British American Tobacco (BAT) signed an agreement, on 15 July, with the European Commission and 24 member states to work with the European Anti-Fraud Office (OLAF) and national law enforcement authorities to help in the fight against contraband and counterfeit cigarettes. The agreement includes yearly payments by BAT to the Commission and member states, totalling €134 million over the next 20 years. The tobacco company also committed to making extra payments, which are dependent on seizures made. The Commission has already signed two other agreements with industry stakeholders: one in 2004 with Philip Morris International representing €1 billion and another with Japan Tobacco International, in 2007, for €350 million.

The Commission estimates that around €10 billion are lost to the national and EU budgets each year due to the smuggling of both genuine and counterfeit cigarettes, of which about 10% would be revenue for the EU budget. Jack Bowles, director of the Western Europe branch of BAT, claims 75 billion cigarettes, representing 13% of sales across Europe, are smuggled every year. This alone corresponds to more than the number of cigarettes sold in the UK. OLAF claims member states notified 5.2 billion seized cigarettes in 2008.

To increase the number of seizures, the agreement includes provisions and procedures for cooperation and intelligence-sharing as well as product-tracking procedures. Poland, Spain and Sweden indicated certain procedural problems in the run-up to the signature of the agreement, which prevented them from signing, on 15 July. The Commission is hopeful this will occur soon.

In the past, a key concern was the smuggling of genuine tobacco products, but organised criminal groups have changed their approach and the main threat has become counterfeit cigarettes. It is estimated that about 65% of the seized cigarettes are counterfeit, with China still being the biggest source for these and countries on the Eastern border of the EU trailing behind.

As regards genuine cigarettes smuggled inside the EU, trends show that the main sources are also to be found in the East: Russia, Ukraine, Moldova and Belarus. The Russian city of Kaliningrad, in particular, is a “problem,” according to Taxation and Customs Union Commissioner Algirdas Semeta. Indeed, the Baltic Tobacco Factory produces genuine cigarettes, so-called ‘genuine cheap whites’, which are then smuggled into the EU. They are popular with consumers due to their low prices. To deal with this particular issue, OLAF has dispatched a liaison officer to Moscow.

Many illegal factories have been discovered within the member states, and they are also a significant source of supply of counterfeit cigarettes. These illegal factories often produce and sell in the same country. In only a month, they cover all the costs of production and enter into profit. Since the discovery of the first such factory in 2003, over 50 others have been closed down.