ILLICIT TRADE IN CIGARETTES LINK TO ORGANISED CRIME A paper by Prof - - PowerPoint PPT Presentation

ILLICIT TRADE IN CIGARETTES LINK TO ORGANISED CRIME

A paper by Prof Dr Cornelis Roelofse, Department of Criminology and C i i l J i Criminal Justice Cornelis.roelofse@ul.ac.za +27824926156

Introduction Introduction

• Organized crime to a degree is a mythical

Organized crime to a degree is a mythical concept

• A concept although widely discussed
• A concept, although widely discussed,

debated, legislated about and enjoying international policing attention it is still not international policing attention, it is still not adequately defined.

Problem statement Problem statement

• Cigarette smuggling exist ‐ the fact that it is a

Cigarette smuggling exist the fact that it is a low risk, high profit activity for which punishment is very low compared to drug punishment is very low, compared to drug smuggling or human trafficking for instance. As we will see later during this presentation As we will see later during this presentation, cigarette smuggling leads to other serious crimes as proceeds are used to fund other crimes as proceeds are used to fund other crimes, even terrorism

OC OC

• Lebeya (see Roelofse Oliver & Kgosimore

Lebeya (see Roelofse, Oliver & Kgosimore , 2012:28) states: “The confusion pertaining to the existing descriptions and definitions and the existing descriptions and definitions and the indiscriminate use of the term ‘organised crime [T]he existence of over 160 definitions crime …[T]he existence of over 160 definitions illustrates the distorted understanding of

• rganized crime ”
• rganized crime.

Hypothesis Hypothesis

• Cigarette smuggling is an organized illicit

Cigarette smuggling is an organized, illicit economic practice, underpinned or at least passively supported by one or more politically passively supported by one or more politically motivated group(s) and/ or government(s) in an active partnership or collusion involving an active partnership or collusion involving corrupt officials and operator(s).

Hypothesis Hypothesis

• As you may have perceived, I have sidestepped the

need to define organized crime as the variables in the hypothesis deal with the nature of OC. The variables are:

• •

Illicit economy; (including illicit activities by legal

• perators)
• •

Political motivation;

• •

Political motivation;

• •

Collusion (implies organizing);

• •

One government/political grouping (national OC; g /p g p g ( ; and

• •

Governments/groups (Transnational OC).

Government refers to political office bearers as well as

• fficials

Difference between OC and other l criminal groups

• OC differs from gangs in as far as it has the

OC differs from gangs in as far as it has the capability to launder profits and to influence political/government agents political/government agents.

Definitions Definitions

WHO Lester & Allen WHO

• Article 1 of the World Health

Organisation (WHO) FCTC5 describes illicit trade as “any practice or conduct prohibited by law and which relates to

Lester & Allen

• Counterfeit tobacco

production is the illegal

prohibited by law and which relates to production, shipment, receipt, possession, distribution, sale or purchase including any practice or conduct intended to facilitate such

manufacturing in which the manufactured products bear a trademark without

• Smuggled genuine products

("contraband") refers to products illegally traded across international or provincial borders. These may be genuine goods that are illegally

bear a trademark without the consent of the owner of the trademark. (Lester & All 2012

genuine goods that are illegally imported and sold without payment of taxes in the country / state of

• consumption. (Lester & Allen 2012).

Allen 2012

Definitions Definitions

Lester & Allen Lester & Allen Lester & Allen

• Illegally manufactured products

can be sold on the domestic market or smuggled into another

Lester & Allen

• Extra production refers to cigarettes

produced for a domestic market with considerable extra production specifically for smuggling into countries

market or smuggled into another country without payment of

• taxes. (Lester & Allen 2012)
• Local Tax Evasion refers to illegal

specifically for smuggling into countries where there is no legal market for

• them. (Lester & Allen 2012).
• Crossborder shopping is common to

many high taxing countries. Genuine

methods of avoiding payment of local taxes on alcohol or tobacco

• products. These products are

traded within the country of

y g g product that has been purchased in one country is brought into another country and consumed without payment of taxes in that country. This is classified as illicit trade only if the quantities

traded within the country of manufacture as well as providing stock for smuggling into other

• countries. (Lester & Allen 2012).

illicit trade only if the quantities involved are in excess of national personal allowances or are deemed commercial in size (Lester & Allen 2012).

THEORETICAL EXPLANATIONS OF OC THEORETICAL EXPLANATIONS OF OC

• Alien Conspiracy theory (ethnic character, language and
• ften secret codes and markings, make it almost impossible

to plant informers within such groups)

• The Alien Conspiracy has at its root the fact that social

isolation of aliens and their grouping together in neighbourhoods create the environment for criminal

• conspiracy. Kleemans (2012) refers to social embeddedness

th t t th f t t f hi h i k ti A that creates the safety nets for high risk operations. A certain element of trust is part of the social cohesion that is found within families and amongst associates. I want to extend the concept of the Alien Conspiracy to incorporate extend the concept of the Alien Conspiracy to incorporate ideological embeddeness. This means taking this construct

• ut of the current conceptualization and to place it within a

political context political context.

THEORETICAL EXPLANATIONS OF OC THEORETICAL EXPLANATIONS OF OC

• The political domain in society is interwoven with

e po t ca do a soc ety s te

• e

t the economic domain. Political power gives access to resources and resources give access to l l fl ( ) political influence. Harasymiv (2002) urges political scientists to study legitimate and illegitimate power the two are connected and illegitimate power. .. the two are connected and

• interdependent. He declares,
• “ Organised crime, properly understood is

Organised crime, properly understood is attached to political institutions, personnel and processes ‘.

THEORY THEORY

• In this context (Bequai, (1979) referred to the loose

confederation between regional and ethnic crime groups in America due to economic and political

• necessity. Fijnaut (1990), refers to protection that

y j ( ) p criminals enjoy from “corrupt officials.” One of the most deliberate instruments used to protect the nexus between criminals and politicians is to appoint cronies p pp in critical positions in the police and elsewhere in the criminal justice system. This is supplemented by a system of bribery and corruption. Bailey and Godson,( y y p y ,( 2000) state unambiguously that that the political‐ criminal nexus affects inter alia governments monopoly to coercion and the administration of justice. j

THEORY THEORY

• To ensure continuation and reducing the risk of

exposure,

• rganized

crime (political connections implied) applies the scatter effect. Some erroneously assume that if the leadership of an organized crime p g group is neutralised, the activities would seize. This is not the case for the scatter effect of being a multi‐ facetted integrated and symbiotic relationship ensures g y p that the activities continue. Often very loose, rather than strict

• rganizational

structures, ensure

• perpetuation. This may be in a circle of friends, families

p p y ,

• r even political membership. Where structure exists it

is based on bond rather than strict hierarchy.

ECONOMIC THEORY ECONOMIC THEORY

• Smuggling flourishes where there are profits to be

gg g p made as a result of tax rate differences between neighbouring countries, where the goods concerned are easily transported and the subject of many are easily transported and the subject of many thousands of individual movements each day

• In the context of our theme. it simply means that

p y products that are deemed to have inflated prices such as tobacco products create a market opportunity for illicit trade Producing cheaper cigarettes within a illicit trade. Producing cheaper cigarettes within a country, or a neighbouring state makes the supply and distribution very lucrative

Not only tax and excise Not only tax and excise

• In the 1997 fiscal year excise tax on tobacco

In the 1997 fiscal year excise tax on tobacco was 21 percent. It was then increased to 50 percent And currently is slightly above that

• percent. And currently is slightly above that.

However between 1997 and 2008 the price of a packet of cigarettes increased by about 400 a packet of cigarettes increased by about 400

• percent. This price hike is an industry driven

increase and due to this increase government increase and due to this increase, government is getting a higher income at its taxation rate

• f over 50 % (Stassen: 2013)
• f over 50 %. (Stassen: 2013)

TYPES OF TRADE TYPES OF TRADE

• The illicit trade in cigarettes comes in many forms:
• Bootlegging, or buying a quantity of cigarettes that

exceeds custom regulations;

• Large scale smuggling;
• Large‐scale smuggling;
• Postal imports, or using the postal system to smuggle

cigarettes;

• Counterfeit products
• Possible other forms such as through diplomatic

channels; and channels; and

• Using small aircraft flying short distances across

borders from privately operated air strips.

Sea, a possibility Sea, a possibility

• Although no such operation has been uncovered in South

Africa, our coastline offers a potential for smuggling. This is already a practice in Europe. As land border controls are tightened this may become an option for connections from Zi b b i M bi I E Zimbabwe via Mozambique. In Europe,

• smuggling takes place at sea or on rivers. In these cases,

the smugglers disperse sealed packages with cigarettes th t h ll b t l t ll t th near the coast, where small boats later collect the

• shipments. In such schemes, sometimes the corrupt border

guards or customs officers inform smugglers of the patrolling schedules of border guards so as to avoid patrolling schedules of border guards, so as to avoid detection (Financial Action Task Force, 2012).

OC groups in RSA OC groups in RSA

The number of new organised criminal groups that were identified in South Africa for the The number of new organised criminal groups that were identified in South Africa for the 2003/2004 - 2010/2011 financial years is as follows: Table 1: Number of organised crime groups identified in South Africa Yea 2003/20 2004/20 2005/20 2006/20 2007/20 2008/20 2009/20 2010/20 r 04 05 06 07 08 09 10 11 No 120 186 115 109 72 51 121 179 (Lebeya in Roelofse Oliver &Kgosimore 2012: 23) (Lebeya, in Roelofse, Oliver &Kgosimore, 2012: 23)

Intelligence Intelligence

• Policing organized crime relies heavily on the ability of police agencies to gather

intelligence on groups, their activities and the individuals and their contacts. In South Africa, the intelligence services in the Police are going through a crisis and this can be the reason for the new wave of the increase in organized crime groups. One should also take the Soccer World Cup into consideration as groups infiltrated One should also take the Soccer World Cup into consideration as groups infiltrated South Africa with prospects of an increased demand for sex and drugs during that time.

• Swart (2013:4) posits that “ A spike in organized crime can almost certainly be

attributed to the paralysis is of the police’s embattled crime intelligence unit.” He reacted to the release of crime statistics that indicate that crimes normally committed by syndicates such as truck and car hijacking and aggravated robbery has increased has increased.

• The trouble in the intelligence unit (suspension of Mdluli, arrests of Lazarus and

Bernard from the financial and logistics units) is something the fight against

• rganized crime cannot afford. Burger as quoted by Swart (Ibid.,p.4), stated that

“… a unit that should be at the centre of any crime‐fighting initiatives but instead focuses on its internal battles and meddles in the political arena.”

MAIN ORGANIZED CRIME GROUPS IN SOUTH AFRICA

• The Triad groups in RSA are mainly Cantonese

The Triad groups in RSA are mainly Cantonese and Mandirin speaking groups of which according to Gastrow (2001: 3) are:

• Wo Shing Wo
• San Yee On
• 14K‐Hau and
• 14K‐Ngai groups.

Groups and routes Groups and routes

Routes for illicit cigarette trade : Triads

• China – South Africa
• China‐ Namibia‐South Africa‐ Zambia
• China‐ Namibia‐South Africa‐ Zambia

Middle East, Pakistani and Eastern European groups

• UAE (Dubai) – South Africa,
• UAE (Dubai) – Namibia – South Africa,
• UAE (Dubai) – Namibia‐ Angola – Botswana/Namibia –

UAE (Dubai) Namibia Angola Botswana/Namibia South Africa, The Zimbawean connection

• Zimbabwe

South Africa Mozambique

• Zimbabwe – South Africa – Mozambique

Market share Market share

• Stassen (2013) quotes sources that say that

approximately 55 percent of illegal cigarettes in pp y p g g South Africa originate from Zimbabwe, between 30 and 35 percent is manufactured locally and th t i i t f Middl E t t i the rest originates from Middle Eastern countries.

• INTERNAL share has grown since 2011 at about

7% p a in correlation with external decline 7% p.a. in correlation with external decline.

• Should SAPS and SARS not be able to audit

existing production??? existing production???

OC in South Africa (Swart 2012) OC in South Africa (Swart, 2012)

TOBACCO COMPANIES/EMPLOYEES TOBACCO COMPANIES/EMPLOYEES

• The International Consortium of investigative Journalists (2001)

t d th f th d f T Ch i h t b reported the case of the murder of Tommy Chui who was to be a prosecuting witness against corrupt customs officials and a 100 million Hong Kong Dollar bribe in which three former executives of a big tobacco company were allegedly implicated. The same source g p y g y p also refer to a year‐ long investigation by the Center for Public Integrity that some tobacco companies have worked closely with companies and individuals directly connected to organized crime. Th i l t f l d liti l fi b

• The involvement of even lawyers and political figures can be

substantiated by several high profile cases of which the one in Louisiana in the USA is a good example. Lawyers used their connections in the Clinton administration to remove a prosecutor in p a case of a sales executive of a tobacco company for smuggling into Canada.

CIGARETTES, JUST ONE OF MANY OC OPERATIONS

• It is a well‐established fact that cigarette

g smuggling is an OC activity. Rowan (2012) states: “it is almost exclusively the domain of organized crime groups ” This view is supported by other crime groups… This view is supported by other

• experts. The Financial Action Task Force (2012),

composed of 34 states, of which South Africa is a t d l d th t t b li i “ l part declared that tobacco smuggling is “ a low risk, high profit enterprise that entices traditional criminal traffickers to move into more lucrative and dangerous criminal enterprises such money laundering, arms dealing, and drug trafficking

Expansionist approach Expansionist approach

Whiting (2012) who is of the opinion that “…Organised criminal gangs will deal with any commodity: alcohol, tobacco…‐ whatever makes money and allows them to launder their criminal profits. So what is evident from p these statements is that organized crime groups may start with a particular activity but will expand their operations. One crime leads to another and all attempt to launder p their profits. Illicit cigarette trading can thus:

• be a stand‐alone activity;
• an entry point into more dangerous activities;
• an entry point into more dangerous activities;
• done in combination with other crimes; and
• also serve as a laundering activity.

g y

Money Laundering

• Money laundering is a specialization field in OC crime

where individuals an groups market their services to OC

• groups. There are a plethora of tactics used such as:
• Running a number of bank accounts locally and abroad and

moving money from one to another.

• Setting up front companies
• Using auctions

Using auctions

• Buying expensive commodities such as diamonds
• Buying property at an officially lower price than the market

value but paying the other part in cash value, but paying the other part in cash.

• Runners change small amounts of foreign currencies at

money changers’ offices. Etc. Etc. Etc.

Laundering Laundering

Diagram 4: Money laundering process

Dirty money

Laundering agent

Placement Integration Layering

Placement simply means putting the money in the bank If the threshold prescribed by the law Placement simply means putting the money in the bank. If the threshold prescribed by the law (See FICA hereunder

Terrorism Terrorism

• Evidence of this has emerged in a report by Rollins &Wyler

(2012). The report states that terrorist groups in the Middle East (Hamas and Hezbollah), the Real Irish Republican Army and the Kurdistan Workers party have funded from i tt li ti i A i E d cigarette smuggling operations in America, Europe and Africa.

• In 2004, 10 people were arrested and charged with

i d di t ib ti f t b d i tt i possession and distribution of contraband cigarettes, wire fraud and money laundering as part of a scheme to smuggle more than USD 2 million in cigarettes bought in Virginia to New York One subject was arrested in Detroit Virginia to New York. One subject was arrested in Detroit and found with hundreds of thousands of dollars in wire transfer receipts showing payments to people associated with Hezbollah (Financial Action Task Force (2012) with Hezbollah (Financial Action Task Force (2012).

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Corruption Corruption

• Where governments fail to act it should serve

Where governments fail to act it should serve as one of the indicators of corruption and/or coercion The normal OC modus operandi is to

• coercion. The normal OC modus operandi is to

bribe key officials or to actually lure them into the structure which allows them to share the structure which allows them to share

• profits. They can also be blackmailed, once

they have accepted a bribe The main targeted they have accepted a bribe. The main targeted groups are customs officials and the police

Corruption Corruption

• Customs: The main target of corruption related to cigarette

li t i d h k i t th i tit ti smuggling are customs agencies and checkpoints – the institutions involved in controlling imports of cigarettes and collecting excise

• taxes. The pressure is greatest along external borders, in particular

the border with Zimbabwe

• The border towns at the crossings are heavily dependent on

bootlegging and trafficking excisable goods. The local customs and border authorities usually allow this trade as a routine way of i l C t l d l l t l d hi ll t l t thi

• survival. Central and local customs leadership generally tolerate this

cross‐border culture. There are different schemes for ‘border crossing fees’: from fixed amounts, which are split between the

• fficers on a shift, with a share going to higher‐ups, to fees

, g g g p , determined according to the quantity smuggled. The bribes are paid either by ‘mules’ transporting the cigarettes or scheme

• rganisers.

Corruption Corruption

• Transport sector: research on cigarette

Transport sector: research on cigarette smuggling in the Netherlands (Van Dijk, 2007) has shown that corruption could exist in about has shown that corruption could exist in about 19% of the cases where a company employee – most often a driver – would become most often a driver would become involved in a smuggling ring.

Corruption Corruption

• Political corruption is used /can be used to

Political corruption is used /can be used to protect or shield individuals from prosecution.

• Police corruption is evidenced normally
• Police corruption is evidenced, normally

through bribes, demanding protection fees and free products or even being part of and free products or even being part of syndicates.

Structure Strategy State Business Structure Relationship/result Evasion Initial phase of establishing OC within a state. OC group(s) avoid Ghettoized criminal markets for contraband goods and services OC ‐ Subordinate to state state/law enforcement through clandiesine operations and secrecy and fronting Enticing and penetrating state OC ‐ Using legal business for its Corruption Enticing and penetrating state

• agencies. Put it to its own use

OC ‐ Using legal business for its “business” OC ‐ Encroaching state structures through individuals State uses OC groups for covert Business uses OC groups for Collusion

• perations and activities

profitable illegal activities OC and state structures Engaging – more individuals draw structures into OC State officials are shifting loyalty Business is done via criminalised Assimilation State officials are shifting loyalty and serve OC objectives. OC activities and operatives are protected. Business is done via criminalised tenders OC takes increasing role – Assimilating – with state structures De Facto‐isation Takes on legal political authority. Uses state resources as vehicles for OC Illegal and legal business have merged OC and state Integrating and illegal activities become “legitimate” Replacement OC becomes government Criminal business has become the norm OC Takes over the state

Initial phase of Ghettoized Evasion establishing OC within a state. OC group(s) avoid state/law criminal markets for contraband goods and OC ‐ Subordinate to state S t a t avoid state/law enforcement through clandestine goods and services and fronting t e

• perations and

secrecy C

• n

Corruption Enticing and penetrating OC ‐ Using legal business OC n t r

• Corruption

penetrating state agencies first at lower levels , e.g. legal business for its “business” Exploiting OC ‐ Encroaching state structures through l border and customs

• fficials, and

then weak controls,

• ften paying

bribes individuals then increasingly into upper echelons.

Increasing association Business uses OC Losin Collusion

• f individuals in

powerful positions in state and OC groups. State uses OC groups for covert operations groups for profitable illegal activities OC and state structures Engaging – more individuals draw structures into OC g Contr

• l

H y for covert operations and activities y b r i d Assimilation State officials are shifting loyalty and serve OC objectives. I fl li d Business is done via criminalised tenders OC takes increasing role – Assimilating – ith t t t t S y s t Influences policy and

• laws. OC activities and
• peratives are

protected. with state structures e m De Facto‐isation Takes on legal political authority Uses state Illegal and legal business have merged OC and state Integrating and illegal OC S

• authority. Uses state

resources as vehicles for OC Integrating and illegal activities become “legitimate” S t a t e R l OC b C i i l b i h OC T k h Replacement OC becomes government Criminal business has become the norm OC Takes over the state

Conclusion Conclusion

• To conclude, I am of the opinion that the illicit trade in

cigarettes is both an entry point and extension of criminal activities of small gangs and also organized crime groups.

• Generally the trend in the world is to clamp down on
• smoking. Tobacco companies run the risk of some of their

employees being drawn into illicit markets to sustain

• profits. There is already evidence of this and because

i tt l l dit d i d cigarettes are a legal commodity, more and more organized crime groups are getting involved in illicit trade as it is less dangerous and penalties are less severe. This poses severe challenges to tobacco companies and law enforcement challenges to tobacco companies and law enforcement

• agencies. The police and criminal Justice system should

work in a coordinated way to increase penalties by lobbying for revision of relevant laws for revision of relevant laws.

Conclusion Conclusion

• In addition, markings on the outside of cigarette packages should

b t d b l l h d d i id th k t th t be augmented by a regularly changed code inside the packet so that spot checks made at outlets can be more effective. The hypothesis that illicit economic practice, underpinned or at least passively supported by one or more politically motivated group(s) and/ or pp y p y g p( ) / government(s) in an active partnership or collusion involving corrupt officials and operator(s) that has been stated in the beginning of this presentation is deemed to be adequately verified. Final support comes from Douglas in Harasymiw (2003) that stated Final support comes from Douglas in Harasymiw (2003) that stated. “the systemic corruption that is spreading throughout our social, political and economic fabric… and the symbiotic relationship between these illegal activities and the political structure that k i ibl makes it possible.

• I conclude by stating that the romanticizing of organized crime is
• ut of place. I narrow it down to political and/or government

sponsorship before crime should be classified as organized sponsorship before crime should be classified as organized.