Understanding the Black Market Threat

DRL's Ioos breaks down what retailers can do to combat illicit trade

Published in Tobacco E-News

By  Melissa Vonder Haar, Tobacco Editor

LAS VEGAS --When asked about the most pressing issue facing tobacco retailers and manufacturers, Carl Ioos, senior vice president of the Glenview, Ill.-based DRL Enterprises (an affiliate of Republic Tobacco and Top Tobacco), didn't miss a beat: illicit tobacco trade, aka black market, aka contraband, aka counterfeits. Multiple terms for one massive--and growing--problem.

"When it comes to illicit trade, it's first important to frame the issue," he said during the "Cutting Through the Rhetoric" general session. "We're talking about illegal sales of products: it's one category, even if there's different terms used to describe it."

Ioos added that illicit tobacco trade usually falls into three categories: counterfeit tobacco products (Ioos revealed that he actually discovered counterfeits on the NATO Show floor), compliance evasion (evading the requirements of the Tobacco Control Act, Tobacco Tax Bureau or Master Settlement Agreement) or, most frequently, tax evasion (evading international, federal, state and local excise taxes).

It's a big problem.

"In terms of quantifying illicit trade, worldwide it's about 600 billion cigarettes or $80 billion annually," Ioos said. "Here in the United States, it's about 30 billion cigarettes, with a value of about $10 billion. About 10% to 12% of cigarettes purchased annually are purchased through illegal sales."

As to the causes, Ioos said "it's not rocket science": high taxes and underfunded regulatory efforts to combat black market activities are to blame.

Perhaps nowhere is it more apparent that high taxes are fueling the black market than the heavily taxed states of Massachusetts and New York. More than 50% of cigarettes in these two states come from the black market.

"The high tax rate leaves a great margin for the criminals: if they're not paying that tax, they're making a lot of money," Ioos said. "Then when those taxes increase, it's throwing gasoline on the fire. You increase the tax you've just made more money for the bad guys."

More money at very little risk, thanks to a lack of funding in prosecuting illegal activities.

"We're told there's no money to enforce a lot of these rules and regulations," said Ioos. "Additionally, the punishment doesn't fit the crime: it's more lucrative for someone to deal in illegal cigarettes than narcotics. The punishments are less severe, the fines are less onerous, and there's less cops chasing them around."

To better combat the black market, Ioos and other manufacturers have advocated the FDA to embrace a track and trace program.

"Unfortunately, what we hear most times is that there is little money to do this," he said. "And in other times--which is more disappointing--there's little interest."

But there are still ways retailers and manufacturers can fight the black market.

"Be careful on your out-of-state purchases of cigarettes from distributors, make sure that they're accurately tax stamped," said Ioos. "Really make sure that you've got the right stuff in your stores. Most retail compliance checks focus on illegal age sales--but you don't want to be caught in an inspection where they come up with an illegal product."

Additionally, Ioos encouraged any interested parties to contact their local, state and federal representatives--something Ioos did himself at NATO's trade show booth.

"It took me five minutes to send three letters to my member of Congress," he said. "Unfortunately Senator Dick Durbin (D-Ill.) is one of them, so I put a special message at the bottom of his letter. Perhaps it's time to stop taxing and punishing the legitimate, compliant companies and start going after the companies that are selling products illegally."