Select Committee on Public Accounts Minutes of Evidence


Supplementary memorandum submitted by HM Customs and Excise


  1.  Customs estimate that in 2000-01 around 17 billion cigarettes were successfully smuggled into the UK. In addition Customs seized 2.77 billion cigarettes in the process of being smuggled.

  2.  Overwhelmingly cigarettes are smuggled in maritime freight on routes originating outside the EU. Customs estimate that 70-80% of cigarettes are smuggled in this way and have therefore not borne any tax anywhere in the EU.


  3.  Customs estimate that between 11-17% of all cigarettes seized in 2000-01 were counterfeit. The most popular brand to be counterfeited is Benson & Hedges (manufactured by Gallaher Ltd for the UK and European market, and BAT for other global markets). Customs believe this is because B&H is a popular premium price brand in the UK and also has a significant global presence.


  4.  The vast majority of UK exports do not feed the UK smuggled market although most smuggled cigarettes are UK manufactured UK brands. This is not particularly surprising since UK smokers are most predisposed to purchase cigarette brands with which they are familiar and hence these brands are most popular with smugglers.

  5.  In 2001, approximately 100 billion cigarettes were exported from the UK . In the financial year 2000-01 Customs estimate that, of the total number of cigarettes smuggled into the UK, around 16 billion were originally exported from the UK, giving an overall return rate of 16%. The return rate for Regal and Superking cigarettes, manufactured by Imperial Tobacco Limited, is far higher and Customs believe it may be as high as 65% Customs base this estimate on Imperial's sales data for the two brands, during their financial year October 1999 to September 2000, of 12.2 billion cigarette exports, compared to Customs estimate of their 50% share of the illicit market of around eight billion cigarettes. The estimated smuggled return rate for all other UK cigarette exports is around 10%.

  6.  Very large volumes of Regal and Superking cigarettes are exported to parts of the world outside the EU where, in Customs understanding (for example because the economy is weak with low personal incomes and would therefore not appear to be able to support the purchase of more expensive UK brands), the domestic market for these brands is limited.


  7.  The share of Customs' seizures accounted for by Regal and Superking cigarettes has over several years been consistently much greater than their share of the legitimate market by a factor of around four to five (see the analysis of the licit and illicit UK tobacco at Table 2 below).

  8.  Of non-counterfeit product seized by Customs in 2000-01 the breakdown of the principal brands involved was published in the November 2001 Pre-Budget Report document Tackling Indirect Tax Fraud and is as follows:

Brand% of total Seizures
Superking/Superking Blue24
Benson & Hedges16
All others *35

  It is estimated that between 11-17% of all cigarettes seized were counterfeit and this table shows estimates of the principal seized brands amongst the remainder. Seized Benson & Hedges include packets manufactured by both BAT and Gallaher.

  * Includes all other brands as well as seizures below de minimis levels in which brands are not recorded.

  9.  Customs data for calendar year 2001 (Table 2) shows 50% of Customs seizures were Regal and Superkings manufactured by Imperial. Customs have no reason to believe that their seizures of Imperial product are unrepresentative of the share these brands have of overall smuggled volumes.


UK Market Share 2001 (Brands with over 3% of licit market share only)
BrandManufacturer Market of Marketper cent of
Licit Market
Approx per
cent Illicit
RothmansBATPremium 4.50.3
Benson & Hedges
(All types)
Gallaher—UK and
European markets
BAT—other Markets
SovereignGallaherEconomy 3.215.4
MayfairGallaherEconomy 5.7  0.6
Silk CutGallaherPremium 4.40.0
SuperkingsImperialMid-Price 5.330.1
RegalImperialPremium 3.920.1
Embassy No. 1Imperial Premium3.14.8
Lambert & ButlerImperial Economy11.60.6
Marlboro LightsImperial Premium4.00.1

  Licit Market Share—taken from Tobacco Manufacturers Association Data 2001.

  Illicit Market Share—taken from seizures in excess of 250,000 (2001-02) (ie: per cent of seizures by Brand). There are no other significant seizures (over 1% of the total) of UK brands represented in the illicit market.


  10.  In 2001, the legitimate market share of Regal and Superking cigarettes was 9.2%, representing about five billion cigarettes out of total estimated UK consumption of 56 billion cigarettes. Based on Customs' seizure data for 2001, the illicit market share of these two brands was 50%, representing about eight billion cigarettes out of the total estimate of 16 billion smuggled UK manufactured cigarettes. Overall, Imperial's share of the legitimate market is around 40% compared to their share of the smuggled market of over 55%.

  11.  Customs dialogue with Imperial has been less co-operative than with other manufacturers and as a consequence our view is that controls over their exports are not yet at a level where we could enter with Imperial into a Memorandum of Understanding. At a meeting with Customs in April 2002, Imperial stated that they had no interest in seeing smuggling into the UK and that they wished to do everything they could to co-operate with Customs to combat smuggling. Customs has agreed to review this in three months to determine what progress has been made.

  12.  At the present time Customs are concerned that:

    —  Substantial exports take place where details are not forthcoming as to the intended market of end consumption.

    —  Specific questions are either not answered or answered selectively and after considerable delay.

    —  The speed and completeness of responses to tracking and tracing requests in respect of seized goods is significantly slower than other manufacturers and has the highest failure rate in being unable to track and trace.

    —  Open access to sales and marketing staff involved in exports to countries posing a high smuggling risk has not been possible.

    —  Details of customers to whom supplies have been discontinued because of smuggling concerns are not routinely supplied and trade has continued with some customers even after Customs have raised concerns.

  13.  Some examples of the areas in which Customs would like to see increased co-operation from Imperial are:

    —  Clarifying and improving ITL's export policy, including the factors taken into account by sales and marketing staff to reduce the risks of return smuggling to the UK.

    —  sharing with Customs, data on ITL's understanding of existing and prospective consumption in specific overseas markets.

    —  Providing Customs with direct access to Imperial Tobacco International Limited sales and marketing staff to gain a better understanding of overseas markets and of ways to identify and prevent overseas diversion of UK exports into smuggling chains.

    —  Ways in which Customs and ITL can improve the prompt exchange of information, including the handling of tracking and tracing requests.

    —  Open discussion on ITL decisions to suspend, cease or continue trading with overseas customers where there are indications that the customer or trade related to a customer features in UK smuggling.


  14.  Large volumes of Regal and Superking cigarettes are exported to a number of destinations outside the EU where Customs are unclear where the intended market of consumption is. It is important to acknowledge that there are international hubs from which cigarettes can be legitimately sold on for consumption in a variety of other markets. That said in the period October 2000 to September 2001, it is Customs understanding that over a third of all Regal and Superking cigarettes went to the following destinations (in excess of three billion sticks, compared to total exports in the same period of 9.1 billion sticks). The quantities exported to these countries to date in the current Imperial accounting year (since October 2001) have dropped significantly.

DestinationOctober 2000 to Sept. 2001 October 2001 to April 2002
Latvia1,363 million Nil
Russia incl. Kaliningrad835 million 99 million
Afghanistan325 million Nil
Moldova540 million36 million
Andorra84 million0.2 million

  15.  Customs have been unable to establish why such large quantities have been exported to such destinations. The quantities exported to these five locations over the 12 month period in question are equivalent to over half of all the Regals and Superkings legitimately consumed in the UK during the same period.


  16.  The red and yellow card system, introduced in early 2001, is the method adopted by Customs to flag up customers of tobacco manufacturers about whom they have serious concerns. The system is totally voluntary.

  17.  The concerns are generally based on seizures of cigarettes, the proportion of a particular customer's total purchases that appear to be finding their way back to the UK, and the profile of their brand purchases. Customers of most serious concern are red card customers. In these cases, Customs would expect a fully co-operative tobacco manufacturer to take action against that customer. When yellow cards are given against customers, Customs would expect them to be the subject of enquiries by the tobacco manufacturer.

  18.  In issuing a card Customs invite the manufacturer to consider the following:

Red cards

    —  the cessation of supply to the highest risk customers (this is viewed by Customs as the only action consistent with a responsible export policy);

    —  restriction of certain brands supplied;

    —  the delivery of product directly into the market for which it is intended;

    —  contractual provisions regarding the behaviour of distributors in relation to the destination of product they handle; and

    —  an agreed system under which customers feed into the tracking system and report back any findings. This will protect their interests and enable them to identify those of their customers that are diverting product out of the market.

Yellow cards

    —  warn the distributor that product being supplied to them is returning to the United Kingdom;

    —  draw attention to the distributor and remind them of their obligations with reference to the manufacturers compliance policy;

    —  contact the distributor to verify sales and report any findings and action taken to Customs; and

    —  consider a contractual agreement with the distributor if not already in place.

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