A methodology for estimating the illicit consumption of cigarettes at the country level

ABSTRACT

This paper introduces and discusses a methodology for estimating the scale of illicit consumption of cigarettes at a national level. After reviewing current data gathering approaches and estimates, the paper delineates a methodology to estimate the consumption of each type of illicit cigarette (i.e., counterfeits, illicit whites, smuggled/trafficked genuine cigarettes). The proposed methodology is tested through estimating the size and characteristics of the illicit cigarette market in 27 Member States of the European Union in 2016. The results, which underline the heterogeneity in the quality and in the quantity of the illicit consumption of cigarettes in Europe, are presented along with considerations about the strengths and limitations of the proposed methodology in relation to extant approaches.

KEYWORDS:

• Cigarette trafficking
• transnational crime
• smuggling
• empty Pack Survey
• illicit Whites
• European Union

Acknowledgement

This work is the result of the joint efforts by all authors. A.A., M.D. and C.M. jointly conceptualized the entire methodology and wrote the paper. A.A. provided the introductory and background sections; C.M. detailed the methodology and produced the presented estimates; A.A. and M.D. jointly wrote the results, discussion, and conclusion sections. All authors reviewed the manuscript.

Access to Empty Pack Surveys data has been accorded to the authors within the framework of the research project ‘ITTP Nexus in Europe and beyond’ by Transcrime-UCSC (http://www.transcrime.it/en) and financed by PMI IMPACT, a global grant initiative of Philip Morris International to support projects dedicated to fighting illegal trade and related crimes. PMI IMPACT did not fund this paper, had no role in the writing of it, and did not exercise any editorial control.

The authors would like to thank the anonymous reviewers for their valuable suggestions and the members of the Research team who developed the project Nexus and in particular Luca Cinciripini, Federica Daphne Ierace, Elias Mamo Fiedle, Marina Mancuso, Riccardo Milani, Rogier Alexander Rutgers, and Ernesto U. Savona. This publication reflects the view only of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. OLAF, Study to Identify an Approach to Measure.

2. Aziani et al., “Empty Discarded Pack Data.”

3. Joossens et al., “Issues in the Smuggling of Tobacco Products”; and Shelley and Melzer, “The Nexus of Organized Crime.”

4. Kulick, Prieger, and Kleiman, “Unintended Consequences of Cigarette Prohibition.”

5. Calderoni et al., “Price and Non-Price Determinants of the Illicit Cigarette Trade”; Joossens et al., “Issues in the Smuggling of Tobacco Products”; and Kulick, Prieger, and Kleiman, “Unintended Consequences of Cigarette Prohibition.”

6. See note 1 above.

7. Allen, The Illicit Trade in Tobacco Products; and Shen, Antonopoulos, and von Lampe, “The Dragon Breathes Smoke.”

8. Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market; and Ross et al., “A Closer Look.”

9. Joossens et al., “Issues in the Smuggling of Tobacco Products”; and Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market.

10. E.g. Guindon et al., “Cigarette Tax Avoidance”; and Nagelhout et al., “Socioeconomic and Country Variations in Cross-Border.”

11. E.g. Andreeva, Kharchenko, and Zakhozha, “Tobacco Smuggling Estimates Based on Pack Examination.”

12. E.g. Fix et al., “A Novel Approach to Estimating the Prevalence of Untaxed Cigarettes.”

13. E.g. HMRC, “Measuring Tax Gaps 2017 Edition.”

14. E.g. Bhagwati, “On the Underinvoicing of Imports”; and Joossens, “Tobacco Smuggling.”

15. E.g. Yürekli and Sayginsoy, “Worldwide Organized Cigarette Smuggling.”

16. Zheng et al., “Estimating Nicotine Consumption in Eight Cities Using Sewage Epidemiology.”

17. E.g. Barker et al., “Estimating Cigarette Tax Avoidance”; and Calderoni et al., “Price and Non-Price Determinants of the Illicit Cigarette Trade.”

18. Fink, The Survey Kit.

19. Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market.

20. Gallus et al., “Temporal Changes of Under-Reporting of Cigarette Consumption”; Guindon et al., “Cigarette Tax Avoidance and Evasion”; and Johnson, “Sources of Error in Substance Use Prevalence Surveys.”

21. Merriman, “Understand, Measure”; and Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market.

22. Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market; and Ross, Understanding and Measuring Cigarette Tax Avoidance and Evasion.

23. Ross, Understanding and Measuring Cigarette Tax Avoidance and Evasion.

24. See note 22 above .

25. See note 23 above .

26. Ben Lakhdar, Lermenier, and Vaillant, “Estimation Des Achats Transfrontaliers de Cigarettes 2004–2007”; and Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market.

27. Prichard et al., “Measuring Drug Use Patterns in Queensland.”

28. Castiglioni et al., “Evaluation of Uncertainties Associated with the Determination.”

29. Aziani et al., “Empty Discarded Pack Data”; and Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market.

30. Aziani et al., “Empty Discarded Pack Data”; Calderoni, “A New Method for Estimating the Illicit Cigarette Market”; and Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market.

31. E.g., Barkans and Lawrance, “Contraband Tobacco on Post-Secondary Campuses in Ontario, Canada”; Davis et al., “Cigarette Trafficking in Five Northeastern US Cities”; Kurti et al., “Identifying Counterfeit Cigarette Packs Using Ultraviolet Irradiation and Light Microscopy”; and Merriman and Chernick, “Using Littered Pack Data to Estimate Cigarette Tax Avoidance in NYC.”

32. Merriman, “The Micro-Geography of Tax Avoidance”; and Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market.

33. Webb et al., Unobtrusive Measures, 2.

34. Lalam et al., L’observation Du Marché Illicite de Tabac En France.

35. E.g., Aziani et al., “Empty Discarded Pack Data”; Barkans and Lawrance, “Contraband Tobacco on Post-Secondary Campuses in Ontario, Canada”; Consroe et al., “Spring Breaks and Cigarette Tax Noncompliance”; Davis et al., “Cigarette Trafficking in Five Northeastern US Cities”; Kulick and Prieger, “Empty Discarded Pack Data”; Kurti, von Lampe, and Thompkins, “The Illegal Cigarette Market in a Socioeconomically Deprived Inner-City Area”; Kurti et al., “Innovations in Counterfeiting Tax Stamps”; Lakhdar, “Quantitative and Qualitative Estimates of Cross-Border Tobacco”; Merriman, “The Micro-Geography of Tax Avoidance”; and Merriman and Chernick, “Using Littered Pack Data to Estimate Cigarette Tax Avoidance in NYC.”

36. Scollo, “Early Evidence about the Predicted Unintended Consequences of Standardised Packaging of Tobacco Products in Australia.”

37. Gilmore et al., “Towards a Greater Understanding of the Illicit Tobacco Trade in Europe,” 2013; and Ross, Understanding and Measuring Cigarette Tax Avoidance and Evasion.

38. Aziani et al., “Empty Discarded Pack Data”; and Ross, Understanding and Measuring Cigarette Tax Avoidance and Evasion.

39. E.g., Calderoni, “A New Method for Estimating the Illicit Cigarette Market”; Joossens et al., “Illicit Cigarettes and Hand-Rolled Tobacco in 18 European Countries”; HMRC, “Measuring Tax Gaps 2017 Edition”; Lakhdar, “Quantitative and Qualitative Estimates of Cross-Border Tobacco”; Lencucha and Callard, “Lost Revenue Estimates from the Illicit Trade of Cigarettes.”

40. Prieger and Kulick, “Cigarette Taxes and Illicit Trade in Europe.”

41. Calderoni et al., The Factbook on the Illicit Trade in Tobacco Products 3 – Ireland.

42. Blecher, “A Mountain or a Molehill”; Lencucha and Callard, “Lost Revenue Estimates from the Illicit Trade of Cigarettes”; and Gilmore et al., “Towards a Greater Understanding of the Illicit Tobacco Trade in Europe,” 2014.

43. See note 40 above.

44. Prieger and Kulick, “Cigarette Taxes and Illicit Trade in Europe.”

45. See note 23above.

46. Ross, Understanding and Measuring Cigarette Tax Avoidance and Evasion.

47. KPMG, Project SUN. A Study of the Illicit Cigarette Market in the European Union.

48. E.g., Gallagher et al., “Tobacco Industry Data on Illicit Tobacco Trade”; Gilmore et al., “Towards a Greater Understanding of the Illicit Tobacco Trade in Europe,” 2014; and Joossens et al., “Illicit Cigarettes and Hand-Rolled Tobacco in 18 European Countries.”

49. Gilmore et al., “Towards a Greater Understanding of the Illicit Tobacco Trade in Europe,” 2014.

50. Joossens et al., ”Illicit Cigarettes and Hand-Rolled Tobacco in 18 European Countries.”

51. Gallagher et al., “Tobacco Industry Data on Illicit Tobacco Trade.”

52. PMI IMPACT did not fund this paper, had no role in the writing of it, and did not exercise any editorial control.

53. Gallagher et al., “Tobacco Industry Data on Illicit Tobacco Trade”; Gilmore et al., “Towards a Greater Understanding of the Illicit Tobacco Trade in Europe,” 2014; and Joossens et al., “Illicit Cigarettes and Hand-Rolled Tobacco in 18 European Countries.”

54. Luxembourg was excluded due to the paucity of the available data.

55. European Commission, “Excise Duties.”

56. OLAF, Project ‘White Smoke.’

57. Figures on the origin of seized cigarettes fail to distinguish between seizures of counterfeits and legally registered products. In principle, the methodology would need to rely on seizures of cigarettes that were registered as legally produced, thus excluding counterfeits from this figure. However, according to the World Customs Organisation ‘Illicit Trade Report 2015ʹ; ‘Illicit Trade Report 2016ʹ., counterfeit products account for approximately 2% of total seizures.

58. E.g., Berlusconi, Aziani, and Giommoni, “The Determinants of Heroin Flows in Europe.”

59. Prieger and Kulick, “Cigarette Taxes and Illicit Trade in Europe”; Sung et al., “A Major State Tobacco Tax Increase,”

60. Cumby et al., ”Testing the Autocorrelation Structure of Disturbances in Ordinary Least.”

61. Nomenclature of Units for Territorial Statistics (NUTS) proposed by the EU is the standard subdivision of countries for statistical purposes. The nomenclature NUTS0 is associated with the national territory. NUTS1 to 3 do not necessarily correspond to administrative divisions within the country.

62. See note 40 above.

63. As seen, our system of equations can be written in the classical form $Ax=b$, where $A$ is our $57\times 57$ coefficient matrix, $x$ and $b$ are $57\times 1$ vectors in the vector space ${\mathbb{R}}^n$. By the Rouché–Capelli theorem, a system of linear equations with $n$ variables has a unique solution if and only if the rank of its coefficient matrix $A$ is equal to the number of unknowns $n$: $n=rank\left(A\right)$, meaning that the $n$ rows of the matrix $A$ are linearly independent. While the rows of our $A$ matrix are linearly independent, we cannot rule out the possibility that they will not be in any other empirical applications. Nonetheless, as first, the dimension of the samples from which the $m$ elements of $A$ are (should be) derived makes any perfect linear correlation unlikely also in other empirical cases. As second, researchers encountering in their applications an $A$ matrix which is not positive semidefinite, may perturb their matrix to make it positive semidefinite while introducing only minimum biases in their final estimates. In particular, they can add an $\mu$ value such that $A+\mu I$ is positive definite.

64. Webb et al., Unobtrusive Measures.

65. ASH, “Tobacco Tax Gaps.”

66. World Customs Organisation, Illicit Trade Report 2014.

67. The threshold of 50% is intentionally conservative so to avoid any possible inflation of the estimates of illicit whites and illicit consumption. Yet, the proposed approach produces results that largely overlap with existing lists of illicit white brands e.g., Ross et al., “A Closer Look”. Most brands identified as illicit whites by this methodology have overall low consumption volumes and are produced mainly in non-EU countries.

68. The adoption of different thresholds does not substantially influence the results. The 50% one was preferred because it was considered more neutral.

69. The threshold is intended to be conservative. The adoption of different thresholds that clearly indicate a disproportionate consumption of non-domestic cigarettes does not substantially influence the results.

70. Joossens and Raw, “From Cigarette Smuggling to Illicit Tobacco Trade”; and Reuter and Majmundar, Understanding the U.S. Illicit Tobacco Market.

71. The estimate of 112 hours considers the total number of waking hours in a week assuming an average of 8 hours of sleeping, while 40 hours constitute the average weekly working hours.

72. E.g., Merriman, “The Micro-Geography of Tax Avoidance.”

73. Eurobarometer, “Eurobarometer Survey on Tobacco,’ March 2009.

74. The correlation was computed using the price of a pack of the most sold brand and the price of a premium pack (i.e., Marlboro). The ‘price propensity’ coefficient represents the propensity to buy additional cigarette packs given an increase of 1 euro of the price differential between the origin and destination country. As shown in Table 3, data on the number of packs bought on trips to lower-price countries and on the proportion of the annual tobacco consumption bought in another country refers to 2008 and to 2012, respectively Eurobarometer, “Eurobarometer Survey on Tobacco,” May 2012. Since then, in all EU MSs, taxes on cigarettes – and prices with them – have risen multiple times. Nonetheless, correlations between prices of the most sold cigarettes in 135 countries in 2008, 2012, and 2016 are 0.90 and 0.96, respectively. Considering only EU MSs, 2008–2016 prices have a correlation of 0.97; 2012–2016 prices have a correlation of 0.99. In consideration of this, we might assume that the use of data referring to different years should not introduce major distortions in our estimate.

75. The ‘price propensity’ coefficient for residents returning from higher-price countries was multiplied by 0.5 to incorporate the assumption that smokers are more responsive to the chance to save money by buying lower priced cigarettes compared to running the risk of buying more expensive cigarettes.

76. Chen et al., “Did the Tobacco Industry Inflate Estimates of Illicit Cigarette Consumption in Asia?”; and Calderoni et al., “Price and Non-Price Determinants of the Illicit Cigarette Trade.”

77. E.g., Chen et al., “Did the Tobacco Industry Inflate Estimates of Illicit Cigarette Consumption in Asia?”.

78. E.g., Termsirikulchai et al., “Cigarette Consumption among Foreign Tourists in Thailand.”

79. E.g., KPMG, Project SUN. A Study of the Illicit Cigarette Market in the European Union; and Transcrime, “An European Outlook on the Illicit Trade in Tobacco Products.”

80. Agaku et al., “Impact of Cigarette Price Differences across the Entire European Union.”

81. Eurobarometer, “Eurobarometer Survey on Tobacco,” May 2012.

82. Later versions do not investigate consumers’ attitudes to purchasing tobacco cross-border.

83. Fendrich et al., “Tobacco-Reporting Validity in an Epidemiological Drug-Use Survey”; and Johnson, “Sources of Error in Substance Use Prevalence Surveys.”

84. The linear correlations between the different estimates of the shares of illicit consumption on total consumption are highly significant; R² = 0.78 between the average of our estimates and KMPG’s (R² = 0.94 when focusing on total illicit consumption) and R² = 0.74 between our and Euromonitor International’s estimates (R² = 0.96 when focusing on total illicit consumption). Since Prieger and Kulick’s estimate of total consumption is strongly correlated with the one by KPMG, we can safely assume that our own estimates align also with the one by Prieger and Kulick.

85. Calderoni et al., “Price and Non-Price Determinants of the Illicit Cigarette Trade”; Nagelhout et al., “Socioeconomic and Country Variations in Cross-Border.”

86. Calderoni et al., “Price and Non-Price Determinants of the Illicit Cigarette Trade”; Goel, “Cigarette Smuggling”; and Prieger and Kulick, “Cigarette Taxes and Illicit Trade in Europe.”

87. Calderoni et al., “The Belarusian Hub for Illicit Tobacco.”

88. OECD, Trade in Counterfeit Products and the UK Economy: Fake Goods, Real Losses.

89. See Chen et al., ‘Did the Tobacco Industry Inflate Estimates of Illicit Cigarette Consumption in Asia?’; Gallagher et al., “Tobacco Industry Data on Illicit Tobacco Trade”; KPMG, Project SUN. A Study of the Illicit Cigarette Market in the European Union’; and Merriman, “The Micro-Geography of Tax Avoidance.”

90. See note 22 above.

91. Antonopoulos and Hall, “The Financial Management of the Illicit Tobacco Trade in the United Kingdom”; Von Lampe, “The Cigarette Black Market in Germany and in the United Kingdom”; WHO, “Combating the Illicit Trade in Tobacco Products from a European Perspective.”

92. See Aziani et al., “Empty Discarded Pack Data”; Ross et al., “A Closer Look”; and World Customs Organisation, ‘Illicit Trade Report 2015ʹ.

93. OLAF, Project ‘White Smoke’; and Transcrime, “An European Outlook on the Illicit Trade in Tobacco Products.”

94. Fix et al., :A Novel Approach to Estimating the Prevalence of Untaxed Cigarettes in the USA.”

95. See note 51 above.

96. See note 49 above, 2013.

97. Stoklosa, “Contrasting Academic and Tobacco Industry Estimates of Illicit Cigarette Trade.”

Additional information

Notes on contributors

Alberto Aziani

Alberto Aziani is an assistant professor at Università Cattolica del Sacro Cuore in Milan and researcher at Transcrime. He holds a PhD in Criminology and a MSc in Economics and Social Sciences. His main research interests are transnational illicit markets and organized crime. On these topics, he has conducted studies and developed projects for international organizations and funding institutions.

Marco Dugato

Marco Dugato graduated in Sociology (MA) at the Università degli Studi di Milano Bicocca (2009). Since 2009, he is researcher at Transcrime. He coordinated several research projects at national and international level (Europe, Latina America). His main research fields are: spatial analysis of crime; crime and criminal justice statistics; organized crime and illicit markets estimates. Since the a.y. 2010/2011 he has been Adjunct Professor of Crime Statistics within the framework of the MA in Applied Social Sciences at the Faculty of Sociology of the Università Cattolica del Sacro Cuore di Milano. Since the a.y. 2013/2014 he is Adjunct Professor of Methods and Techniques for Criminological Research within the framework of the MA in Public Policies at the Faculty of Political and Social Sciences of the Università Cattolica del Sacro Cuore di Milano. From 2015 he is founding partner and administrator of the spin-off company Crime&tech.

Cecilia Meneghini

Cecilia Meneghini is a Ph.D. candidate in Criminology at the Università Cattolica del Sacro Cuore in Milan and a researcher at Transcrime. Currently, she is a visiting research scholar at the University of Colorado Boulder. In 2017 she obtained a Master’s Degree with honors in Economic and Social Sciences from Bocconi University in Milan. Her research interests include organized crime and criminal networks, life-course criminology, and the analysis of illicit markets and transnational illicit flows. On these topics, she conducted studies and collaborated on different international projects.