Free zones ‘being used to make bootleg cigarettes’
▶ Industry experts claim half of UAE’s smokers are now using illicit tobacco
A year since the UAE brought in its milestone 100 per cent tobacco tax, half the smoking population has turned to cheaper, illicit cigarettes.
Middle East experts claim 50 per cent of the UAE cigarette industry is now taken up by “cheap whites” or lower quality cigarettes.
Many are made in the UAE’s free zones or smuggled in to avoid government regulations and excise duties.
There are 77 tobacco-related operations in Dubai free trade zones, including 22 manufacturers of cheap whites.
“There is not a lot of regulation in these free zone areas, such as the standard of paper used or quality of tobacco,” said industry investigator Brendan Lemoult, who is vice president of anti-illicit trade training at Japan Tobacco International.
“Free zones are either not declaring a market, or being deceptive about where these cigarettes are destined to go,” he said.
The Gulf Research Centre think tank compiled a report on the region’s black market trade to assess the effect of the tobacco tax implemented across the GCC last year.
Details of the study included research on the trade’s effect on national security, organised crime, societal issues and the region’s legitimate economy.
The report claimed smugglers were taking advantage of simplified customs procedures and a lack of regulation to disguise the origin and nature of bootleg products.
“Manufacturing facilities in the UAE free zones are producing cheap whites without the packaging health information that 98 per cent of countries have,” said Tamer Shabana, director of illicit trade prevention at tobacco multinational Philip Morris Middle East.
“We do our own research to measure the penetration of illicit products, counterfeit cigarettes and illegally imported tobacco from other countries.
“We also complete empty packet surveys to see what cigarettes are being smoked, and we know illicit whites cover 50 per cent of the UAE market.”
Free trade zones are duty free areas that offer warehousing and distribution facilities for trade, trans-shipment and reporting operations, generally organised around major seaports, international airports and factories.
The UAE has one of the region’s largest free trade zones.
A new plan to add digital stamps to cigarettes is part of a government crackdown on tax evasion in the tobacco industry. It is hoped the measure will help to prevent illegally smuggled tobacco, such as cheap whites.
“We have seen tobacco products exported out of free zones and declared for importation in a third country elsewhere in the eastern European Union,” Mr Lamoult said.
“One lorry can contain 10 million cigarettes, so the value can be somewhere between $2 million and $5m (Dh7.34m and Dh18.36m) per container.
“If smugglers have 10 containers they want to ship to areas of high taxation, such as the UK, they only need to get one through to make a profit.
“This is the risk of high taxation in some countries, and some free zones are helping facilitate that industry.”
Stuart Patterson, a partner at law firm Herbert Smith Freehills in Dubai International Financial Centre said adequate laws in the UAE are in place but, like many free zones, are not always adequately enforced.
Greater physical access to free zone operations for checks and more reporting of suspicious financial transactions would also help to tighten up these areas, he said.
The Financial Action Task Force, backed by the G7 group of the world’s biggest economies, conducts evaluations of countries to assess how vulnerable they are to money laundering.
The UAE is due for an inspection next year.
“When trade passes through free zones, fees are paid and those fees are effectively proceeds of crime that are effectively invested back into the legitimate economy,” Mr Patterson said. “How you combat this is difficult, but these areas can be subject to greater transparency and accountability.”