Cigarette street sellers in action
Customs says we’re being deluged by smuggled and counterfeit cigarettes as big profits attract organised crime. Steve Kilgallon investigates.
Afew social media messages, a meeting on a city street corner – and a regular smoker can easily make a 50 per cent saving on the shop price by buying cheap smuggled cigarettes. Cigarette smuggling is booming, with Customs warning that organised crime syndicates are now muscling in because of the huge profits to be made.
The high cost of a packet of cigarettes here, and the relatively low cost in nearby Asian countries makes New Zealand a prime target.
While ethnic Chinese and Korean groups have driven the trade, Customs’ lead investigator says trans-national crime gangs and local gangs are now running cigarette smuggling in parallel with their usual drug operations.
We were easily able to set up two street meetings with young Korean men who had advertised on the Korean social media platform Kakao Talk, offering to sell imported cigarettes by the carton for cash.
Their cartons would cost just $175 – or $17.50 a pack, against a typical shop price of $31 – and they indicated no limit on how many we could buy.
Our first seller was happy to meet outside a Denny’s restaurant in downtown Auckland. The backseat of his stationwagon was littered with cigarette cartons, and he had five cartons of Korean-branded Marlboros ready to sell to our contact.
When we confronted the man as he prepared to complete the transaction, he said he was paying cash for the cigarettes from another Korean he contacted via Kakao Talk, and insisted he would pay GST on the transactions. He said he was paying less than $175 a carton for his supply, but wouldn’t say how much, or give his own name or the name of his supplier. He said it was his 34th such street sale and he was a New Zealand citizen on a sickness benefit.
Asked how he knew the cigarettes were being brought in legally, he said: ‘‘I have no idea. I buy them in New Zealand.’’ Asked if he knew what he was doing was likely to be illegal, he said: ‘‘Oh really. Oh sorry. I am not doing this again.’’
Yet minutes later, we watched as a young woman approached the man to purchase cigarettes. And within half an hour, he was again messaging our source offering to complete the original trade we had interrupted. Days later, he was offering to sell 100 cartons in one exchange.
Our second seller met outside a Korean dairy near the waterfront, with 10 packets of cigarettes bundled in a plastic bag for sale. When approached, he walked away quickly, saying that the cigarettes were a gift he had brought from overseas for his ‘‘relative’’ (our contact). He’d told our source he was here on a working holiday visa from Korea.
Like the first man, he was prepared to meet our source again, but said he couldn’t complete the sale because it was too risky and they would have to meet outside the CBD.
A third seller arranged to meet outside a cafe on High St, but failed to turn up.
Kakao Talk is littered with advertisements from people willing to sell cigarettes to members of a 2600-strong forum for Koreans living in New Zealand. Bruce Berry, Customs’ national investigations manager, wasn’t surprised. He said Chinese and Korean communities were the main source of the illicit trade, and much of it was conducted almost openly on social media. Customs was battling against a community belief that cigarette smuggling was not a serious offence.
Berry said the price of cigarettes was now high enough that the profit margin for smugglers was appealing enough to attract organised crime. ‘‘It’s been a consistent message from Customs for a while now that we’ll see an increase in this [smuggling] as we reach that tipping point,’’ he said. ‘‘We are well past it now, and it [tobacco] is a viable commodity in its own right. Organised crime are just in it for the money, they are not interested in what harm this is doing to our community: it’s just the same thing as drugs.’’ Berry said trans-national organised groups had seen the opportunity and it was ‘‘only a matter of time before domestic organised crime factions see the money to be made; if they are not already’’. Groups who had imported drugs were now importing cigarettes in tandem; one key Customs target had also being prosecuted for importing methamphetamine and MDMA.
Customs’ biggest inquiry, Operation Whitethorn, reaches its culmination tomorrow when a man Customs believes was at the centre of a major smuggling ring will enter a plea at the Auckland District Court.
Customs seized 1.8m cigarettes and around $2m cash and also restrained multiple properties, luxury cars and bank accounts.
Berry says a conservative estimate of the amount of tax and duty avoided by those involved in Whitethorn would be between $16 million and $20m.
In another recent case, a mother and son were arrested and charged over what Customs believes was a smuggling ring bringing in tobacco from the Cook Islands; 79.6kg was seized and Customs said $113,422 in duties and GST had been evaded.
Berry said 95 per cent of his fraud unit’s time had been spent this year investigating cigarette smuggling. They have six more major prosecutions of smuggling syndicates ready to go in 2020 and say they have identified three more major wholesalers they are preparing cases against.
Whitethorn began because of a Crimestoppers tip about a low-level seller, but Customs worked up the chain to charge the two main offenders. Berry said the organisation’s approach was to target the ringleaders and so cause the biggest disruption to supplies.
Customs officers had seen cigarettes stitched into clothing or ‘‘bodypacked’’, which involves cigarettes being strapped to the torso. Larger consignments had been concealed in shipping containers or mailed to PO boxes with false declarations. One group caught using multiple PO boxes for misdeclared packages simply began paying the excise instead – using skimmed credit cards. Tour group organisers had been deported for instructing their tourists to each bring in their personal duty-free allowance (50 cigarettes or 50g of tobacco), then regathering it to resell.
In the 2018-2019 financial year, Customs intercepted 614kg of loose tobacco and 4.5m cigarettes at the border – which would equate to $10.8m in lost excise. In the first four months of the 2019-2020 financial year – July to October – Customs intercepted another 143kg of loose tobacco and 3.1m cigarettes. New Zealand First recently claimed interceptions at the border had risen 352 per cent between 2015 and 2019.
‘‘In one hour in November, we seized more than 100,000 cigarettes at the International Mail Centre: that’s the scale of what we’re dealing with,’’ Berry said.
The tobacco industry itself estimates 10.2 per cent of the New Zealand cigarette market is now illicitly-traded. A report commissioned by KPMG estimated that of that illicit trade, 82.3 per cent of it was in contraband and suggested lost Customs revenue was $224m.
A 10 per cent increase in excise duty every year since 2011 has driven New Zealand prices to the second-highest in the South-east Asia/Pacific region, behind only Australia. An average pack might cost $31 in New Zealand, but just $1.62 in Vietnam, $5.29 in China and $6.07 in Korea.
A tobacco industry source said the major companies typically made just a few per cent profit on each cigarette, with three-quarters of the sale price going to the government: ‘‘So if you can cut 75 per cent out of your costs, then it can become very lucrative.’’ Each individual cigarette is worth about $1 to the government.
Earlier this month, NZ First said it planned to oppose this year’s excise rise, partly because of the impact it had on smuggling, with leader Winston Peters saying organised crime had seen an ‘‘economic opportunity’’ which had placed ‘‘unnecessary pressure’’ on Customs, diverting it from the drugs trade.
The biggest cigarette company, Phillip Morris, declined to comment.
In a statement, its biggest rival, British American Tobacco, advocated for the government to bring in new laws and regulations to crack down on smugglers. BAT’s suggestions include increasing sentences so they match those for drug importation; introducing licences for importers and growers; introducing tobacco-detection dogs at ports of entry and the International Mail Centre, and reviewing or removing the existing personal allowance for homegrown tobacco.
Those homegrown limits are often used as a loophole for New Zealand’s other big illicit tobacco problem: ‘‘chop chop’’, or loose-leaf tobacco. While some of this is imported, much is grown illicitly domestically, even on industrial levels and sold surreptitiously at dairies or markets.
The industry source said the big companies were worried and employed their own private investigators to check out leads and pass information to Customs.
‘‘We take it very seriously,’’ said the source. ‘‘We probably feel that they are not doing enough – but I think that’s what you get when you deal with any regulator, they don’t have enough resource to combat it. I don’t think the government believes how big it is – but once you start crunching the numbers it could be billions of lost money in excise and duty.’’
The industry says counterfeit cigarettes are only 0.2 per cent of the illicit trade at present, but Berry predicted that counterfeits would become a growing problem.
The source said illicit factories in Indonesia could turn out ‘‘bloody good’’ counterfeits, and their work had become easier since plainpackaging regulations were imposed, meaning the government published clear regulations around pack size, the size and wording of health warnings, and even the required colours, fonts and pantones to be used. That left only the unique identifiers on the packs and cigarettes to identify them as fake.
The maximum sentence for offences relating to cigarette importation is five years’ imprisonment, making it a less risky proposition than the drug trade. One source said: ‘‘You can make as much money as you would from drugs, and you won’t go to prison.’’
Berry says Customs are making inroads into the problem. ‘‘We do believe we are having an impact’’.
‘‘Organised crime are just in it for the money, they are not interested in what harm this is doing to our community: it’s just the same thing as drugs.’’ Bruce Berry