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The cigarette “transit” road to the Islamic Republic of Iran and Iraq: Illicit tobacco trade in the Middle East

Abstract

• The issue of cigarette smuggling is now high on the agenda of governments and international organizations. It has been estimated that a third of internationally exported cigarettes are lost to smuggling. Total revenue lost by governments due to cigarette smuggling is estimated at US$ 25–30 000 million annually.

• Studies of the impact of smuggling show that when smuggled cigarettes account for a high percentage of the total sold, the average price for all cigarettes, taxed and untaxed, will fall, increasing sales of cigarettes overall.

• The cigarette companies often blame organized crime for the massive amount of cigarette smuggling worldwide, but much of the organized criminal smuggling that accounts for the vast majority of cigarette smuggling worldwide has occurred with the knowledge of the major cigarette companies themselves, and would not occur without the cigarette companies’ compliance.

• In the Middle East, the two main target markets for international tobacco companies are the Islamic Republic of Iran and Iraq. Both the Islamic Republic of Iran and Iraq represent huge possibilities for international cigarette companies. Indeed, tobacco trade journals, internal tobacco industry documents and documents filed in legal actions make the importance placed on both countries by the entire tobacco industry very clear.

• According to trade journals, Cyprus is an important distribution point for American cigarettes going to the Islamic Republic of Iran through traders in Oman. At the same time, some of these cigarettes are sold to traders in Turkey who take them into Iraq. Beirut’s imported cigarettes are distributed to traders and merchants in various countries in the Middle East and North Africa. It appears that the major customers for cigarettes distributed from Lebanon are the Islamic Republic of Iran and Iraq. From Beirut to Dubai or Oman and then on to the Islamic Republic of Iran is the path of some of the American cigarettes destined for Lebanon. Trucks now carry cargo through the Syrian Arab Republic to reach the open-air markets in Iraq.

• In their legal action against several international tobacco companies, the European Union (EU) filed in January 2002 documents on cigarette smuggling into Iraq showing that since the early 1990s, American tobacco companies have distributed their products from the United States into Iraq. For example, cigarettes produced in the United States have been shipped to and through ports in the EU to companies in Cyprus for years. Indeed, since 1996, approximately 50 billion cigarettes have been sent by RJ Reynolds Tobacco Company (RJR) (and its successor, Japan Tobacco) to Cyprus. Approximately half of these shipments were exported from Cyprus to Turkey in transit. Many of these shipments were destined for Iraq.

• On 30 October 2002, the EU and ten Member States launched another lawsuit against RJR. The new EU lawsuit goes far beyond any previous allegations, accusing RJR of direct complicity in facilitating not only money laundering schemes but also other criminal enterprises. Allegations on cigarette smuggling into Iraq were even more detailed.

• The EU allegations on smuggling in Iraq are in line with the well known methods of the cigarette smuggling scheme:

– Exports of billion of cigarettes from major tobacco manufacturers.

– Complex transport routes in order to complicate investigations.

– Off-loading and re-loading of containers and removing marks and numbers from products to prevent their being traced.

– Frequently switched bank accounts to cover up actions.

– Operations led from Switzerland, a country protected by bank secrecy and business privacy laws.

– Offshore companies located in Liechtenstein.

– Use of tax-free harbours such as Mersin in Turkey.

• Internal tobacco industry documents describe in great detail the monitoring of smuggling operations and the illegal character of the transit (smuggling) trade in Lebanon and the Syrian Arab Republic. Several documents stipulate that it is unwise for the tobacco companies to have direct links with the transit trade.

• The objective of each company is to sell more products and make higher profits. Penetrating new markets and increasing the market share of its products is part of the strategy to achieve this objective. An obstacle for multinational tobacco companies are trade restrictions and/or embargoes. Some markets are closed to foreign companies or allow imported cigarettes only under certain strict conditions. Where there are high tariffs or a state monopoly, international cigarettes will be smuggled into the country, weakening the position of the state monopoly and delivering the market into the hands of the multinationals.

• While illegal imports may be an option in order to penetrate a market, the ultimate goal in the long term is to obtain official imports or production. The strategy of the international tobacco companies in the Islamic Republic of Iran became a success story in 2002, when the state tobacco authority signed an import and production deal with four cigarette companies in a bid to cut down cigarette smuggling. It is a clear example of how successful this strategy of international tobacco companies can be. The stages of the strategy are:

1. Penetrate the market through illegal imports.

2. Weaken the state monopoly by reducing the market share of domestic brands and legal sales.

3. Convince the authorities to privatize or to open the market.

4. Authorize the legal import and/or production of foreign brands.

5. Stop fuelling the illegal market and take over the market in a legal way.

• If tobacco smuggling is to be tackled successfully it will require international collaboration. The likeliest mechanism for achieving this is the WHO Framework Convention on Tobacco Control (FCTC). In the text of the FCTC, article 15 deals with illicit trade of tobacco products, including markings, monitoring, data collection, cooperation, penalties, confiscation and licensing.

• Manufacturers should be required to have covert and overt markings on all packages of tobacco products that would identify manufacturer, date and location of manufacture, and another identifier that would show the chain of custody—wholesaler, exporter, distributor and end market. The onus should be placed on the manufacturer (through record keeping, and tracing and tracking systems) to prove that the cigarettes that leave the factory arrive in their intended end market.

• The way to combat smuggling is not to reduce taxes, but rather to control the supply of illegal cigarettes.

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