ILLICIT TRADE IN CIGARETTES LINK TO ORGANISED CRIME 

A paper by Prof Dr Cornelis Roelofse, Department of Criminology and 

C i i l J iCriminal JusticeCornelis.roelofse@ul.ac.za

+27824926156

IntroductionIntroduction

• Organized crime to a degree is a mythicalOrganized crime to a degree is a mythical concept

• A concept although widely discussed• A concept, although widely discussed, debated, legislated about and enjoying international policing attention it is still notinternational policing attention, it is still not adequately defined. 

Problem statementProblem statement

• Cigarette smuggling exist ‐ the fact that it is aCigarette smuggling exist   the fact that it is a low risk, high profit activity for which punishment is very low compared to drugpunishment is very low, compared to drug smuggling or human trafficking for instance. As we will see later during this presentationAs we will see later during this presentation, cigarette smuggling leads to other serious crimes as proceeds are used to fund othercrimes as proceeds are used to fund other crimes, even terrorism

OCOC

• Lebeya (see Roelofse Oliver & KgosimoreLebeya (see Roelofse, Oliver & Kgosimore , 2012:28) states: “The confusion pertaining to the existing descriptions and definitions andthe existing descriptions and definitions and the indiscriminate use of the term ‘organisedcrime [T]he existence of over 160 definitionscrime …[T]he existence of over 160 definitions illustrates the distorted understanding of organized crime ”organized crime.  

HypothesisHypothesis

• Cigarette smuggling is an organized illicitCigarette smuggling is an organized,  illicit economic practice, underpinned or at least passively supported by one or more politicallypassively supported by one or more politically motivated group(s) and/ or government(s) in an active partnership or collusion involvingan active partnership or collusion involving corrupt officials and operator(s).

HypothesisHypothesis

• As you may have perceived, I have sidestepped the need to define organized crime as the variables in the hypothesis deal with the nature of OC. The variables are:

• • Illicit economy; (including illicit activities by legal operators)

• • Political motivation;• • Political motivation;• • Collusion (implies organizing);• • One government/political grouping (national OC; g /p g p g ( ;and

• • Governments/groups (Transnational OC).

Government refers to political office bearers as well as officials

Difference between OC and other lcriminal groups

• OC differs from gangs in as far as it has theOC differs from gangs in as far as it has the capability to launder profits and to influence political/government agentspolitical/government agents.

DefinitionsDefinitions

WHO Lester & AllenWHO• Article 1 of the World Health 

Organisation (WHO) FCTC5 describes illicit trade as “any practice or conduct prohibited by law and which relates to

Lester & Allen

• Counterfeit tobacco production is the illegal 

prohibited by law and which relates to production, shipment, receipt, possession, distribution, sale or purchase including any practice or conduct intended to facilitate such 

manufacturing in which the manufactured products bear a trademark without• Smuggled genuine products 

("contraband") refers to products illegally traded across international or provincial borders. These may be genuine goods that are illegally

bear a trademark without the consent of the owner of the trademark. (Lester  & All 2012genuine goods that are illegally 

imported and sold without payment of taxes in the country / state of consumption. (Lester  & Allen 2012).

Allen 2012

DefinitionsDefinitions

Lester & Allen Lester & AllenLester & Allen• Illegally manufactured products 

can be sold on the domestic market or smuggled into another

Lester & Allen• Extra production refers to cigarettes 

produced for a domestic market with considerable extra production specifically for smuggling into countriesmarket or smuggled into another 

country without payment of taxes. (Lester  & Allen 2012)

• Local Tax Evasion refers to illegal 

specifically for smuggling into countries where there is no legal market for them. (Lester  & Allen 2012).

• Crossborder shopping is common to many high taxing countries. Genuine 

methods of avoiding payment of local taxes on alcohol or tobacco products. These products are traded within the country of

y g gproduct that has been purchased in one country is brought into another country and consumed without payment of taxes in that country. This is classified as illicit trade only if the quantitiestraded within the country of 

manufacture as well as providing stock for smuggling into other countries. (Lester  & Allen 2012).

illicit trade only if the quantities involved are in excess of national personal allowances or are deemed commercial in size (Lester  & Allen 2012).

THEORETICAL EXPLANATIONS OF OCTHEORETICAL EXPLANATIONS OF OC

• Alien Conspiracy theory (ethnic character, language and often secret codes and markings, make it almost impossible to plant informers within such groups)

• The Alien Conspiracy has at its root the fact that social isolation of aliens and their grouping together in neighbourhoods create the environment for criminal conspiracy. Kleemans (2012) refers to social embeddednessth t t th f t t f hi h i k ti Athat creates the safety nets for high risk operations. A certain element of trust is part of the social cohesion that is found within families and amongst associates. I want to extend the concept of the Alien Conspiracy to incorporateextend the concept of the Alien Conspiracy to incorporate ideological embeddeness. This means taking this construct out of the current conceptualization and to place it within a political contextpolitical context.

THEORETICAL EXPLANATIONS OF OCTHEORETICAL EXPLANATIONS OF OC

• The political domain in society is interwoven with e po t ca do a soc ety s te o e tthe economic domain. Political power gives access to resources and resources give access to 

l l fl ( )political influence. Harasymiv (2002) urges political scientists to study legitimate and illegitimate power the two are connected andillegitimate power. .. the two are connected and interdependent.  He declares, 

• “ Organised crime, properly understood is Organised crime, properly understood is attached to political institutions, personnel and processes ‘. 

THEORYTHEORY

• In this context (Bequai, (1979) referred to the  loose confederation between  regional and ethnic crime groups in America due to economic and political necessity.  Fijnaut (1990), refers to protection that y j ( ) pcriminals enjoy from “corrupt officials.” One of the most deliberate instruments used to protect the nexus between criminals and politicians is to appoint cronies p ppin critical positions in the police and elsewhere in the criminal justice system. This is supplemented by a system of bribery and corruption. Bailey and Godson,( y y p y ,(2000) state unambiguously that that the political‐criminal nexus affects inter alia governments monopoly to coercion and the administration of justice. j

THEORYTHEORY

• To ensure continuation and reducing the risk ofexposure, organized crime (political connectionsimplied) applies the scatter effect. Some erroneouslyassume that if the leadership of an organized crimep ggroup is neutralised, the activities would seize. This isnot the case for the scatter effect of being a multi‐facetted integrated and symbiotic relationship ensuresg y pthat the activities continue. Often very loose, ratherthan strict organizational structures, ensureperpetuation. This may be in a circle of friends, familiesp p y ,or even political membership. Where structure exists itis based on bond rather than strict hierarchy.

ECONOMIC THEORYECONOMIC THEORY

• Smuggling flourishes where there are profits to begg g pmade as a result of tax rate differences betweenneighbouring countries, where the goods concernedare easily transported and the subject of manyare easily transported and the subject of manythousands of individual movements each day

• In the context of our theme. it simply means thatp yproducts that are deemed to have inflated prices suchas tobacco products create a market opportunity forillicit trade Producing cheaper cigarettes within aillicit trade. Producing cheaper cigarettes within acountry, or a neighbouring state makes the supply anddistribution very lucrative

Not only tax and exciseNot only tax and excise

• In the 1997 fiscal year excise tax on tobaccoIn the 1997 fiscal year excise tax on tobacco was 21 percent. It was then increased to 50 percent And currently is slightly above thatpercent.  And currently is slightly above that. However between 1997 and 2008 the price of a packet of cigarettes increased by about 400a packet of cigarettes increased by about 400 percent. This price hike is an industry driven increase and due to this increase governmentincrease and due to this increase, government is getting a higher income at its taxation rate of over 50 % (Stassen: 2013)of over 50 %. (Stassen: 2013)

TYPES OF TRADETYPES OF TRADE

• The illicit trade in cigarettes comes in many forms:• Bootlegging, or buying a quantity of cigarettes that exceeds custom regulations;

• Large scale smuggling;• Large‐scale smuggling;• Postal imports, or using the postal system to smuggle cigarettes;

• Counterfeit products • Possible other forms such as through diplomatic channels; andchannels; and 

• Using small aircraft flying short distances across borders from privately operated  air strips.

Sea, a possibilitySea, a possibility

• Although no such operation has been uncovered in South Africa, our coastline offers a potential for smuggling. This is already a practice in Europe. As land border controls are tightened this may become an option for connections from Zi b b i M bi I EZimbabwe via Mozambique. In Europe, 

• smuggling takes place at sea or on rivers. In these cases,the smugglers disperse sealed packages with cigarettes

th t h ll b t l t ll t thnear the coast, where small boats later collect theshipments. In such schemes, sometimes the corrupt borderguards or customs officers inform smugglers of thepatrolling schedules of border guards so as to avoidpatrolling schedules of border guards, so as to avoiddetection (Financial Action Task Force, 2012).

OC groups in RSAOC groups in RSA

The number of new organised criminal groups that were identified in South Africa for theThe number of new organised criminal groups that were identified in South Africa for the

2003/2004 - 2010/2011 financial years is as follows:

Table 1: Number of organised crime groups identified in South Africa

Yea 2003/20 2004/20 2005/20 2006/20 2007/20 2008/20 2009/20 2010/20

r 04 05 06 07 08 09 10 11

No 120 186 115 109 72 51 121 179

(Lebeya in Roelofse Oliver &Kgosimore 2012: 23)(Lebeya, in Roelofse, Oliver &Kgosimore, 2012: 23)

IntelligenceIntelligence

• Policing organized crime relies heavily on the ability of police agencies to gatherintelligence on groups, their activities and the individuals and their contacts. InSouth Africa, the intelligence services in the Police are going through a crisis andthis can be the reason for the new wave of the increase in organized crime groups.One should also take the Soccer World Cup into consideration as groups infiltratedOne should also take the Soccer World Cup into consideration as groups infiltratedSouth Africa with prospects of an increased demand for sex and drugs during thattime.

• Swart (2013:4) posits that “ A spike in organized crime can almost certainly beattributed to the paralysis is of the police’s embattled crime intelligence unit.” Hereacted to the release of crime statistics that indicate that crimes normallycommitted by syndicates such as truck and car hijacking and aggravated robberyhas increasedhas increased.

• The trouble in the intelligence unit (suspension of Mdluli, arrests of Lazarus andBernard from the financial and logistics units) is something the fight againstorganized crime cannot afford. Burger as quoted by Swart (Ibid.,p.4), stated that“… a unit that should be at the centre of any crime‐fighting initiatives but instead

focuses on its internal battles andmeddles in the political arena.”

MAIN ORGANIZED CRIME GROUPS IN SOUTH AFRICA

• The Triad groups in RSA are mainly CantoneseThe Triad groups in RSA are mainly Cantonese and Mandirin speaking groups of which according to Gastrow (2001: 3) are:

• Wo Shing Wo• San Yee On • 14K‐Hau and • 14K‐Ngai groups.

Groups and routesGroups and routes

Routes for illicit cigarette trade :Triads• China – South Africa• China‐ Namibia‐South Africa‐ Zambia• China‐ Namibia‐South Africa‐ Zambia

Middle East,  Pakistani and  Eastern European groups • UAE (Dubai) – South Africa,• UAE (Dubai) – Namibia – South Africa,• UAE (Dubai) – Namibia‐ Angola – Botswana/Namibia –UAE (Dubai)  Namibia Angola  Botswana/Namibia 

South Africa, The Zimbawean connection• Zimbabwe South Africa Mozambique• Zimbabwe – South Africa – Mozambique

Market shareMarket share

• Stassen (2013) quotes sources that say that approximately 55 percent of illegal cigarettes in pp y p g gSouth Africa originate from Zimbabwe, between 30 and 35 percent is manufactured locally and th t i i t f Middl E t t ithe rest originates from Middle Eastern countries.

• INTERNAL share has grown since 2011 at about 7% p a in correlation with external decline7% p.a. in correlation with external decline.

• Should SAPS and SARS not be able to audit existing production???existing production???

OC in South Africa (Swart 2012)OC in South Africa (Swart, 2012)

TOBACCO COMPANIES/EMPLOYEESTOBACCO COMPANIES/EMPLOYEES

• The International Consortium of investigative Journalists (2001)t d th f th d f T Ch i h t breported the case of the murder of Tommy Chui who was to be a

prosecuting witness against corrupt customs officials and a 100million Hong Kong Dollar bribe in which three former executives ofa big tobacco company were allegedly implicated. The same sourceg p y g y palso refer to a year‐ long investigation by the Center for PublicIntegrity that some tobacco companies have worked closely withcompanies and individuals directly connected to organized crime.Th i l t f l d liti l fi b• The involvement of even lawyers and political figures can besubstantiated by several high profile cases of which the one inLouisiana in the USA is a good example. Lawyers used theirconnections in the Clinton administration to remove a prosecutor inpa case of a sales executive of a tobacco company for smuggling intoCanada.

CIGARETTES, JUST ONE OF MANY OC OPERATIONS 

• It is a well‐established fact that cigarette gsmuggling is an OC activity. Rowan (2012) states: “it is almost exclusively the domain of organized crime groups ” This view is supported by othercrime groups…  This view is supported by other experts. The Financial Action Task Force (2012), composed of 34 states, of which South Africa is a 

t d l d th t t b li i “ lpart declared that tobacco smuggling is “ a low risk, high profit enterprise that entices traditional criminal traffickers to move into more lucrative and dangerous criminal enterprises such money laundering, arms dealing, and drug trafficking

Expansionist approachExpansionist approach

Whiting (2012) who is of the opinion that “…Organisedcriminal gangs will deal with any commodity: alcohol, tobacco…‐ whatever makes money and allows them to launder their criminal profits.  So what is evident from pthese statements is that organized crime groups may start with a particular activity but will expand their operations. One crime leads to another and all attempt to launder ptheir profits. Illicit cigarette trading can thus: • be a stand‐alone activity; • an entry point into more dangerous activities;• an entry point into more dangerous activities; • done in combination with other crimes; and • also serve as a laundering activity.g y

Money Laundering

• Money laundering is a specialization field in OC crime where individuals an groups market their services to OC groups. There are a plethora of tactics used such as:

• Running a number of bank accounts locally and abroad and moving money from one to another.

• Setting up front companies• Using auctionsUsing auctions• Buying expensive commodities such as diamonds• Buying property at an officially lower price than the market 

value but paying the other part in cashvalue, but paying the other  part in cash. • Runners change small amounts of foreign currencies at 

money changers’ offices. Etc. Etc. Etc.

LaunderingLaunderingDiagram 4: Money laundering process

Dirty money

Laundering agent

PlacementIntegration

Layering

Placement simply means putting the money in the bank If the threshold prescribed by the lawPlacement simply means putting the money in the bank. If the threshold prescribed by the law (See FICA hereunder 

TerrorismTerrorism

• Evidence of this has emerged in a report by Rollins &Wyler (2012). The report states that terrorist groups in the Middle East (Hamas and Hezbollah), the Real Irish Republican Army and the Kurdistan Workers party have funded from i tt li ti i A i E dcigarette smuggling operations in America, Europe and Africa. 

• In 2004, 10 people were arrested and charged with i d di t ib ti f t b d i tt ipossession and distribution of contraband cigarettes, wire 

fraud and money laundering as part of a scheme to smuggle more than USD 2 million in cigarettes bought in Virginia to New York One subject was arrested in DetroitVirginia to New York. One subject was arrested in Detroit and found with hundreds of thousands of dollars in wire transfer receipts showing payments to people associated with Hezbollah (Financial Action Task Force (2012)with Hezbollah (Financial Action Task Force (2012).

http://

b k 8 bl d k/ i /3806 h h //www.bunker8.pwp.blueyonder.co.uk/orgcrim/3806.htmhttp://www.bunker8.pwp.blueyonder.co.uk/orgcrim/3806.

CorruptionCorruption

• Where governments fail to act it should serveWhere governments fail to act it should serve as one of the indicators of corruption and/or coercion The normal OC modus operandi is tocoercion. The normal OC modus operandi is to bribe key officials or to actually lure them into the structure which allows them to sharethe structure which allows them to share profits. They can also be blackmailed, once they have accepted a bribe The main targetedthey have accepted a bribe. The main targeted groups are customs officials and the police

CorruptionCorruption

• Customs: The main target of corruption related to cigarette li t i d h k i t th i tit tismuggling are customs agencies and checkpoints – the institutions 

involved in controlling imports of cigarettes and collecting excise taxes. The pressure is greatest along external borders, in particular the border with Zimbabwe

• The border towns at the crossings are heavily dependent on bootlegging and trafficking excisable goods. The local customs and border authorities usually allow this trade as a routine way of 

i l C t l d l l t l d hi ll t l t thisurvival. Central and local customs leadership generally tolerate this cross‐border culture. There are different schemes for ‘border crossing fees’: from fixed amounts, which are split between the officers on a shift, with a share going to higher‐ups, to fees , g g g p ,determined according to the quantity smuggled. The bribes are paid either by ‘mules’ transporting the cigarettes or scheme organisers.

CorruptionCorruption

• Transport sector: research on cigaretteTransport sector: research on cigarette smuggling in the Netherlands (Van Dijk, 2007) has shown that corruption could exist in abouthas shown that corruption could exist in about 19% of the cases where a company employee – most often a driver – would becomemost often a driver  would become involved in a smuggling ring. 

CorruptionCorruption

• Political corruption is used /can be used toPolitical corruption is used /can be used to protect or shield individuals from prosecution. 

• Police corruption is evidenced normally• Police corruption is evidenced, normally through bribes, demanding protection fees and free products or even being part ofand free products or even being part of syndicates. 

Structure

Strategy

State Business Structure

Relationship/result

EvasionInitial phase of establishing OC within a state. OC group(s) avoid 

Ghettoized criminal markets for contraband goods and services  OC ‐ Subordinate to state

state/law enforcement through clandiesine operations and secrecy

and fronting

Enticing and penetrating state OC ‐ Using legal business for itsCorruption

Enticing and penetrating state agencies. Put it to its own use

OC ‐ Using legal business for its “business” OC ‐ Encroaching state structures 

through individuals

State uses OC groups for covert  Business uses OC groups for Collusion operations and activities profitable illegal activities OC and state structures Engaging 

– more individuals draw structures into OC

State officials are shifting loyalty Business is done via criminalisedAssimilation

State officials are shifting loyalty and serve OC objectives. OC activities and operatives are protected.

Business is done via criminalised tenders OC takes increasing role –

Assimilating – with state structures

De Facto‐isation Takes on legal political authority. Uses state resources as vehicles for OC   

Illegal and legal business have merged OC and state Integrating and 

illegal activities become “legitimate”

Replacement OC becomes government Criminal business has become the norm 

OC Takes over the state 

Initial phase of  Ghettoized Evasion establishing OC 

within a state. OC group(s) avoid state/law

criminal markets for contraband goods and

OC ‐Subordinate to state

Statavoid state/law 

enforcement through clandestine 

goods and services and fronting

te

operations and secrecy C

onCorruption

Enticing and penetrating

OC ‐ Using legal business OC n

tro

Corruption penetrating state agencies first at lower levels , e.g. 

legal business for its “business”Exploiting 

OC ‐Encroachingstate structures through 

lborder and customs officials, and then

weak controls, often paying bribes

individuals

then increasingly into upper echelons. 

Increasing association  Business uses OC  LosinCollusion of individuals in 

powerful positions in state and OC groups. State uses OC groups for covert operations

groups for profitable illegal activities

OC and state structures Engaging – more individuals draw structures into OC

gControlHyfor covert operations 

and activitiesybrid

AssimilationState officials are shifting loyalty and serve OC objectives. I fl li d

Business is done via criminalised tenders OC takes increasing 

role – Assimilating –ith t t t t

Syst

Influences policy and laws. OC activities and operatives are protected.

with state structures

em

De Facto‐isation Takes on legal political authority Uses state

Illegal and legal business have merged OC and state 

Integrating and illegal

OC 

Sauthority. Uses state resources as vehicles for OC   

Integrating and illegal activities become “legitimate”

State

R l OC b C i i l b i h OC T k hReplacement OC becomes government

Criminal business has become the norm 

OC Takes over the state 

ConclusionConclusion

• To conclude, I am of the opinion that the illicit trade in cigarettes is both an entry point and extension of criminal activities of small gangs and also organized crime groups. 

• Generally the trend in the world is to clamp down on smoking. Tobacco companies run the risk of some of their employees being drawn into illicit markets to sustain profits. There is already evidence of this and because i tt l l dit d i dcigarettes are a legal commodity, more and more organized crime groups are getting involved in illicit trade as it is less dangerous and penalties are less severe. This poses severe challenges to tobacco companies and law enforcementchallenges to tobacco companies and law enforcement agencies. The police and criminal Justice system should work in a coordinated way to increase penalties by lobbying for revision of relevant lawsfor revision of relevant laws.  

ConclusionConclusion

• In addition, markings on the outside of cigarette packages should b t d b l l h d d i id th k t th tbe augmented by a regularly changed code inside the packet so that spot checks made at outlets can be more effective.  The hypothesis that illicit economic practice, underpinned or at least passively supported by one or more politically motivated group(s) and/ or pp y p y g p( ) /government(s) in an active partnership or collusion involving corrupt officials and operator(s) that has been stated in the beginning of this presentation is deemed to be adequately verified. Final support comes from Douglas in Harasymiw (2003) that statedFinal support comes from Douglas in Harasymiw (2003) that stated. “the systemic corruption that is spreading throughout our social, political and economic fabric… and the symbiotic relationship between these illegal activities and the political structure that 

k i iblmakes it possible.• I conclude by stating that the romanticizing of organized crime is 

out of place. I narrow it down to political and/or government sponsorship before crime should be classified as organizedsponsorship before crime should be classified as organized.