisms allowing discussing cooperation on
tackling customs fraud, including possible joint actions, and a similar
Framework should be endorsed with Belarus. The negotiations of Administrative
Cooperation Arrangements between OLAF and the Ukrainian and Moldovan Customs
should be finalised by July 2013, and negotiations should start with Russia and Belarus.

Although there is no bilateral framework
for cooperation with the UAE, the EU has to address the problem with the UAE at
political level, in addition to reinforcing EU controls on consignments coming
from the UAE and organising targeted operations.

The EU should also continue providing
technical and financial assistance to the European Neighbourhood countries,
Western Balkans and Turkey in order to fight against the illicit trade,
including corruption in customs and other law enforcement authorities.

Also the partnership and cooperation
agreements with Vietnam, Malaysia and Singapore[51] should
serve as a basis for enhanced cooperation in the fight against organised crime.
The proposed anti-fraud provisions in free trade agreements (FTA) with these
countries must be used for enhanced cooperation in customs matters. Such
anti-fraud provisions will be systematically proposed in all of the EU's
international trade and/or cooperation agreements.

The entry into force and implementation
of the FCTC Protocol will bring a new dimension to the fight against the
illicit trade also at global level, through the track and trace regime and the Global
information sharing focal point located at the WHO FCTC Secretariat, and also
by enhancing judicial cooperation in criminal matters and mutual legal
assistance in legal matters. Apart from the WHO itself, also the WCO and
Interpol can play an important role in encouraging their members to ratify and
implement the FCTC Protocol and take efficient measures on that basis.

The Commission will

- intensify its work with China, European Neighbourhood countries, Russia, Western Balkans and Turkey in the areas of customs cooperation and the fight against
cigarette smuggling;

- examine the usefulness of posting additional EU liaison officers
to important source and transit countries;

- propose relevant anti-fraud provisions to be systematically
included in the negotiating mandates for relevant international agreements;

- promote signature, ratification and implementation of the FCTC
Protocol in particular by the main source countries, inter alia through a close
cooperation with the WCO and a reinforced cooperation with Interpol and through
financial support and technical assistance to the WHO FCTC Secretariat and
non-EU countries.

The Commission and the European External Action Service (EEAS) will
raise the problem of illicit tobacco traffic systematically at EU level with
the main source and transit countries, in particular the UAE. The Commission
will propose joint action plans between the EU and the main source countries.

The Commission will and the Member States should ensure cooperation
with the Global information sharing focal point at the WHO FCTC Secretariat.

4.4.        Strengthening
sanctions

In terms of disincentives, effective and
dissuasive sanctions, including criminal sanctions are needed across the EU to
successfully curb the illicit tobacco trade. The Commission will have an
external study carried out on existing penalties in the Member States
specifically relating to the illicit trade in tobacco products and in
particular smuggling, and the way they are applied by the courts.

Several existing, more general initiatives
already offer possibility to increase the disincentives to illicit tobacco
trade. For one, the provisions of recently adopted WHO FCTC Protocol
require Contracting Parties to adopt legislative and other measures to
establish as unlawful a list of conducts under their national law, and to
ensure that persons held liable for the unlawful conduct are subjected to
effective, proportionate and dissuasive criminal or non-criminal sanctions. The
study to be launched will also monitor compliance with the FCTC Protocol, and
based on the results, the Commission will consider proposing legislative
action.

Furthermore, the Commission has already
proposed in July 2012 the adoption of a Directive on
the fight against fraud to the Union's financial interests by means of criminal
law (‘PIF-Directive’)[52]
harmonising the definitions of crimes, levels of minimum and maximum sanctions
and periods of time limitations which still vary in the EU Member States. If
taken up by Member States, this could contribute to the effort to tackle the
problem of differing sanctions in the Member States. Furthermore,
the Commission will propose in 2013 an approximation of the definitions of
customs infringements and non-criminal sanctions.

The Commission will

- carry out an external study on existing penalties in the Member
States the objective of which will also be to analyse the transpositions of the
FCTC Protocol;

- table a proposal to approximate definitions of customs
infringements and non-criminal sanctions.

5.           Conclusion

Combating illicit trade in tobacco products
requires both political commitment and concrete actions in order to protect the
financial interests of the EU and the Member States, to fight against
cross-border crime and to protect the citizens from goods which do not comply
with tobacco control legislation.

Certain measures and initiatives have been
adopted and are being implemented. Others are in the pipeline, and still others
need to be reinforced. Above all, the problem of tobacco smuggling is a complex
and global problem. For effective results, it needs to be addressed in a
comprehensive way, both geographically and in terms of rules, resources and
procedures addressing demand, supply, control and enforcement.

The implementation of the Strategy set out
in this Communication and the measures and actions associated thereto, set out
in the attached Action Plan, would address the identified problems and drivers
and thus significantly strengthen the fight against the illicit trade in the EU
and support the implementation of the existing measures and policies.

The Commission invites the European
Parliament and the Council to discuss the measures proposed in this
Communication and its Action Plan and to support the Commission and the Member States in their implementation. The Commission will monitor the implementation of
the Action Plan, which should be concluded by the end of 2015, in particular
its effects on the different drivers of the problem, and will prepare a report
after three years from the publication of this Communication.

[1]               In this Communication, ‘illicit trade’ is understood
to include different types of (international) smuggling of both genuine and
counterfeit tobacco products (mainly cigarettes), as well as illicit internal EU
production and distribution.

[2]               The estimation is based on seizures reported by the
Member States which amounted to 4.5 – 4.6 billion cigarettes per year between
2005 and 2011.

[3]               Including brands of the four main global producers: Philip Morris International, Japan Tobacco
International, British American Tobacco and Imperial Tobacco Limited.

[4]               For the purpose of this Communication the expression
"Other brands" is used to describe brands not produced by the
four manufacturers with which the EU and the Member States have Cooperation Agreements.
These cigarettes are often referred to as ‘cheap whites’.

[5]               For example as regards provisions on ingredients and
the obligatory presentation of health warnings on the package.

[6]               Philip
Morris International (July 2004), Japan Tobacco International (December 2007),
British American Tobacco (July 2010) and Imperial Tobacco Limited (September
2010), see on http://ec.europa.eu/anti_fraud/investigations/eu-revenue/cigarette_smuggling_en.htm.

[7]               Commission Staff Working
Document accompanying the Commission Anti-fraud Strategy, Brussels, 24.6.2011, SEC(2011)
791 final, hereinafter referred to as ‘Eastern Border Action Plan’.

[8]               See Chapter 2.

[9]               Protocol to eliminate illicit trade in tobacco
products (hereinafter referred to as the ‘FCTC Protocol’).

[10]             Excise Movement and Control System, see footnote 29.

[11]             For example: Luk Joossens, Pricing Policies and Control
of Tobacco in Europe (PPACTE), Work Package 5, deliverable 5.2: Illicit tobacco
trade in Europe: issues and solutions, August 2011, available at: http://www.ppacte.eu/index.php?option=com_docman&task=cat_view&grid=65&Itemid=29
(hereinafter referred to as "Joossens"); World Bank Economics of
Tobacco Toolkit, Understand, Measure and Combat Tobacco Smuggling, David
Merriman, 2001, available at http://siteresources.worldbank.org/INTPH/Resources/7Smuggling.pdf.

[12]             For this Communication, analysis was based mainly based
on official information (seizure reports) on the provenance, types and brands
of the products that was provided by the Member States' authorities to the
Commission (OLAF) through the Anti-Fraud Information System (CIGINFO submodule
created on the basis of Title II of Council Regulation 515/1997 EC of 13 March
1997, OJ L 82,22.3.1997, p.1.) in 2010 and 2011, and on information provided to
OLAF by the Member States in the framework of the Task Group Cigarettes (an
annual meeting organised by OLAF with authorities from EU Member States and
some non-EU countries), complemented by industry reports (i.e. information
provided by the four tobacco manufacturers with which the EU has legally
binding Cooperation Agreements and the KMPG Project Star Report), the Tobacco
Reports by the World Customs Organisation (WCO), as well as threat and risk
analysis done by EUROPOL and FRONTEX.

[13]             Joossens, p. 13.

[14]             KMPG Project Star Report 2012, commissioned by Philip
Morris International Management S.A., http://www.pmi.com/eng/media_center/media_kit/Documents/Project_Star_2012_Final_Report.pdf

[15]             According to the WCO last Customs and Tobacco Report
2011, cigarettes remain the main challenge on a global level, too.

[16]             In China, the ports of Shekou, Xiamen, Guang, Zho,
Huang Pou, Ningbo and Yantian were signalled most often by the Member States;
in the UAE the ports signalled are those of Jebel Ali and Dubai.

[17]             Such as Richman, Manchester, Marble, Gold Mount,
Capital.

[18]             See
for example the Eastern border Annual Overview, 2012, http://www.frontex.europa.eu/assets/Publications/Risk_Analysis/EB_AO.pdf.

[19]             See also in EU Organised Crime Threat Assessment OCTA
2011 Report by EUROPOL at http://www.europol.europa.eu/publications/European_Organised_Crime_Threat_Assessment_(OCTA)/OCTA_2011.pdf,
p. 24-25.

[20]             See footnote 4.

[21]             E.g. Jin Ling.

[22]             E.g. Fest, Richman, Gold Mount.

[23]             E.g. Raquel, Gold Classic.

[24]             There are around 200 different preferential and
non-preferential duties applicable to tobacco products.

[25]             Like raw tobacco, cigarillos (Brands like "Next, Partner, Braniff, Skjold"
etc), diet tobacco (dried ice expanded tobacco), water pipe tobacco etc.

[26]             These grey areas mainly concern the definitions of "travellers"
and "occasionally entering the EU when coming from a third country".

[27]             F. ex.: customer identification requirements;
requirements to monitor the sales to ensure that quantities are commensurate
with the demand within the intended market, reporting to the authorities of any
evidence that a customer is engaged in unlawful activities.

[28]             Customs cooperation/mutual assistance based on Regulation
515/1997; IT infrastructures: AFIS (Anti-Fraud Information System) and MAB
(Mutual Assistance Broker); CIS (Customs Information System)

[29]             E.g. CRMS (Customs Risk Management System) /RIF (Risk Information
Form) – Article 13 of Council Regulation (EEC) No 2913/92 establishing the
Community Customs Code, OJ L 302, 19.10.1992, p. 1–50, and Article 4g of
Commission Regulation (EEC) No 2454/93 laying down provisions for the
implementation of Council Regulation (EEC) No 2913/92 establishing the
Community Customs Code, OJ L 253, 11.10.1993, p. 1–766, NCTS (New Computerised Transit
System) – Article 353 of Commission Regulation No 2454/93, EMCS (Excise
Movement and Control System) – Commission Regulation (EC) No 684/2009 of 24 July
2009 implementing Council Directive 2008/118/EC as regards the computerised
procedures for the movement of excise goods under suspension of excise duty, OJ
L 197, 29.7.2009, p. 24–64, VIES (VAT information exchange system) –Council
Regulation (EU) No 904/2010 of 7 October 2010 on administrative cooperation and
combating fraud in the field of value added tax, OJ L 268, 12.10.2010, p. 1–18,
VIESCLO (Central Liaison office for indirect taxation).

[30]             CRMS/RIF.

[31]             NCTS.

[32]             COM (2012) 793, 8.1.2013.

[33]             Council Regulation (EC) No 2007/2004 of 26 October 2004
establishing a European Agency for the Management of Operational Cooperation at
the External Borders of the Member States of the European Union, OJ L 349,
25.11.2004, p. 1.

[34]             Council
Decision 2002/187/JHA of 28 February 2002, OJ L 63, 6.3.2002, p. 1.

[35]             E.g. Study on Anti-corruption measures in EU border
control, Gounev, Philip/Dzhekova, Rositsa/Bezlov, Tihomir, 2012,

http://www.frontex.europa.eu/assets/Publications/Research/Study_on_anticorruption_measures_in_EU_border_control.pdf;
Integrated Report on Pricing Policies and Tobacco Control, Study carried out
for the European Commission under the Seventh Framework Programme), Currie,
Townsend, Leon Roux, Godfrey, Gallus, Gilmore, Levy, Nguyen, Rosenqvist,
Clancy, 2012.

[36]             Final report of the Study on Examining the links between
organised Crime and Corruption, by Philip Gounev and Tihomir Bezlov, Centre for
the Study of Democracy, 2010, p. 96-97, http://ec.europa.eu/dgs/home-affairs/doc_centre/crime/docs/study_on_links_between_organised_crime_and_corruption_en.pdf.

[37]             Certain neighbouring countries have, worryingly,
recently decriminalised cigarette smuggling.

[38]             For cigarettes, the Parties are obliged to introduce
the requirement within five years from the entry into force of the Protocol,
for other tobacco products within ten years (Article 8 (3)).

[39]             COM(2012)788 final of 19.12.2012, Proposal for a
directive on the approximation of the laws, regulations and administrative
provisions of the Member States concerning the manufacture, presentation and
sale of tobacco and tobacco related products.

[40]             Commission Regulation (EEC) No 2454/93, Articles 4g –
4j.

[41]             DOC 9947/4/11 LIMITE ENFOCUSTOMS 38 REV, Project Group
4.6. of the 4th Action Plan of the 2009 Strategy on customs
cooperation (Doc. 15198/09 ENFOCUSTOM 118 ENFOPOL 272).

[42]             The Anti-Fraud Transit Information System is an AFIS
application, see footnote 28.

[43]             COM(2011) 135 final.

[44]             COM(2013) 173 final.

[45]             Commission Staff Working Document Determining the
technical and operational framework of the European Border Surveillance System
(EUROSUR) and the action to be taken for its establishment (SEC(2011)145
final).

[46]             This should include funding of additional customs
equipment under Hercule II and III, and work with the Greek national
authorities in order to identify and remove weaknesses in controls.

[47]             COM(2012) 464 final and COM(2012) 465 final.

[48]             COM(2011) 750 final.

[49]             The Project Group on Action 5.1 "To improve the
possibilities to tackle the threat of serious and organised crime in tobacco
smuggling, through new forms of cooperation and investigative techniques".

[50]             OJ L 375, 23.12.2004, p. 20.

[51]             The PCA with Vietnam was signed in June 2012, the
negotiations with Singapore and Malaysia are advanced. Negotiations for the FTA
with Singapore were concluded in December 2012.Negotiations on FTAs with the
other countries are on-going.

[52]             COM(2012) 363 final, 2012/0193
(COD), Proposal for Directive of the European Parliament and the of Council on
the fight against fraud to the Union's financial interests by means of criminal
law.