A senate inquiry into illicit tobacco is hearing evidence of huge losses in tax revenue, hidden smoking rate increases and higher criminal profits than in the drugs trade. By Karen Middleton.

Curbing the illicit tobacco trade

A member of the  Australian Border Force’s Tobacco Strike Team with confiscated tobacco in Melbourne.
A member of the Australian Border Force’s Tobacco Strike Team with confiscated tobacco in Melbourne.
Credit: Department of Immigration and Border Protection

The man leading federal parliament’s investigation into illicit tobacco is a rabid anti-smoker.

“I can’t stand cigarettes,” says Liberal MP Craig Kelly, chairman of the joint committee on law enforcement. “When it comes to fanatical nonsmokers, they could give me a badge.”

But he is sympathetic to the tobacco industry’s argument that rocketing excise and inadequate law enforcement are contributing to a growing black market.

“I have grave concerns that we’re trying to attack this issue through taxation,” Kelly says. “Like many things we do in government, the unintended consequences can be worse than the problems we’re trying to overcome.”

The Gillard government introduced plain packaging in 2012 and dramatically escalated tobacco excise, implementing yearly rises of 12.5 per cent each September 1 for the next four years. The Turnbull government extended the annual excise hikes in this year’s budget until 2020.

But there is growing concern about the increasing availability of cheap, illegal cigarettes, and the possible impact on smoking rates.

According to the most recent Australian Bureau of Statistics national health survey, adult smoking rates fell from 16.1 per cent in 2011-12 to 14.5 per cent in 2014-15. The National Drug Strategy household survey shows a similar decline.

But the Australian Criminal Intelligence Commission’s annual national wastewater survey, in which household waste is tested for the presence of various drugs, tells a different story. Law-enforcement agencies consider it more reliable because it’s hard to hide what’s in your urine. The commission’s 2017 report issued in July, from testing conducted between October and December last year and February this year, shows tobacco use nationally going up, not down.

At an August senate estimates hearing, acting chief executive of the ACIC, Nicole Rose, said reports based solely on official tobacco sales or answering survey questions were not always accurate.

“You’re talking about the difference between licit and illicit tobacco,” Rose told the committee. “I suspect that is what the difference would be.”

The commission is due to produce its own illicit tobacco report this year.

The high price of cigarettes in Australia relative especially to Asia, where they can retail for less than $2 a packet, has sparked a flourishing illicit trade. This not only threatens health efforts and costs unknown amounts in lost tax revenue, but also poses a serious challenge to law enforcement. The illicit tobacco market is increasingly linked to – and in some cases even more profitable than – the narcotics trade, underscored in the recent interception of a haul of cocaine and cigarettes from the Middle East.

The illicit trade also undermines the legal tobacco industry’s revenue, making the issue especially thorny for politicians. 

Craig Kelly’s committee has been conducting an inquiry into illicit tobacco in Australia since December 2015 and is due to report on October 18. A separate Treasury-commissioned inquiry into the black economy is expected to make further recommendations aimed at curbing the illicit tobacco trade when it also reports next month.

Kelly believes excise rises must be matched by more investment in law enforcement, beyond the $7.7 million announced in the 2016 budget for a tobacco strike force. “We’re creating all these law-enforcement issues and we’re basically going down the track of prohibition by price,” he tells The Saturday Paper.

Kelly’s sentiment doesn’t run all the industry’s way. He favours no longer letting tobacco companies defer paying duty on their tobacco products until they leave the warehouse but paying it upon import instead: “The tobacco companies won’t like it. But government would get the money upfront.”

He says parts of shipments are going missing from warehouses – presumably stolen and sold – before duty can be paid.

Big tobacco’s collective pariah status sees its three biggest proprietors working together to try to persuade politicians they have a common interest in busting open the illicit trade. When the representatives of British American Tobacco, Philip Morris and Imperial Tobacco visited parliament recently, some MPs agreed to meet with them but one or two refused.

“That is quite frustrating,” says a spokesman for Imperial Tobacco. “Obviously we are the experts in tobacco so we do deserve a seat at the table.”

The tobacco industry would like future excise rises restricted but doesn’t think it’s likely. The industry also wants to expand co-operation with law-enforcement agencies. But the degree to which that already occurs has attracted some criticism because of World Health Organisation guidelines that the tobacco industry not be allowed to influence governments.

Earlier this year, the three companies asked the Australian Competition and Consumer Commission for permission to work together – normally a breach of competition law – to withhold their products from retailers found to also be selling cheap illegal tobacco.

But the ACCC refused, saying they could already do so individually without permission, and allowing collusion could be seen as giving them a “quasi-regulatory role”. It said such permission might be inconsistent with the WHO guidelines and “could create community perception of a partnership between the Australian government (and government agencies) and the tobacco industry”.

The Health Department is also extremely mindful of its obligations under the WHO convention on tobacco. Many in the wider Australian health sector have the same concerns and strongly oppose the industry’s position on excise.

In its submission to the tobacco inquiry, Cancer Council Australia says increasing excise is “the single most effective method available for reducing tobacco consumption, increasing attempts to quit and reducing smoking prevalence, thereby reducing death and disease caused by smoking”.

“Cancer Council Australia is not aware of any evidence suggesting that increases in excise in Australia have led to an increase in the size of Australia’s illicit tobacco market.”

It points to overseas studies showing the influence of factors other than price, including the ease of operating illegally in various countries, the likelihood of being caught and “the extent of any penalties”.

The council rejects the findings of a 2016 annual report that the three big players commissioned from KPMG UK, which estimated the Australian federal government is missing out on $1.61 billion in tax each year. The health sector says the report is discredited because the tobacco industry funded it.

The Australian Tax Office told the senate inquiry last year that it was working with the Department of Immigration and Border Protection on its own estimate. The ATO told The Saturday Paper the work was “ongoing” and it would “release the gap when we are satisfied we have an estimate that is both credible and reliable”.

The former head of the government’s illicit tobacco taskforce and a now-retired former Australian Federal Police officer, Rohan Pike, puts the lost tax revenue figure at more like $4 billion.

Pike – who consults to the Australian Retailers Association, which has tobacco companies as clients – made a submission to the tobacco inquiry, some of which was redacted before publication because of fears it could jeopardise operations. Pike says all government agencies must take the issue more seriously, but that it isn’t only about lost revenue.

“The second issue is to differentiate tobacco control from tobacco crime,” he says.

Craig Kelly agrees: “Although the Health Department might cheer about this [higher prices], all the other people who are cheering are the bikie gangs and other groups involved in the illicit trade.”

Despite his concerns, Kelly acknowledges price should still play a role.

“You have to have some price pressure,” he says. “You have to have the strongest possible law enforcement. You’ve got to make lepers of those that smoke… make their lives horrible.”

The illegal trade involves a range of products, including loose-leaf tobacco, known as “chop-chop” and sometimes rolled into cigarettes, “shisha” tobacco smoked in Middle Eastern hookahs, contraband in the form of stolen legally imported cigarettes, illegally imported foreign brands without Australian health warnings or any duty paid, and counterfeit products with fake Australian packaging.

Most of it comes from overseas.

Growing tobacco in Australia has been illegal since 2006 and the ATO is responsible for policing illicit tobacco produced domestically.

The Department of Immigration and Border Protection is responsible for tracking down illegal imports, along with other agencies including the Australian Federal Police, state police and the ACIC.

Evidence to the illicit tobacco inquiry exposed agencies’ squabbling over responsibility and indicated they wanted legislative changes to make prosecuting offenders easier.

The ATO in particular complained that because current law required proof of the precise origin of illegally grown tobacco – something often unable to be determined, even with biological testing – prosecutions were elusive.

Its submission indicated that while there had been multiple busts last year and the tobacco was destroyed, no prosecutions ensued.

The ATO told The Saturday Paper that had changed in 2017.

“This year, one person has recently been convicted of two offences under the Excise Act,” the spokesman said. “There are 12 matters currently under investigation, four matters are currently before the courts, and a further two matters are under consideration by the Commonwealth Director of Public Prosecutions. Most cases are from regional Victoria or New South Wales.”

The ATO confirmed draft legislation aimed at making prosecutions easier was with Treasury. It was “up to the government when it is introduced”.

The legal tobacco industry wants an overall national illicit tobacco strategy with a single organisation heading it.

Without detailing what his committee will recommend, Craig Kelly supports more cohesion.

“No one seems to have a clear responsibility,” he says.

What the various inquiries and agencies do appear to agree on is that everyone must do more, and soon.

This article was first published in the print edition of The Saturday Paper on September 23, 2017 as "Smoke rings".

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Karen Middleton is The Saturday Paper’s chief political correspondent.

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