Scant evidence EU tobacco deal curbed smuggling

“We have concluded an agreement with PMI, which is quite unique in its scope and I am not afraid to use the term ‘landmark’ agreement here," she said. "We have built an efficient system to fight against future cigarette smuggling and counterfeiting.”

Fast forward eleven years - and four budget commissioners later – and the agreement with PMI is nearing its expiration date. According to current EU budget chief Kristalina Georgieva, the commission is almost done with its assessment of the agreement.

So has cigarette smuggling and counterfeiting dropped in the past eleven years?

In May 2015, Georgieva came to the plenary session in Strasbourg at the request of several MEPs, to talk about the PMI deal.

“There are some facts that are very clear,” she noted.

“The main objective of the PMI agreement to reduce the presence of smuggled PMI products on the EU black market has been achieved. Between 2006 and 2014 the volume of illegal PMI products seized by member states under the agreement has dropped by 85 percent. That substantially exceeds the overall downward trend in seizures. This drop applies equally to both genuine and counterfeit PMI products.”

According to the Commission, EU member states reported that they seized 4.5 billion cigarettes in 2005, and 3.1 billion in 2013.

In parallel, the occurrence of PMI brands among the seized cigarettes has also dropped.

In a 2013 report to the parliament and national capitals, the commission said that the agreement with PMI, and three others like it with the other big tobacco companies, “have clearly led to a significant reduction in the presence of these companies' products on the illicit market”.

In 2011, the share of seized cigarettes with “other brands”, i.e. brands from companies that don't have an agreement with the EU, reached 58 percent.

But a decreased share of PMI's cigarettes in seizures does not automatically mean an absolute decrease in smuggled goods, just as that a rise in police reports does not directly prove an increase in crime.

The trouble with crime data

The honest answer is of course: we don't know for sure. By their very nature, illegal activities are difficult to quantify.

In any case, there are several factors that complicate matters.

Member states have only begun to report their seizures of smuggled cigarettes systematically in 2005, which means there is no accurate picture of the situation before the agreement went into force.

Also, as seizures were decreasing in the past decade, the estimates of the overall size of illicit trade in cigarettes went up.

The commission said in the same 2013 document in which it signalled a downward trend in seizures that consumption of illicit cigarettes has increased by 30 percent in six years. The EU executive cited a study by audit company KPMG, which had said that 8.4 percent of all cigarettes smoked by Europeans in 2007 were illegal, while in 2012 that share was 11.1 percent.

KPMG has written annual reports on the state of illicit tobacco trade in Europe, commissioned by PMI, but they are not completely uncontroversial.

This website was granted access via a freedom of information request to the minutes of a 2 July, 2013 meeting with representatives of PMI, KPMG, the EU and 23 of its member states in Brussels.

The minutes noted that that year's KPMG report “were released by PMI without consultation with member states”, which one member state called “very embarrassing”.

Another member state (MS) pointed out a “significant difference between the figures from the KPMG report and MS figures”.

A representative of Olaf, the EU's agency that deals with tobacco fraud, said that: "the difference between the OLAF/MS and KPMG figures is huge, it represents a gap of 25 per cent. OLAF/MS figures show a decrease of 12% (around 3,8 billion cigarettes seized) while the KMPG points out the increase of 11%.”

At a similar meeting a year earlier, one country “congratulated KPMG for the excellent analytical and statistical work” but also noted “that the statistics provided by KPMG are the only tool member states have at their disposal to check the global trends and figures”.

Lack of independent data

And this is problematic, say a group of researchers in an article published earlier this year in the peer-reviewed medical journal Tobacco Control. The article tried to assess the impact of the PMI agreement and three other similar deals that were struck with other tobacco giants.

“Full evaluation of the agreements is almost impossible, as there are no independent publicly available data on the origins and brands of illicit tobacco products and the size of the illicit market in the EU ... The only publicly available data on the EU illicit cigarette trade over time are data produced by KPMG for the tobacco industry”, said the article.

Two years earlier, another article was published in Tobacco Control, specifically about the KPMG reports.

The researchers noted there was “lack of transparency, inadequacy of methodological details and subsequent quality of the data inputted to the model, the over-reliance on PMI data, and the lack of external validation.”

Wrong incentive?

Another problem when evaluating whether the agreements have reduced PMI's share of illicit cigarettes traded, is that PMI itself gets to say whether a seized cigarette was a genuine or counterfeit.

Under the agreement, PMI has to make a payment that is equivalent to 100 percent of the evaded taxes when a batch of 50,000 or more smuggled cigarettes are seized that carry its brand. However, if it is determined they are fake, PMI does not have to pay. The same goes for the other three manufacturers.

As of June 2015, all four manufacturers have paid €88 million in seizure payments, and €1.3 billion in annual payments, as stipulated by the agreements.

The Tobacco Control authors, who want the EU to end the tobacco agreements, criticized the fact that PMI is allowed to say whether seized cigarettes are fake or not, because it has an interest in the outcome.

“The intention of the seizure-based payments to deter the tobacco industry from further involvement in the illicit cigarette trade has failed because the agreements contain too many loopholes that provide [tobacco multinationals] with both the incentive and opportunity to classify seized cigarettes as counterfeit”.

While the EU and its member states have the option to do random checks and test the seized cigarettes which PMI claimed to be counterfeit in an independent laboratory, there has never been a dispute that triggered such an investigation.

A commission document sent to MEPs in the spring said that one "(large) member state has over a certain period of time verified 123 determinations 'genuine or counterfeit' made by manufacturers, and not found any error".

The text also notes that EU anti-fraud agency Olaf has requested an independent laboratory in Scotland to "analyse more than 300 samples of seized cigarettes. (....) Of these random checks, none has revealed a false determination."

Lost taxes

Meanwhile, the €88 million in recovered seizure payments is nowhere near enough to make up for the tax revenue that is reportedly lost due to smuggling.

The commission says that every year the EU and member states budgets lose €10 billion in potential tax revenue.

Curiously, it has used the same figure since at least July 2010.

Green MEP Bart Staes recently noted in a parliament debate with Georgieva that despite the agreement with PMI and other tobacco companies, the financial loss is steady at €10 billion.

“That figure is apparently not coming down, because I have heard that figure of €10 billion for years,” said Staes.

The 2013 commission communication explained that the estimate of €10 billion annual loss “is based on seizures reported by the member states which amounted to 4.5 – 4.6 billion cigarettes per year between 2005 and 2011”.

But since the volume of seized cigarettes has slowly been going down, to 3.1 billion in 2013, it may be time for the commission to update the figure, before deciding on a possible renewal of the agreement with PMI.

This is part three in a series of articles about the EU's agreement with tobacco company PMI

Part one: Will EU renew $1.25bn deal with tobacco firm PMI?

Part two: EU sleuths ignore special powers on tobacco smuggling

Part four: How did the EU spend its €110 million in tobacco money?