Since 2004 the EU and the member states have signed controversial billion dollar agreements with the four main tobacco companies. The aim was to fight the illicit trade in cigarettes and court charges have been dropped in return for money. But smuggling has continued and this causes losses in tax and duties which vastly exceed the amounts paid by the companies.

Usually, Monday discussions in Strasbourg are quite calm. Lawmakers are coming from all over Europe after a long trip and basically everybody tries to smooth start the plenary week.

But this time it was different.

The issue concerned the tobacco industry. And it was probably not the best Monday for EU Budget Commissioner Kristalina Georgieva.

During the debate, held on May 18, about the agreements that the EU and some member states have signed with the tobacco industry, the outspoken French parliamentarian, José Bové, accused Brussels to work with “fraudsters and gangsters” when fighting illicit trade.

“It is the tobacco industry who carries out audits in the member states to verify counterfeits. So it is the gangsters, the tobacco smugglers themselves who are combatting counterfeit within their own traffic. It’s really a scandal! Today we shouldn’t support the fraudsters, that is we should not support the tobacco industry, which is a true mafia,” Bové said during the discussions.

According to Bové, it is the tobacco companies themselves that organise smuggling and therefore it doesn’t make sense to make deals with the them in order to fight it. Similar critique has been raised by other European politicians as well as non-governmental organisations (NGOs). The agreements that the EU and its member sates have signed with four major tobacco companies are indeed controversial.

However, the European Commission says there has been results. And member states’ finance ministries could agree as the major part of the tobacco money ends up in the national treasuries.

Billion dollar deals

It all started in the early 2000s. The number of illicit cigarettes seized on the black market in the EU peaked at around six billion per year. At the time several major tobacco companies were accused by the EU of being part of the smuggling activities.

It concerned Philip Morris International (PMI), RJ Reynolds, Japan Tobacco International (JTI) and British American Tobacco (BAT). Subsequently the companies were taken to court.

Later, between 2004 and 2010, the Commission and several member states settled agreements with PMI and JTI, as well as BAT and Imperial Tobacco Limited (ITL). The charges were dropped in return for money. Together the four companies agreed to pay 2,15 billion USD. (See details in table 1).

Table 1: EU Agreements with cigarette manufacturers Company PMI JTI BAT ITL Payments (million USD) 250 400 200 300 Year signed 2004 2007 2010 2010 Duration 12 years 15 years 20 years 20 years

Of this money only 9,7 percent goes to the EU budget. The rest, 90,3 percent, is distributed among the member states that have signed the agreements.

Big tobacco company tied to smuggler factory

Since the EU and the member states decided to settle in court with the tobacco companies, the question of their involvement in smuggling activities was never completely answered. However, Investigative press has written many stories about the cases.

The International Consortium of Investigative journalists, ICIJ, published the report “Tobacco Underground” in 2009. They reported on how Russian cigarettes flooded the EU market with illicit cigarettes manufactured by the company Baltic Tobacco Factory in Kaliningrad. This company had ties to both BAT and JTI.

BAT has reportedly supplied the Russian company with tobacco and the factory network was previously owned by subsidiaries of JTI.

Also the Organized Crime and Corruption Reporting Project, a network of investigative journalists in Eastern Europe and the former Soviet Union, reportedly uncovered evidence of widespread cigarette smuggling by distributors of JTI.

Tobacco Tactics, a website established by the Tobacco Control Research Group at the University of Bath, said that JTI had relationships “with another alleged smuggler, IBCS Trading, which had previously been accused in an EU lawsuit”.

In addition, the EU’s own anti-fraud office, OLAF, has started an investigation into JTI’s alleged involvement in smuggling activities. If confirmed this would be a clear breach of the companies’ obligations under signed agreements.

When asked by the European Parliament about the results of this investigation, the European Commission stated it has “no comment to make as this concerns an on-going OLAF investigation.”

Additional seizure payments

Apart from the fixed amounts, the companies also agreed to make additional payments in case member states’ customs seize a certain number of the companies’ genuine products on the black market. These seizure payments are suppose to make up for lost taxes and duties and they aim at creating incentives for tobacco companies to better control the supply chain.

The fines are not paid if the seized products are counterfeit. There is also a threshold of 50,000 cigarettes. Below that amount the companies don’t pay even if the seized products are genuine.

In total, the four companies have paid 1,35 billion euros in fixed payments up until May 2015. Out of this, 105 million euros had been allocated to the EU budget. The figures are described in a document, seen by Euranet Plus, that the European Commission sent last week to the European Parliament’s Budgetary Control Committee.

The seizure payments amounted to 88 million euros out of which 4,5 million went to the EU budget.

Little compared to lost tax

The amounts received by the tobacco companies are far from matching the losses in tax due to illicit trade of tobacco. According to OLAF, the European Union looses 10 billion euros each year in tax. Similar amounts have been estimated in KMPG’s Project Sun Report, which is a study of the illicit cigarette market in the EU commissioned by the four major tobacco companies operating in the EU.

In addition, substantial parts of the money paid by the companies go back to the private sector as administration costs, such as lawyers fees. Based on Commission figures, they should amount to around 260 million euros in total. More than twice as much as the contribution to the EU Budget.

One could also note that tobacco companies pay much higher fees in the US, where they have made other agreements. The deals as such are not comparable as the European ones are about making up for lost tax revenues due to smuggling, while the American are more about making tobacco companies cover parts of the tobacco related health care costs.

But while Europe will roughly receive 2 billion USD during a time frame of 12-20 years plus unknown seizure payments, the US will receive 200 billion USD over 25 years.

Still, the agreements are not only about getting money from tobacco companies. The main aim is actually to fight illicit trade in tobacco and the EU Commissioner responsible for the agreements, Kristalina Georgieva, argues that the main goal has been achieved.

However, a closer look at industry figures show that the overall smuggling has not declined.

Author: Andreas Liljeheden, Euranet Plus News Agency

End of part 1/3 of the dossier

‘Did the EU make a fool’s bargain with the tobacco industry?’

This article is part of a dossier in three parts.