Data on Illicit Trends – A New Paradigm Needed

May 2020

By Telita Snyckers, Independent Tax and Customs Transformation Consultant

The global pandemic COVID-19 has fundamentally changed the world as we know it and has already had an impact on virtually all aspects of our collective personal and professional lives.

Knowing where illicit trade is flourishing makes it easier to develop a targeted business case for solution providers to sell their services to governments the world over. By the same token, solution providers occasionally need to assess the extent to which their offerings are actually making a difference.

Both of those drivers require access to reliable and recent data on the size and prevalence of illicit commodities like alcohol, tobacco and pharmaceuticals.

Dearth of independent estimates

Estimates on the size and prevalence of illicit trade can generally only come from one of three sources: governments themselves, independent academic researchers, or industry-funded studies.

Government estimates would be ideal, because they could conceivably draw from the biggest possible dataset. However, there are very few governments with the capacity or capability to do so – the UK being one of very few notable exceptions with the HMRC Tobacco Tax Gap Estimates. Indeed, some government estimates are downright curious, including a Russian report that suggests that only 0.9% of its tobacco market is illicit.

Academic researchers make a strong case as to why we should not rely on industry-funded studies: a) because they potentially underplay the involvement of multinational tobacco companies; and b) because their estimates tend to be inflated, when compared to more independent estimates, as a way of arguing against higher tax rates (and there certainly are a large number of studies that seem to support both of these arguments). In theory, therefore, academic estimates are argued to be generally preferable.

But just how accessible are these independent estimates actually?

A recent personal project included compiling estimates on the size and prevalence of illicit tobacco in Europe. While there are a number of industry-sponsored estimates – most notably those in, for example, KPMG’s Project Stella and the Project Sun report on the EU, Norway and Switzerland – extensive research failed to find any recent academic or otherwise independent estimates on the size and prevalence of illicit tobacco in Europe.

That doesn’t necessarily mean that these estimates don’t exist – simply that they are not readily available in any kind of easily digestible format. Instead, the few independent estimates that could be found are typically a decade old.

A similar pattern is evident in other regions, with research being dominated by the likes of – for instance – Oxford Economics’ Asia Illicit Tobacco Indicator, the Transcrime Nexus Report, and the various Euromonitor reports on illicit trade.

Black holes

But more than that, some countries are veritable black holes, with virtually no data or insights being readily available.

In Europe, countries like Andorra have historically been closely associated with the smuggling of cigarettes, and yet do not feature in any of the international indexes like the Illicit Trade Index, and no estimates are readily available on the size and prevalence of illicit commodities. Outside Europe, the situation is even more dire – it is virtually impossible to comprehensively assess the size and prevalence of illicit products across Africa, the Americas and more.

Estimates focus only on destination countries

Moreover, estimates almost solely focus on the size and prevalence of illicit commodities in destination countries, but there is nothing that lets us assess the size or relative risk in respect of countries that serve as the primary source of, for instance, raw tobacco, or the secondary source of manufactured cigarettes, or that serve as transit destinations – and even less so when it comes to the systemic risks of countries being used to house the profits from smuggling. As a result, our focus is on shutting the stable door when the horse has already bolted, with little data to assess the relative risks posed by source countries.

The WHO FCTC reporting

Even reporting of progress made in implementing the WHO’s FCTC Protocol recommendations relating to supply chain security is problematic, and should perhaps be referenced with caution.

Many countries simply don’t submit reports; others report that they have introduced traceability solutions when they demonstrably have not; phrasing of some of the key questions leaves them open to interpretation (eg. is ‘% of packs smuggled’ meant to encompass all illicit packs on the market, or only those that were actually physically smuggled across the border?) In 2016, some countries noted that they had already complied with all of the relevant supply chain security measures, only to note in 2018 that they had complied with none.

The FCTC country reports should form a cornerstone of our insights into progress made in the battle against illicit tobacco, but instead – in many respects – raise more questions that they answer.

Illicit tobacco on the increase

In the final analysis, we actually know very little, forcing us to reference whatever data sources are available to shed at least some light on how well we are doing in the fight against illicit trade.

Using what appears to be the most comprehensive dataset at our disposal for Europe as an example – in this case KMPG’s Project Stella estimates – between 2014 and 2018 the prevalence of illicit cigarettes has seemingly increased in at least 40% of countries across Europe. Some countries have seen fairly substantive increases including, for example, the Czech Republic where prevalence increased by 3%, Cyprus by 3.8%, Slovakia by 4.1%, Slovenia by 4.7% and the United Kingdom by 4.4%.

This is worrisome, particularly given the strategic focus on illicit tobacco across Europe in recent years. And while data was not immediately available, experience suggests that it is probably safe to assume that a similar trend would likely be seen in other regions across the world.

Rethinking the paradigm

You cannot manage what you cannot measure. The current paradigm leaves us grasping at straws. Governments lack capacity, academics lack funding, and industry estimates are tainted with a perception of bias.

Perhaps it is time to rethink what data we track, how we analyse it, how we triangulate data from different sources, and how we can augment what we do know with more novel data sources. To do so requires more engagement on the part of three counterparts that have historically held each other at bay. But unless we find a way to somehow leverage government’s access to data, underpin it with academic, objective and transparent estimation methodologies, and link it to industry imperatives, we will continue to fight with one hand tied behind our backs.

Also in this issue:

  • New Alcohol Stamps for Ukraine from 1 May
  • Pakistan Court Cancels Tobacco Track and Trace System
  • SICPA Continues Talks with Turkmenistan
  • Tobacco Control Scale 2019 – Clarifying Details of Authors
  • Genuine or Fake? Roles and Responsibilities
  • Is It Justified to Increase Excise Taxes to Battle COVID-19?
  • South Africa: Illicit Trade is Booming
  • Watchdog Group Shines Light on Tobacco Industry Influence over Track and Trace

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