10 May 2017
In March, the Royal United Services Institute (RUSI) released the final report in its On Tap Europe series, an 18-month investigation into the patterns of illicit trade in tobacco, alcohol and pharmaceuticals in Europe and potential policy solutions. It makes for startling reading: in 2013, say the authors, counterfeit and pirated goods cost the EU perhaps as much as €85bn, and 2015 saw 41 illegal cigarette factories being dismantled in Poland alone. “This is not minor criminality, it is sophisticated organised crime on an international scale,” the report continues; although some activity is undertaken by individuals, European illicit trade is dominated by organised crime. How has this happened, and what does RUSI suggest the EU do about it?
The evolution of organised crime groups from hierarchical mafia-like structures to more amorphous networks has facilitated illegal trade by encouraging co-operation rather than competition. But the root of the problem is, flatly, that incentives to illicit production are too high and disincentives are too low. “Activities in the illicit trade are comparatively low risk, yet offer substantial profits”, says the report, pointing to lightweight, low-cost counterfeit tobacco as an example.
A major force behind the boom is the striking scale of corruption at European borders. The Center for the Study of Democracy found that “trafficking in cigarettes has become one of the biggest and fastest growing drivers of corruption along the EU’s eastern land borders, as well as at some major ports in Western Europe”. In particular, RUSI criticises European border forces for failing to prosecute corrupt officials, instead transferring or quietly dismissing them if they are even caught in the first place. Likewise, European free-trade zones reduce oversight, while European regulation to facilitate cross-border trade has the unintended side-effect of making illicit trade easier. Indeed, member states sometimes fail to apply their own standards: the UK, for example, is facing a potentially very large fine for failure to act against counterfeit goods.
Meanwhile, the explosion in e-commerce since the broadband revolution has enhanced the importance of the postal service over bulk containers: the former is harder to profile as only a small percentage of parcels can be searched, while the latter are riskier investments. Equally, the potential customer base for organised crime groups has vastly expanded thanks to the internet, which has also made it easier for them to conceal the true nature of their activities. Social media is a popular point of sale, and websites run by organised crime groups can appear quite legitimate; some even adopt the tactic of setting their prices artificially high, to look like ordinary businesses with unusually good bargains rather than cheap, shady outfits.
The report states baldly, however, that those same consumers “must share some responsibility” for the problem. The social acceptability of smuggling tobacco, alcohol and pharmaceuticals—as distinct from smuggling narcotic drugs—reduces the pressure on border forces to take action. Likewise, in every country RUSI visited for their report, the purchase of illicit goods was described as socially acceptable. “Purchasing illicit tobacco or alcohol is too often seen as a minor, victimless crime, even perhaps as a small victory over the tax agency and government,” says the report, adding that consumers tend not to recognise the links to organised crime. European Commission research indicates that the enormous revenue stream brought in by illicit tobacco is not really appreciated by most consumers. Again, this is quite distinct from the social treatment of illegal drugs, where the links to organised crime are widely understood and accepted.
The report files its conclusions under two headings: Investigation and Prosecution, and Legislation, Regulations and Sanctions. Under the first heading, RUSI suggests Europol and Frontex should establish a dedicated centre to support member states in tackling public sector corruption; meanwhile, member states should develop internal strategies to disrupt the trade domestically, as well as taking on temporary national task forces to tackle the problem. RUSI points to failures in public-private information sharing across the EU, but praises the UK information gateway regime under section 7 of the Crime and Courts Act 2013 as a “successful non-coercive mechanism, permitting information sharing without imposing any undue obligations”.
In terms of legislation, regulations and sanctions, RUSI emphasises the need for effective asset recovery regimes, as well as consistent sanctions for illicit trade across member states, in order to strengthen deterrence. More broadly, the report calls for EU regulation of courier services and “unambiguous global regulation” of free-trade zones, recognising that states are unlikely to act alone for fear of competition. Somewhat ambitiously, RUSI argues the World Customs Organization—the obvious choice for such a global regulator—is too weak and needs to be reformed along the lines of the Financial Action Task Force (FATF) model, which has seen significant progress in countries as different as the Philippines and the UK, where a pending FATF review in 2018 has been credited with hastening reforms of the UK’s AML regime. Lastly, RUSI recommends that research be conducted into the best way of reducing the social acceptability of illicit trade, and measures implemented to protect consumers who unwittingly consume illicit goods.
The threat is multifaceted, but change must come, concludes the report. Although organised crime now looks like “an official quietly stamping paperwork; a lorry passing across internal EU borders; an innocuous parcel in a postman’s van”, it is costing billions and will continue to do so until the right “balance…between facilitating trade and ensuring security” is found and acted upon.
Richard Nicholl (@rtrnicholl) is Legal Editor for a leading provider of corporate legal intelligence. He also works as a freelance political commentator and investigative journalist.
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