Romanian public revenue up in smoke of smuggled tobacco

Cigarettes are smuggled into Romania by the billions on foot, by truck, by boat across the Danube and on cargo ships in Black Sea ports. Smokers who buy them save money, but the illegal trade will cost the state an estimated €1.5 billion for the four years ending in 2010, according to Japan Tobacco International (JTI), a company doing business in Romania. Police estimates are similar.

And it’s getting worse. JTI officials say smuggling doubled in 2005 and tripled in 2006. In 2007 smuggling traffic grew about 12 percent, then 13 percent more in the first quarter of 2008, the company said.

Low risk, high profits

Tobacco smuggling is growing because profits are getting bigger. A legal pack of Viceroy in Romania costs €1.40, about two-thirds of which is taxes. A pack of Viceroy costs 19 cents in Ukraine, where taxes are low. A serious smuggler can net more than €100,000 for a truckload of smuggled cigarettes. And that profit margin is expected to rise as Romania follows Europe’s lead in raising tobacco taxes.

A new member of the European Union (EU), Romania has the longest border with non-EU countries, sources of cheap tobacco. Cigarettes pour in from Serbia, Ukraine and ; Moldova.

Romanians smoke about 1.7 billion packs of legal cigarettes a year. JTI estimates that 15 percent of total smokes consumed each year are smuggled, or approximately 260 million packs. Romanian police seized 7 million packs between January and October 2007 – a tiny fraction of the estimated total.

The effects of tobacco smuggling go beyond lost revenue for the state government – which JTI estimated to be €72 million in excise taxes alone in 2006 – and lost profits for Romanian tobacco companies. It means fewer jobs, the company said. According to British American Tobacco (BAT), illicit profits from cigarette smuggling are feeding the illegal trade in drugs, weapons and human beings and boost corruption.

Titu Netoiu, the head of the Portile de Fier Customs Office, said 70 percent of his officers’ time is spent policing cigarettes instead of searching for drugs and counterfeit commodities and verifying the authenticity of documents.

Traffickers and smugglers are creative

“Cigarettists,” as traffickers are called, are creative crooks. Some mendress in women’s clothing and manage to hide 85 packs over their bodies. Police say there are two types of cigarette smugglers: traffickers – small operators who walk or drive as many packs as they can manage across Romanian’s borders; and smugglers, usually involved in  organized crime, who  deal in larger volume and more elaborate means.

Smuggling techniques include importing tobacco under cover of phantom companies; selling cigarettes that have been declared “in transit”; importing cigarettes using the “lid’ method –  disguising them as other products such as gas, coal or fireworks;processing and manufacturing cigarettes in legal or illegal factories; importing or exporting cigarettes with the help of corrupt customs officers or customs mercantile agents; illegal commercialization of cigarettes with or without tax stamps or with counterfeit stamps; and fictitious liquidation of cigarette supplies from duty-free shops.

Another method of smuggling cigarettes with low risk is selling large quantities to Serbian sailors with the cooperation of customs officers. A cooperative operation between Serbian and Romanian authorities in May 2006 led to the confiscation of 75,000 packages of cigarettes hidden on a ship.

Law officers say it’s hard to prosecute smugglers, as the accused declare in front of the investigators that they found the cigarettes on the edge of the road, and they were in their way to declare them to the authorities.

Duty-free flood gates

Police estimate that half of all cigarettes smuggled into the country pass through duty-free shops on the border. It’s legal to buy cigarettes at a duty-free shop and bring them into Romania. Smuggling is a question of quantity.

The law allows border crossers to carry cigarettes into the country “for their personal consumption.”  An unwritten law says that every person can enter Romania with 20 packs of cigarettes and one liter of alcohol without paying taxes, said Marcel Bontindean, deputy of the Timisoara Border Police Directorate.

“There isn’t anywhere written in the Romanian law that someone can bring into Romania this or that amount of cigarettes or alcohol,” Bontindean said. “If one individual crosses the border 10 times with 20 packages of cigarettes, he earns around €45-65 daily. That means almost €1,800 monthly. It is a good job, isn’t it?”

Authorities estimated that considering the number of cigarettes that entered the country at border crossings in September, each person who entered Romania would have had to carry with him or her an average of 80 packs. Authorities look to organized crime for an explanation.

Prosecutors said duty-free shop activities were monitored between December 2005 and May 2006 focusing on an international organized crime group specializing in smuggling cigarettes. All the operations were supported and encouraged by corrupt police and Customs Office officials.

The idea was simple. Large quantities of cigarettes were being bought from duty-free shops in the Moldova Veche harbor area – shops owned by the following companies: GFS Duty-free Romania, SDV Free Tax, Santo International, A.V.A. Tour, Distribution General Value, and New Mexico. The buyers smuggled them into the country and sold them at Romanian markets and fairs. Part of the money smugglers earned they passed to corrupt customs officers and local or county policemen for their cooperation.

Bontindean called the duty-free shops “a real ant hill.”
In an attempt to stem the tide of illegal cigarettes crossing the border from duty-free shops, the Romanian government shut down the shops  in June 2006.Just two weeks later, another legislative decision came into force and the shops  reopened. Then, on Jan. 1, 2007, they were closed again. When shop owners put political pressure on lawmakers, they were allowed to re-open on May 25, 2007.

Harsher rules, but little affect

Short of shutting the duty-free shops down, authorities are making some gains in imposing harsher penalties on offenders.

When the Stamora Moravita duty-free shops re-opened at the end of May 2007, customs officers seized or withheld 119,679 packs of cigarettes and fined 10 individuals €8,500. Until Oct. 13, 2007, customs officers could fine smugglers €850-2,300.  After that, a new law raised fines to €1,450-2,900.

Before that law,  vehicles with specially build hiding places for smuggling cigarettes were retained until the fine was paid. The new law allowed for seizure of these vehicles. In under two weeks, 10 cars were seized, among them an Audi 4.

Adrian Popa, director of Corporate, Legal and Regulatory Affairs at BAT, said that as long as a  price gap remains between legal Romanian cigarettes and smokes from neighboring countries, and national legislation is too weak to intervene, cigarette smuggling will continue to increase.