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Tobacco black market grows as tax increases hit home

By aemetha, Sep 23, 2016 | |
  1. aemetha
    Black market tobacco is costing taxpayers millions of dollars each year, but authorities appear uninterested. Blair Ensor reports.

    The escalating cost of cigarettes and a thriving black market in tobacco products make Ron King's business a prime target for criminals. To get to see King's factory – the only one of its kind in Christchurch – Stuff had to sign an agreement not to divulge its location or take any photos without permission. "I'm very, very concerned about security, King says. "I can't sleep some nights because I'm thinking about it."

    The air inside the nondescript two-storey building in the city's eastern suburbs is thick with the smell of fresh tobacco. Bales of kiln-dried tobacco leaves, shipped from India, are stacked against a wall on the first floor waiting to be treated before they are fed through a cutting machine. Upstairs five employees, four of them part-time, sit around a table sorting through the shredded tobacco, removing any defective material. The tobacco is stored in clear plastic bins before it's packed, usually into 30g and 50g pouches, by hand. More than $50,000 worth of finished product sits in the building waiting to be sent around the country. King's business, R & S King Ltd, is a very small player in New Zealand's $1.8 billion tobacco industry, which is dominated by British American Tobacco (BAT).

    For smokers, the habit is getting increasingly expensive as the Government ups its tax to discourage smoking and recoup some of the health costs. A pack of 20 cigarettes is expected to cost about $30 by 2020. A 50g packet of premium loose tobacco, used in roll-your-owns, currently costs about $78. That is big money for hard-up smokers who are turning to the black market to buy stolen cigarettes and illicit loose tobacco.

    Customs estimates the market for illegally manufactured or smuggled tobacco represents 2 to 4 per cent of consumption and is "not a significant problem". Its figures are based on a 2013 report by Action Smoking and Health (Ash), which excludes stolen tobacco products. Police believe the black market is fuelling armed robberies and burglaries, with criminals targeting dairies and stealing tobacco products for resale rather than for personal use.

    King says: "There's going to be people shot over it [tobacco]. Someone is going to get killed."

    A smoker looking for cheap fags can find a host of people in Christchurch selling cut-price tobacco online. As an example, Stuff visited an Aranui home and bought 80g of loose tobacco for $80 from 21-year-old Jasmine Lasseter, who was advertising on Facebook. Lasseter claimed the tobacco was "factory seconds", sourced from a local business owned by her friend's father. She got a kilogram at a time so she never ran out. Initially acknowledging she avoided paying tax on the tobacco, when confronted later she changed her story. Lasseter's Facebook page indicates her sales amount to at least 1kg of tobacco each week. She offers discounts for regulars.

    Surprisingly sellers like Lasseter appear to be operating unhindered by Customs, which is responsible for collecting the duty on tobacco. A Customs spokeswoman said the agency would look into reports or information "provided to us" and "enforce any offences discovered in relation to illegal tobacco". Customs did not ask for details of Stuff's sting although those were supplied later.

    While Customs appears unconcerned about the black market, BAT has hired a private detective to investigate the issue and is keen for the media to expose those involved. BAT spokesman Saul Derber estimates the size of the black market has at least doubled since the 2013 Ash report. "I would say 1 to 2 million 30g pouches (worth about $45 each) are being sold on the streets of New Zealand without any tax being paid, without any health warnings applied and no concerns about what age group they're selling to. Sales are rife of chop chop (illicit tobacco)."

    The tobacco giant acknowledges a vested interest — illegal sellers are eating into their profits. It believes the Government, which collects more than $1 billion in tobacco tax annually, should be more interested in tackling the issue. A 2010 Ernst and Young report commissioned by BAT says the illicit trade costs taxpayers up to $50 million each year. A submission to parliament by BAT in 2012 says tax increases on tobacco could fuel a significant rise in the black market for tobacco. "BAT is concerned that New Zealand is a target for illicit (including counterfeit) tobacco products by organised crime networks, alongside seeing unlicensed domestic tobacco leaf growers seeking to exploit consumer demand for tobacco."

    Australian media reports suggest the local black market for tobacco is booming and worth more than $1 billion. Organised criminals are attracted by the huge money at stake and the softer penalties compared to those for importing and dealing drugs.

    Customs says police have told it they are not aware of any organised criminal involvement in New Zealand's tobacco black market. The country's isolated location limits importation of tobacco products to sea and air transport. No large-scale domestic commercial growers exist. "Customs' import and export clearance processes, and systems for collecting duty on tobacco products, provide sound supply-chain controls," the spokeswoman says.

    BAT gave Stuff aerial video footage of a large crop of tobacco said to have been in Motueka, near Nelson, in March. It claims to have footage of another. Laurie Jury is among those growing tobacco in Motueka. "Everyone seems to point the finger at me. I've grown it for years and I'm just playing around with it at the moment. There's other uses for the tobacco … and I'm doing trials on making a spray out it." Jury's property has twice been searched by Customs agents, who accused him of supplying the black market. However, none of the charges brought against him stuck. Jury is still fighting for the return of 4.79 tonnes of tobacco seized in a 2010 raid. He declined to comment further until that matter was resolved.

    King, 74, is concerned at Lasseter's comments suggesting a Christchurch factory is supplying tobacco to the black market. "It's definitely not my tobacco," he says, after smelling the product supplied to Stuff. It's apparently poor quality and is going mouldy. Supplying the blackmarket would jeopardise his licence and livelihood. "[Customs] weigh your tobacco in and they weigh your tobacco out. Every packet is accounted for. They come and inspect your premises and they come and inspect your books." King believes a lot of home grown tobacco finds its way to the blackmarket. He suspects there is a large illicit manufacturer operating, but has no idea where.

    BAT's Derber believes the best way to tackle the black market trade is to either ban homegrown tobacco or set up a licensing or registration system for those growing it.

    Ash believes tobacco companies exaggerate and "play on fears about the illicit trade", rather than acknowledge the "more substantial problem" of legal tobacco use.

    Customs Minister Nicky Wagner says the black market for tobacco will likely grow as the price of cigarettes increase and officials are "watching it very closely". New Zealand does not have a "major problem" like Australia "and we don't want to have it so maybe more preventative measures would be good", she says. A person without a licence can manufacture up to 15kgs of tobacco for personal use each year. It cannot be sold or given away.

    Wagner says proposed changes to the Customs and Excise Act would see that amount reduced to 5kg. "I think that will make a difference [to the black market]." She does not think banning or licensing the manufacture of tobacco for personal use is needed. "If we had the same problem that they've got in Australia I think we would need to have more rules around it." She plans to raise the issue of tobacco sales via social media at a meeting with officials next week.

    23 September 2016


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