Introduction

The issue of smuggled cigarettes entering the market and possible economic consequences have been discussed with regularity by the media in the recent past. As a result of this the KAMPANA Media Team decided to conduct a study of the situation.

In this study the significant points taken into consideration were, media reporting of the issue, police raids of smuggled cigarettes and the contribution made by the Ceylon Tobacco Company (CTC) to this situation.

Background

The situation in Sri Lanka with regard to smoking prevalence in society figures as much as between 40 percent of the male population over 15, documents research findings. This number makes up the market that Ceylon Tobacco, as representatives of British American Tobacco (BAT) virtually monopolises.

Reports show that Sri Lanka, when compared with other Asian countries, records a decrease in tobacco use. Possible reasons for this maybe:

1. Effective tobacco prevention strategies

2. Some government policies on tobacco control such as high tax. (However, although the duty on tobacco in Sri Lanka is relatively high cigarettes still remains affordable for the consumer.)

In the recent past the issues of the smuggled cigarettes and that of the sudu cigarette [note: referred to as the sudu or white cigarette, it is a locally produced variety of illicit cigarette] have been highlighted by the media as potent mattershat needed to be dealt without delay.

The issue of incidents of raiding has also been highlighted to quite a large extent by the media. Along with the story of the raids, every news item inevitably carries as its focus the losses for the government as a result of the sale of smuggled cigarettes. Print and electronic media alike have taken up this issue with great fervour, repeatedly running news stories about these incidents. However, the source of this information has been rather vague and this has led to speculation this has led to speculation as to where the media receives its information from.

Interestingly, parallel to these news stories being covered in the media, tobacco companies too have raised this issue with the media through media briefings convened by them. In a media briefing conducted by CTC, it was held that 120 million smuggled cigarettes enter the Sri Lankan market annually and, as a result, the government suffers a loss of 100 million rupees and the company suffers a loss of between 40-50 million rupees annually.

At same time, the tobacco industry also conducted free tobacco distributions in public places in remote areas in order to promote their products as a healthier alternative to the harmful smuggled cigarettes in the market; this was timed with the spreading of the news in some localities some localities that these smuggled cigarettes were hazards to one's health, the symptoms of which were also given.

Focus:

In this context some of the issues faced and put forward in this report are as follows:

• If illegal or smuggled cigarettes are entering the local market in such great quantities, would this result in an increase in smoking prevalence?

• Does the tobacco industry suffer a significant loss as a result of smuggled cigarettes entering the market?

• Should it not be the case that the local tobacco industry takes a far more proactive approach to prevent the entrance of such illegal cigarettes into our markets if they wanted to?

• When reports of illegal or smuggled cigarettes are received, what is the source through which the media and police clarify their information?

In order to analyse the above focus questions significant incidents related to this issue and other information gathered on the subject have been presented as case studies in the following sections.

Back to Contents >>>

Case Study I - White Cigarettes

The argument raised by the Tobacco Company with regard to the issue of white cigarettes is suspiciously familiar; it seems as though the same argument seems to resurface with the lapse of time. On this matter, CTC held that they were the highest tax payers to the government; in addition to this, the white cigarette manufacturer does not pay tobacco tax and their products are of low quality which is harmful for the health. The proposition of CTC was that the tobacco tax should be reduced so that people can get accepted branded cigarettes for a low price, which, as they held, would eliminate the health risk factor. n July 2002, an investigation that was conducted by KAMAPANA Media Team revealed that, according to the White Cigarette Manufacturers' Cooperative Society the manufacture of white cigarettes had been in place for the last 20 years and at the outset they were assisted by Ceylon Tobacco who provided them with the raw materials. Over the years the manufacturers having established themselves had started buying the tobacco directly from tobacco growers.

When the tobacco growers were questioned on this issue they stated that the fertilizers and other resources needed to grow tobacco was provided by the Ceylon Tobacco Depot. Finally, the tobacco is bought over by the Company itself. The tobacco that is left behind is then sold to the white cigarette manufacturers. If the Tobacco Company so wishes they can easily ensure that this remaining tobacco is not sold to the white cigarette manufacturers. The group that makes 'beedi' [note: also, a locally-produced cigarette variety, the market for which is on the decline] had to say, on this subject, that the manufacture of the white cigarette posed a challenge and threat to their jobs. At a gathering convened by Ceylon Tobacco for these producers, the support of the company for the 'beedi' manufacturer against white cigarette producers was promised. However, the 'beedi' manufacturer is, in fact, totally unrelated to this issue as the leaf used to produce the 'beedi' is got down from India and furthermore, the cigarette itself is part of a diminishing market in the country. Yet, it remains important for the Company to get them involved as it serves their purpose of setting them up against the white cigarette manufacturer, in order to bring to focus the issue of the losses suffered by the government. Thus, the Company succeeds in driving their point home which is to reduce the taxes that they are paying.

White cigarette production can be easily eliminated by CTC instead they bring up the issue of people using the white cigarette because their cigarettes are too expensive, thus coming back to their objective of reduction of taxes paid by them.

Back to Contents >>>

Case Study II - The police Raid

One reported raid conducted by a Special Police Investigation Unit of was investigated by the KAMPANA Media Team through a discussion. [October 22, 2003]

Following is the summary of the interview: (the name of the interviewee has been withheld for reasons of privacy)

Q: Where did you get information on the smuggled cigarettes?

“I cannot specify that up through some kind of central authority based in Colombo.”

Q: Within your area what would be the fine for selling smuggled cigarettes?

“The fine would be up to two lakhs. I got this information from a CTC representative who provided me with the Tobacco Tax Bill. This is quite a large sum and if shop owners are periodically fined for this offence there will be a drastic drop in the sale of smuggled cigarettes.”

Q: If this is the case, why have you not done so already?

“If we raid a few shops and take the people into custody we can put an end to the situation, but we have not done so because this has not been a priority. However, if a complaint is recorded we act on it, but this is possible only through a tobacco representative who can identify such shops and file a complaint but that has not been done.”

Thus, it can be seen that if the tobacco industry is more proactive about law enforcement on the issue of smuggled cigarettes, then the process of controlling smuggled cigarettes in the market would be far more productive.

Case Study III - Free distribution of tobacco

On the pretext of making the general public aware of smuggled cigarettes, tobacco companies freely distributed their own brands. There were many such cases reported; one such reported case investigated by the KAMPANA Media Team was at a bus stand in Higurakgoda [October 17, 2003]

The distributors were wearing red t-shirts with John Player-Gold Leaf brand logos. They were also distributing leaflets along with free cigarettes while talking to the youth of the area. What they were saying was that:

“…recently an illegal cigarette bearing the gold leaf trade mark had entered the market at a cheaper rate of about five rupees; but that was a low quality cigarette that caused many health complications, according to people who suffered from these complications.”

However, when the KAMAPANA Media Team interviewed the hospital authorities on the incidents of people receiving treatment in hospital due to health complications as a result of smoking smuggled cigarette, as held by the distributors, the distributors, the answer was in the negative; there were no such reports recorded. When people in the area were interviewed they held that there was no difference between the illegal cigarette and the 'real' cigarette. Furthermore they stated that both cigarettes brought on throat problems.

The distributors were also intent on ensuring that the cigarettes they handed out were used. Thus, they called on all the people gathered around to smoke the free cigarette given to them in order that they could taste the genuine flavour of the company cigarette.

An official present at that moment who was not pleased with what he termed an anti-social activity said that: …if the company had problems with the circulation of illegal cigarettes it was up to them to take legal action; it was unacceptable to conduct such promotions in a public place. Since all the shops in the area buy cigarettes from the tobacco company agent, it was the shop keepers who had to be made aware of the situation.”

Furthermore, he confronted the distributors saying:

“…you have no right to be in the bus stand. If you are so keen, come with me to the police station where we can make an entry or let's go and speak to the shop owners.”

This suggestion was not taken up by the distributors, which leads to the point that, obviously, the objective of the distributors was certainly not in the public interest. Whatever the objective may be the fact remains that free distribution of tobacco among young people is a highly unacceptable, unethical activity. Case Study IV: Internal Documents from Tobacco Companies

Whatever the case may be there is enough evidence to prove that all these supposedly smuggled cigarettes can be traced back to the mother company British American Tobacco (BAT). BAT is very famous for smuggling tobacco into their areas without paying duty. In a series of court cases against tobacco companies, internal documents of these companies that were brought forward revealed their involvement in the cigarette smuggling operations. Some of this information is set out below:

Back to Contents >>>

Literature on smuggling of cigarettes reveals

• Each year 400 billion cigarettes, or one third of the total market, end up illegally smuggled across international boarders.

British American Tobacco (BAT) is the mother company of CTC, which dominates the Asian cigarette market. As BAT, from its own documents presented in various court cases shows:

Large volumes of BAT cigarettes have been smuggled and it has knowingly fostered smuggling in Asia.

Smuggling is a part of BAT's everyday operations and is so integrated that BAT even conduct a monthly product quality rating both on appearance of the package and quality of the smuggled product.

BAT also endeavors to control the price of the cigarettes smuggled within the continent.

• Singapore United Tobacco Limited, (SUTL) a Singapore based trading company served as the primary middleman for smuggling BAT brands into Bangladesh and Afghanistan.

• Large quantities were smuggled from Bangladesh to India. 22 % of the BAT's entire export production went in to just two smuggling channels including SUTL.

From the evidence arising from the documents:

• It is apparent that tobacco companies penetrate otherwise closed markets, especially the poor and the youth with less affordability, who make up a potential target group.

• Smuggling is used to increase the sales of brand by making them available for a lower price.

Summary:

In order to outline the summary to the report, it is important to revisit the focus questions put forward at the outset.If illegal or smuggled cigarettes are entering the local market in such great quantities, would this result in an increase in smoking prevalence?

Tobacco companies are not reporting a loss which means their sales are not dropping; Furthermore, low-priced, branded cigarettes entering the market in such large quantities contribute largely to the increase in smoking.

Does the tobacco industry suffer a significant loss as a result of smuggled cigarettes entering the market?

According to evidence found in world reports both legal and illegal cigarettes all belong to the same mother company BAT and the smuggling of cigarettes is a strategy that is employed by the mother company.

Some cigarettes that were seized had the health warning in Sinhala. Does this signify that CTC's local productions are smuggled back in to the country From the case studies it is also obvious that the company uses the situation to provides publicity to illegal cigarettes in order to increase the number of smokers by providing a less expensive supply of cigarettes, thus expanding the market.

As the Higurakgoda case illustrates, in order to achieve the objective of control of illegal cigarettes the procedure would have been to make the shop owners aware of such an issue. Instead it was obvious that the CTC was promoting tobacco in public places where there were lots of children and young people gathering. Their target, thus, is not really to control the use of illegal cigarettes but rather to use this issue in order to promote their brand.

Thus, as a result of the smuggled cigarette CTC has managed to reach two new target groups - the youth [students] and the poor. This is a gross profit for the company especially since the market is expanded and they do not pay duty on the sold cigarettes.

Should it not be the case that the local tobacco industry takes a far more proactive approach to prevent the entrance of such illegal cigarettes into our markets if they wanted to? On analysing the Ratnapura case study one important factor that needs to be highlighted is that there is no clear plan or commitment to deal with this issue. There is no central authority that exists in order to take up cases concerning smuggled cigarettes for further investigation.

In the reported case the accused pleaded guilty and was fined, which was payable in instalments. However, the action taken was confined only to that area and all that came careful, analytical reporting rather than sporadic sensationalism.

Although, at this point the issue of smuggled cigarettes is not a priority for the police, the people who should be interested in it like the tobacco companies show no commitment to the issue. The action they resort to, time and again, is their eternal call for a reduction of the tobacco tax. They hold that this reduces the incentive for smuggling which is completely off base. Smuggling and tobacco tax are separate issues altogether and have to be treated as such. Effective law enforcement is the most proactive means of dealing with cigarette smuggling.

When reports of illegal or smuggled cigarettes are received, what is the source through which the media and police clarify their information?

Media seems to report almost all the raids and these news items always include the losses to the government's revenue and the issue of tobacco tax targeting to either out of it was media speculation. That outcome is one that is negative because tobacco-related issues need reduce or eliminate tobacco taxes on the basis of the smuggled cigarette. Interestingly, this issue comes to light around the time of the budget. These issues, including that of white cigarette and smuggled cigarette are excessively used with the objective of misleading policy makers.

The information source works in a closed cyclical pattern between the police, the media and the CTC; not one party seems to take a step to clarify their information from an objective outside source. The police seem to get information from the media and CTC, while the media is inspired by police raids backed by reports supplied by the CTC. What becomes evident is that ultimately both the media and the police are kept informed by the CTC, who becomes the central information source.

Conclusion:

Finally, smuggling of tobacco hurts the country by evading otherwise applicable taxes and increasing the number of smokers among two specific target groups the young and poor by making less expensive cigarettes available to them. Furthermore, it is apparent that tobacco smuggling has, through manipulative tactics of the tobacco company, become a means of increasing tobacco sales. This situation is one that undermines all the efforts taken to reduce the availability of cigarettes to young children.

One of the results of this is that national efforts to restrict availability which are important determining factors in reducing smoking in a country are undermined. Raising cigarette tax, as part of a national effort, is an effective way to increase the government's revenue and reduce smoking. In effect, eliminating smuggled cigarettes is less to do with cigarette tax and more to do with government policies.

ue to the lack of awareness of the international history of tobacco company strategies or as a result of being uninformed of the depth of what is taking place in our own country, the situation at hand should not be misinterpreted by specifically the media and other relevant authorities. What should not be lost sight of is the fact that cigarette smuggling is not a by-product of high tobacco tax prevailing in the country.

***************

Back to contents >>>