CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1504-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Northern Ireland Affairs Committee

Fuel LAUNDERING and Smuggling

Wednesday 19 October 2011

MR Paul Williams, MR Steve Payne and MR Tom O'Carroll

Evidence heard in Public Questions 69 – 115

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Northern Ireland Affairs Committee

on Wednesday 19 October 2011

Members present:

Mr Laurence Robertson (Chair)

Oliver Colvile

Lady Hermon

Naomi Long

Jack Lopresti

Dr Alasdair McDonnell

Ian Paisley

David Simpson

Mel Stride

Gavin Williamson

________________

Examination of Witnesses

Witnesses: Mr Paul Williams, UK Head of Corporate Affairs, Japan Tobacco International, Mr Steve Payne, AntiIllicit Trade Government Relations Director, Japan Tobacco International, and Mr Tom O'Carroll, Director of Corporate Affairs, Calor Gas NI Ltd, gave evidence.

Chair : Just before we start, we have previously declared interests, but I would like to draw the Committee’s attention to my registered interest in the register. Does anybody else want to rerefer to their interest?

Oliver Colvile: I would: I joined the Japanese Tobacco manufacturers at the Oval test match on the Friday, and a very good day it was too, for the cricket.

Chair : Did we win?

Oliver Colvile: We won the game eventually, yes.

Chair : Any others?

Ian Paisley: JTI is a major employer in my constituency and I am regularly briefed and updated by them. I want to put that on the record.

David Simpson: Can I put on the record that I have been briefed by them as well, as an MP for the Province in which they employ?

Q69 Chair : Gentlemen, thank you very much for joining us. As you know, we are carrying out an inquiry into fuel smuggling and laundering particularly, but we are also expanding it to tobacco and any other kind of smuggling and laundering. Your advice and evidence to us will be very useful indeed, so thank you very much for coming. Perhaps I can address this to the JTI representatives: could you briefly outline the problem of tobacco smuggling, the extent of the problem, as far as you see, and the impact it might be having on your business?

Paul Williams: Thank you, Mr Chairman. I wondered if I might, just for 30 seconds, address the terms of reference, which might help me lead into that particular question. My name is Paul Williams; I am Head of Corporate Affairs for the UK. I have worked for Gallaher and JTI for over 30 years, and I am accompanied today by Steve Payne, who is the AntiIllicit Trade Director for JTI. We have, as Mr Paisley has said, a large manufacturing plant in Northern Ireland. We employ 950 people and obviously a large range of associated businesses rely on that manufacturing plant for employment. We would like to thank the Committee for inviting us to give oral evidence today.

We recognise that the terms of reference are very much focused on fuel smuggling and laundering but, included within that, there was other smuggling activity. We believe that the same organised crime gangs may-and we are saying may-be involved in smuggling tobacco and cigarettes. In our view it is driven by high levels of taxation, differentials in duty between different countries, and the exploitation of borders by criminals. We would hope that we would be able to help you here with looking at the scale of non-UK duty paid consumption in Northern Ireland, the factors that encourage the criminal activity in that, the cost to government and business, particularly business in Northern Ireland, and how we can better work with the enforcement agencies and other industries blighted by the same issues as ourselves. We do welcome the opportunity.

Turning to your point, Mr Chairman, in terms of understanding what nonUK duty paid is, we see four components to it. Clearly there is counterfeit-manufactured fakes. There are illicit whites; the best definition that I have seen, in actual fact, was the one in the "Cross-Border Organised Crime Assessment", produced by the PSNI and An Garda Síochána, which says that they are brands that have been produced independently of the international tobacco manufacturers, and are essentially manufactured for the black market. That is how we would define illicit whites. The other two elements are what we would regard as crossborder purchases. These are crossborder shopping, and that is made up of travellers who would go abroad and purchase product for their own personal consumption, and also crossborder smuggling, which is the same issue: travellers go abroad, purchase dutypaid product in other countries and bring it back to be sold on. That is our definition of how we regard the different components.

In Northern Ireland, Mr Chairman, smokers consume some 2 billion cigarettes per year. Of that, we believe that 17% or 350 million are nonUK duty paid. Of that breakdown, 170 million of those are counterfeit and illicit whites, with the remaining 50% being made up of 10% dutyfree and 40% crossborder purchases.

Q70 Chair : As well as the obvious loss of revenue and the impact on your business-I will be careful about how I put this-I am not suggesting smoking is safe in itself, but is there a greater risk to health from smoking cigarettes that come through the black market?

Paul Williams: We do not actually conduct any tests on counterfeit products. What we do is clearly manufacture, in our Ballymena factory at Lisnafillan, product that is highly regulated. All of the ingredients that we use within our tobacco products are registered with the Government, so clearly we go through a very controlled manufacturing process. I noted that, in the PSNI’s written evidence, it quoted the BBC documentary,1 which, again, gave an explanation that it believed there was significantly more danger associated with counterfeit product, but we do not carry out research on counterfeit product ourselves.

Steve Payne: I would just add that what we are talking about here is examining the tobacco itself. We will examine the packaging and, from the packaging, we can tell whether the goods are counterfeit or genuine product, but we do not actually analyse the tobacco that is inside the cigarette. We just analyse the packaging. I am just clarifying Mr Williams’s point.

Chair : Perhaps we could look at the details. Ian?

Q71 Ian Paisley: Thank you. You are very welcome to the Committee, all three gentlemen. In terms of the scale, Mr Williams, are the figures that you have quoted to us for Northern Ireland alone, or are they UKwide figures? We have had some discussion with HMRC and we are not entirely clear on the scale of this crime.

Paul Williams: We look at three sets of statistics. We do the equivalent of the General Household Survey, which identifies what we believe is the true number of cigarettes that are smoked in the Province. We then look at retail sales data and that gives us a further estimate of what is purchased within Northern Ireland by retailers. We look at the gap, and we also conduct research in-market to identify the level of illicit trade and nonUK duty paid product that is being smoked in the Province. That comes out from our research at 17%; the UK is 13%, so it is higher than within the UK. From the analysis we have done, the biggest difference is the fact that a large proportion of it-some 47% of it-is either illicit or counterfeit, whereas in the UK it is around about 30%.

Q72 Ian Paisley: They are actually startling figures. Has HMRC ever challenged your figures?

Paul Williams: We work with HMRC in sharing as much information and intelligence as we possibly can. We give regular briefings based on the information that we research in-market, in trying to identify the size of the problem. There is a lot of interest shown in the data that we have and, indeed, we have on occasions analysed those data in more depth for HMRC, when requested.

Q73 Ian Paisley: So there is broad sharing and agreement on what those figures are. Could you maybe indicate to us-this might have to be reserved for the private session and, if it does, feel free to say so-what is the single biggest seizure of smuggled cigarettes that you are aware of in Northern Ireland and the Republic of Ireland?

Steve Payne: The single biggest seizure anywhere in Europe occurred in late ’09 in Greenore, which was a shipment of about 120 million cigarettes on one vessel. It came from the Philippines and was all counterfeit or illicit white cigarettes. I believe over 100 million of the 120 million were a counterfeit of one of our brands, Palace, which we do not actually sell in the UK or Ireland, but they were on that vessel. That was the largest single seizure anywhere in Europe, ever.

Q74 Ian Paisley: If that had got through, what would the criminal have made out of that, if they had sold it on the black market in Northern Ireland?

Steve Payne: The prices vary a lot. If you take an average price in Northern Ireland of between £2.50 and £3.50, you are probably looking at pretty close to £1 million in a 40foot container, which is 10 million cigarettes. If you times that by 12 for that particular vessel, you would easily be looking at £12 million.

Q75 Ian Paisley: Do you think any other vessels may have slipped through? Was that the tip of the iceberg?

Steve Payne: That was a unique case, I believe. That was the only case I am aware of where someone has moved cigarettes in bulk in the hold of a ship. Generally speaking, they will move them in a container when they move large quantities.

Q76 Ian Paisley: It shows a considerable degree of nerve to be prepared to do that. Perhaps they had confidence that it would have got through, but we can only conjecture about that. Finally, Mr Williams, in your evidence you mentioned taxation briefly and taxation policy. There is the Government’s policy of highly taxing this highly controlled product, and people can go overseas, fill their car with this product and bring it back to Northern Ireland or, indeed, the UK. Is it your contention that the policies that are allowing that to happen are actually encouraging people to bend and, in many instances, quite blatantly break the law with regards to this product?

Paul Williams: I think it is about sheer size, and about motivation. The revenue that should have been collected in Northern Ireland would have been £500 million in a normal financial year. The revenue that was actually collected was some £410 million, as we would see it, having worked on our best estimates. £85 million was therefore lost in revenue collection in Northern Ireland as a result of that 17% of the market not being UK duty paid. If we break it down a little bit further and take the 47% of that that is counterfeit and illicit, then that is £42 million that has been evaded as a result of what we regard as being organised crime activity in shipments of counterfeit and illicit whites. If you looked, as Mr Payne said, at the average price that we believe that would be sold for on the street, that is the equivalent of a £29-million profit in 12 months. I think you would agree that the figures are staggering.

Coming back to your point about taxation, it is about opportunity; it is a profit opportunity. The concern we might have is that prices continue to rise. If you take the first three months of 2011, cigarette prices went up by between 68p and 70p per pack,2 which clearly will filter through to the criminal saying, "That is an additional margin we can make." Again, with the economy as it is-this was a comment in the programme on Monday night that I happened to pick up on-it challenges people’s moral compass as to whether or not they decide to buy in an illicit market, as opposed to buying in the legitimate market.3 Our concerns are that anything that affects our production, our factories and the legitimate businesses in Northern Ireland is of huge concern to us as a business.

Q77 Lady Hermon: I wonder if I might just come back to Mr Payne for one moment. In relation to the largest seizure of cigarettes, were there any prosecutions? Were there any arrests? Did anybody actually go to jail?

Steve Payne: I believe this seizure took place right on the border in the port of Greenore; it was technically in the Republic, so it would have been handled by the Republic. As for how many people they actually arrested and what happened with prosecutions, I am not aware of the details of that. The trouble you have with most of the shipments of illicit product is that, a lot of the time, the people are not available to prosecute. If you take not necessarily that particular example but the majority of times in which you have a container, the products come into the country, and often there will be false documents; the individuals and companies on the documents do not exist. When HMRC and other people come to prosecute someone, there is no one to prosecute. They seize the goods, so the seizure statistics are very high, but in terms of actual followup prosecutions of individuals, they are not tied together, because there is no one physically there to prosecute, as the goods are moving independently of people. Occasionally, you might have someone driving a vehicle with the goods, so you might prosecute the driver, but the driver will often just say, "I am sorry, but I did not know what was in the container. I am just doing a job, driving this container from A to B." Again, the prosecution probably would not take place. The number of prosecutions in this area is quite limited, because there is nobody physically to prosecute.

Paul Williams: The statistics that we had from HMRC were that, in 2008/9, 191 people were sentenced for tobacco smuggling in the UK, with the average sentence being given as 21 months, but that is not broken down, I am afraid, by region, so it does not state what might have happened in Northern Ireland. In that year, 5,618 vehicles were seized. As Mr Payne has said, the assets can be seized; it is not always so simple to get to the individuals concerned.

Steve Payne: Especially with the larger seizures. The majority of the figures there, I suspect, are smaller vehicles-cars, vans-where they can seize the driver and the people. With the containers, which are the bigger criminal gangs, you are not going to identify people with this particular shipment.

Q78 Lady Hermon: At any stage, has your company actually lobbied or spoken to-lobbying is a very bad thing to do-the Police Service of Northern Ireland, for example, or the Justice Minister in Northern Ireland about how this particular loophole could be closed? All right, you seize the goods and they are counterfeit, but I would like to think that the people who are running these networks, who are very sophisticated criminals, were actually taken off the scene. I would have thought that was in the interests of your company, since it was a large volume of your cigarettes that were counterfeited-it was your brands that are not sold in the UK. But no one seems to have been prosecuted for that. I would have thought you would be much more proactive in trying to bring about change in the legislation. I have not met anybody who has asked me to take this up with the Government. I am surprised; I am disappointed, actually.

Steve Payne: It is a common problem that we have in every country. It is not unique to Northern Ireland or to the UK. What I explained happens in every country; we cannot identify individuals very easily. What we have done in terms of lobbying, as you called it-

Lady Hermon: I was trying not to say that word, actually.

Steve Payne: As I think you are aware, we have an agreement with the EU that we have signed, with the member states, and we work with the antifraud office, OLAF, in Brussels on a number of these issues. They will then in turn work with law enforcement agencies in the various countries. There is very little we can do in most places about changing the law.

Q79 Lady Hermon: Have you actually tried? That is the point I am making. Mr Williams has been the representative for this company for a very long period of time. I am delighted to see you all here, but can I just ask: have you actually ever once asked for a meeting with the Chief Constable in Northern Ireland or the Justice Minister in Northern Ireland, David Ford, to see what more could be done? It is a really serious offence here. A huge amount of money has been lost to the Exchequer. People’s lives and their health are being damaged are being damaged by smoking counterfeit cigarettes. I am just surprised and, as I say, disappointed that you have not actually been more proactive in trying to bring this up at Government level.

Paul Williams: Working with HMRC is our prime means of engagement. To understand, the tobacco industry has very limited access to Government in any Department. This is one of our difficulties. We work very well with HMRC. We have been instrumental in supporting them in a whole range of different areas. In fact, we are working on four working groups with them as we speak on intelligencesharing, intelligencegathering, communications and understanding consumer behaviour of people who purchase counterfeits. We are very active but, unfortunately, we cannot always get access to Government Departments, I am afraid.

Q80 Lady Hermon: Have you asked? Sorry to pursue this matter, but have you actually asked to meet with the Chief Constable and/or our very hardworking and very good Justice Minister, David Ford? I am not in his party, but I think he has done a sterling job as Justice Minister.

Paul Williams: No, I have not.

Gavin Williamson: Lady Hermon is offering to facilitate such a meeting.

Chair : We may come back to that later.

Q81 Jack Lopresti: Could you give me an overview of the problem of illegal activity with respect to LPG in Northern Ireland?

Tom O'Carroll: Yes, I could. Mr Chairman, thanks again for the opportunity to address you today. I feel humbled a little bit, because the scale of our problem is so small compared to that of the tobacco industry, but it is real none the less. Essentially, Calor has filled and sold LPG cylinders in Northern Ireland for about 75 years. For a number of years, the illegal filling of these cylinders has been a small problem associated particularly with border areas. We find the timing of this inquiry particularly relevant because the problem is clearly growing from our point of view, and has spread south of the border. The problem is not so much one of duty avoidance, because LPG does not incur excise duty, except for automotive purposes, but the problem arises from the point of view that there would still presumably be VAT avoidance and avoidance of taxes on labour and profits.

Also there is the fact that, uniquely I suppose, LPG cylinders are a returnable container, and they are fixed assets belonging to our company, because the company retains the ownership and the maintenance responsibility for those cylinders. The people who fill them illegally deprive us of the use of them but also make it difficult for us to fulfil our obligation to maintain them properly. The standards of safety to which they operate are dubious, to say the least. We see it as, first, a question of some loss of revenue to the Government; secondly, a deprivation to us of our fixed assets and our entitlement to those; and thirdly, potentially a public safety issue.

Q82 Jack Lopresti: Do you see the crime in legal terms as theft or fraud?

Tom O'Carroll: It is both. It is theft and it is trademark infringement. There are also all sorts of other issues. For instance, in the kind of place where these cylinders are filled, they do not have permission to carry out that kind of activity there. They are not meeting their health and safety obligations there, and God knows what else they are not doing.

Q83 Jack Lopresti: Just as an aside, has there been a big takeup on the automotive use of LPG in Northern Ireland?

Tom O'Carroll: No, it is a small market. It is not hugely significant. There are some indications that there is also illegal supply to that market, but particularly to immigrants from Eastern Europe, where there are far higher proportions of LPGfuelled cars.

Q84 Oliver Colvile: On this issue, talking about stuff from Europe, do you perceive that the collapse in the eurozone going on at the moment is going to fuel more activity in this regard?

Tom O'Carroll: In relation to the automotive element?

Oliver Colvile: Yes.

Tom O'Carroll: It is very difficult to say. I think the Eastern European workers have been attracted to Ireland and to Northern Ireland because of relative economic success. That attraction may diminish. In terms of the attraction to illegally filled cylinders, the longer the practice is tolerated or not reduced, the more attraction there will be for that to spread within Northern Ireland and indeed to other parts of the UK.

Q85 Oliver Colvile: You may both wish to do this in the private session rather than this session, but who do you think is behind the major organised crimes in Northern Ireland? Any ideas?

Tom O'Carroll: I think I would prefer to keep that for the private session.

Q86 Oliver Colvile: You may end up saying the same to this, but what are the differences or similarities between those involved in, for example, tobacco smuggling and fuel smuggling?

Tom O'Carroll: I suspect that they are connected, but I have no clear evidence to say that.

Q87 Jack Lopresti: What is the difference between a litre of, say, diesel price and LPG for automotive use in Northern Ireland? Is there a big gap between the two?

Tom O'Carroll: If you take a taxpaid situation, yes, there is.

Q88 Oliver Colvile: Do you think any such criminal activity is pronounced in Northern Ireland because of the former paramilitaries?

Tom O'Carroll: Again, I would prefer to keep that for the private session.

Q89 Mel Stride: Welcome to the Committee; thank you for coming. This is a question for JTI. We have been talking about the cost to the Exchequer in Northern Ireland of tobacco smuggling and an attempt to quantify that. What work have you carried out in terms of quantifying the effect on your business specifically, due to that activity? Do you have a figure that you could provide us with?

Paul Williams: In respect of the actual impact on JTI’s business, that would be commercially sensitive, but I would be happy to provide further detail in writing to the Committee on the impact to our business, if that is okay.

Q90 Mel Stride: Okay, that is fine. The other question I had related to the impact on the retail sector. Is it as strong proportionally on the retail sector as it is upon you as the manufacturer, given that presumably some of these counterfeit products are being sold through the retail sector itself? Do you have a view on that?

Paul Williams: We do not have evidence of the product being sold through retail outlets. If we do find evidence of that at any point in time, then obviously we will share that information, as a business, with HMRC. In terms of the impact in cost terms, it is costing the average Northern Ireland business. On our database, there are around 1,775 outlets that sell cigarettes, and therefore the average cost to them would be in the region of £1,000 of turnover per week.

Q91 Mel Stride: Just to clarify, would you be saying that the notion that retailers are selling counterfeit product is just not happening? Effectively, that is an insignificant factor; it is all being sold through other routes.

Paul Williams: Certainly from the information we receive on outlets that are visited by trading standards, the number is quite small, yes.

Q92 Naomi Long: Good afternoon, gentlemen. I have a question, Tom, for you in relation to the situation with Calor. You have estimated that the lost revenue is around £2 million, and that the loss to HMRC is around £1 million. Could you outline how you calculate those figures, and can you quantify whether that is an increasing figure or a decreasing figure?

Tom O'Carroll: Just to clarify, we did not try to estimate the loss to HMRC. We did estimate that the revenue associated with this activity was about £2 million, but that is purely a guesstimate. We would certainly be of the opinion that the figure is on the increase.

Q93 Naomi Long: The harm that that causes to your business is one element of it, but is there harm also caused to retailers who only supply the legitimate product and is there damage done to them, as well as yourselves?

Tom O'Carroll: Inevitably, yes. We have a significant retail network in Northern Ireland. By its nature, the illegally filled product has to sell at a cheaper price, so they are undercutting the legitimate retailer and depriving them of business and profit. Then, of course, they are faced with the temptation of buying cheaper illegal product if it is offered to them, and working in the grey market themselves.

Q94 Naomi Long: You have mentioned the black market and the grey market. Is there evidence of coercion, in terms of those who actually sell the product? Are those who are actually providing the illegal product for sale coercing anyone to sell it? Or is it a kind of optin, where people are making that choice themselves because of the competitive environment?

Tom O'Carroll: I am not aware of any direct coercion. I have heard of instances of it by repute within the diesel industry, and I suppose it would be legitimate enough to believe that the same probably exists within our industry.

Q95 Dr McDonnell: Do either or both of you have much contact with the Organised Crime Task Force and are you satisfied that the multiagency approach is working?

Tom O'Carroll: I have had some contact. I would say we have had a good reception but, by the nature of the work they do, we do not get feedback on what they do, so it is very difficult to assess whether it is effective or not.

Q96 Dr McDonnell: I am going to lead on with you and then maybe come back to tobacco. You have suggested that the problem is increasing in your pitch. Do you feel it is being taken seriously, or is it just taken as some form of collateral damage that has to be lived with?

Tom O'Carroll: I think that we are certainly being listened to. As I say, we are not clear on what the followup activity is and, in many ways, we do not expect to be given feedback on the followup activity.

Q97 Dr McDonnell: Aside from feedback, do you see any action being taken on the information that you pass?

Tom O'Carroll: No, nothing specific.

Q98 Dr McDonnell: That is very clear. Do you have any idea why it might be that there is no action taken?

Tom O'Carroll: I am not saying there is no action.

Dr McDonnell: No visible action.

Tom O'Carroll: The reality is that LPG is a very small part of the problem, if you take it as a subset of the fuel problem as a whole. Obviously, the authorities’ main efforts are going to be focused on diesel. I think that they will pay attention to any connection between diesel and LPG as they see it, but we are certainly not aware of any specific actions that have been taken relative to LPG alone.

Q99 Dr McDonnell: Could I go back to Gallaher and tobacco? How do you feel the Organised Crime Task Force works?

Steve Payne: I would say that we feed in quite a bit of information to several law enforcement agencies. As Mr O’Carroll said, there is very little feedback because of the nature of what they are doing. We also have the problem that the laws at the moment are written such that they cannot discuss with anybody when they are involved in a criminal investigation, so we would not ask and they would not tell us. But there is certainly intelligence passed in, and we do see action taken in a number of different areas, not just with the Organised Crime Task Force but with HMRC and, as I said, on a broader scope within Europe, with OLAF as well. They are all very active in the tobacco smuggling areas.

Q100 Dr McDonnell: Chair, can I move to another aspect and back to Calor again? In some of the earlier evidence, you guys referred to the prosecution and fines of £300. You obviously think that is not an appropriate punishment. What do you think the punishment should be?

Tom O'Carroll: I was not involved with that particular case myself, but there are two elements: first enforcement, and then punishment. There is legislation that has been breached in various ways in the illegal filling of cylinders. The number of cases actually brought to court under any heading is relatively few. In the particular case you refer to, that came as a result of what was, at the time, one of the largest investigations ever carried out by the PSNI. To be honest, we would have thought £300 was a joke. We would have thought that probably a custodial sentence would have been appropriate.

Q101 Dr McDonnell: Are you suggesting that the cylinders are not properly filled or only partly filled?

Tom O'Carroll: It is our strong belief-I use my words carefully-that they are certainly not filled to the same standard that we apply in our own business.

Q102 Dr McDonnell: When you say ‘standard’, is that quality or is it quantity?

Tom O'Carroll: It is both.

Q103 Gavin Williamson: Do you think there could ever be potentially a danger?

Tom O'Carroll: If you work on the premise that the codes of practice and the legislation that applies to our industry, and it is a highly regulated industry, are primarily there to protect the safety of the public-there is also the consumer legislation on weights and measures-then if people do not operate according to those standards, the logical conclusion is that, yes, people potentially can be put at risk. I would not like to overstate the potential, because we work with good factors of safety within the industry, but there are risks none the less. Also, within consumer legislation, it is our belief that people are not getting what they are paying for.

Q104 David Simpson: When HMRC was here-I am just referring to JTI at this stage-you made the comment that your working relationship with them is very good, or reasonably good. I put a question to them, because the perception among the general public whom I speak to is that there is an acceptable level within HMRC or other organisations in relation to what is smuggled, whether it be fuel, gas or cigarettes. There is a tolerable level. When we look at fuel, something like £200 million or £300 million is lost to the Exchequer. It is still happening 30 years on. There does not seem to be a lot done, as far as slowing it down; it seems to be moving as quickly as ever. You can comment on that, but you do not have to.

In April this year, in the research paper of 2011, HMRC announced a new strategy to target organised crime and those who smuggle. This was specifically targeted at tobacco. The then Economic Secretary to the Treasury said: "The Government believes that tobacco smuggling must be tackled head on." This new strategy that the Government introduced in April-what impact has it had, from April of this year until now, including in prosecutions, which is a subject that Sylvia raised? Can you see evidence on the ground that this new strategy is working?

Paul Williams: We have seen a reduction in the amount of nonUK duty paid in the UK. It has fallen, and it is currently sitting at circa 13% of the market. If you go back 10 years, it was in the low to mid-20s, so there has been a significant reduction. We understand there is an additional £900 million being invested.4 Clearly, that, we believe, will and should have a significant impact. Based on the information we have shared with you today regarding the size and proportion of counterfeit and illicit whites in Northern Ireland, clearly it is one of the areas where that would need to be focused, because that is significantly out of kilter with the percentage in the UK.

Q105 David Simpson: You said it was in the mid20s and is now sitting at 13%; has that happened since the new strategy came in?

Paul Williams: No, it was already in decline. There are clearly economic factors, such as the reduction in travel numbers as a result of the 2008 financial crisis. We are seeing less product-that is, EU duty paid product-moving across as a result of crossborder shopping, as we would put it. Certainly in terms of the volume of seizures that we are seeing as a result of the activities in Republic of Ireland, where there have been 18 seizures this year totalling 98 million cigarettes-large seizures-and obviously the cooperation that is going on currently between the revenue commissioners there, HMRC, An Garda Síochána and PSNI, we are certainly seeing a significant increase in the number of seizures from ships and inland. There are some positives definitely coming out of this.

Q106 David Simpson: Just to clarify the point that Sylvia raised as regards prosecutions, out of all of those, are you aware of any prosecutions?

Paul Williams: The issue for us is that we do not see the prosecutions broken down. It is the same comment that was made to you by HMRC. We do not see whether prosecutions actually take place as a result of this.

Q107 Mel Stride: I just want one quick question to JTI. If I am purchasing cigarettes in Northern Ireland and I buy an averagely priced packet of 20 cigarettes, what do I pay for that? What are your midprice bands?

Paul Williams: Midprice is £6.50 for 20.

Q108 Mel Stride: If I am approached in a pub by someone with an illicit pack of 20 cigarettes-a counterfeit of one of your brands, say-what would I pay for that?

Paul Williams: £3.50 to £4.

Q109 Mel Stride: What would the tax be on that legitimate pack of cigarettes?

Paul Williams: On the legitimate packet of cigarettes at £6.50, it would be just over £5.

Q110 Mel Stride: That is £5 in tax?

Paul Williams: £5 in tax, yes; £5.17.

Q111 Mel Stride: So £1.50 is going to you; £5 is going to the revenue; and I am able to buy it at about £3.50 to £4.

Steve Payne: It is not just going to us; there is also the retailer and the wholesaler, but about £5 is tax.

Q112 Mel Stride: Just out of interest-I think there is no question of us rolling back on tobacco tax, as far as I am aware-what sort of level of tax reduction do you think would start to take away this problem? It would have to be a very significant change, would it not, to catch up with the incentive that is there to avoid the tax?

Paul Williams: The issue is that history would dictate that the Government in the 1990s had an escalator policy in place on taxation on tobacco products, of 3% and then 5%, running through from 1993 to the year 2000. In 1993, the level of nonUK duty paid was something like 6% and, by the time we got to 2000, it was sitting at 27%. It took off as a result of those differentials. We have had a period where we have had inflationonly increases in terms of duty. We have had a lot of activity from HMRC to try to suppress the volume of nonUK duty paid, and they have been successful.

We understand the financial issues that confront us all at the moment, but if we move back to an escalator policy when disposable income is under pressure, and move back to 2% above inflation, we are talking about, between January last year when VAT went up by 2.5% and the next budget, an increase of over £1.03 per pack for a smoker.5 That is an enormous incentive to look at alternatives, in our view. Clearly, it is not only lost revenue; it is also a huge profit opportunity for those who are involved in organised crime. You would see that as a huge additional win. It is another 15%; it is a bonus. If I were in a criminal organisation and I was looking at my strategy document, I would be saying, "What could I really look for?". I would certainly be saying, "Yes, increased levels of taxations give me the profit opportunity I am looking for."

Q113 Mel Stride: Just to round this out, based on the figures you have given, you would probably have to halve the tax to £2.50 to be able to pricematch the kind of rate at which these illicits are being sold in the pub-something of that order. It is a very significant drop in tax.

Paul Williams: As Mr Payne said, the average price of 20 cigarettes if you buy counterfeit would be around 25 pence. A criminal would be buying those at circa 25 pence for 20. They can adjust their profit margin accordingly.

Q114 Ian Paisley: Mel has made the point well there. You would think that, for the amount of tax the Government are able to levy on your product, they would be a wee bit more careful about making sure that people cannot smuggle. If they are doing so well, making a fiver a packet on taxation, you would think that they would be able to make sure that 13 out of every 100 cigarettes are not smuggled, because it is a valuable taxation tool for them. It is a valuable revenue-gatherer for them. I am wondering if you feel short-changed-not just JTI, but the industry. The Government should be doing much more for you to protect your product, given what your product gives to the Government’s coffers each year.

Paul Williams: Whatever HMRC can do is welcomed, and I think the additional money is welcomed. In addition to that, the Committee is already aware that we, JTI, have an OLAF agreement whereby, over 15 years, we will invest $400 million in supporting the EU countries in fighting illicit trade. We take it very seriously. It is a key priority for our business. That can be drawn down, as we understand it, to support countries to fight illicit trade. Yes, Mr Paisley; I think the £11 billion that is currently collected in taxation could very easily be £14 billion, and that would protect jobs, particularly in Northern Ireland, which is important to all of us. Obviously, any further competitive pressure from organised crime does, at some point, put stresses on our production facilities.

Q115 Ian Paisley: To take that to its ultimate conclusion, are you saying that, if Government do not get on top of this and sort this out, those stresses on your commercial activities could lead to job losses?

Paul Williams: It currently sits at 17% in Northern Ireland. Interestingly, we were discussing earlier the fact that if a further £1 a packet in duty went on to 20 cigarettes, if you were sitting there thinking, as a criminal organisation, "What do I do? Do I take the extra margin, or try to increase the volume that I am selling?" It is an interesting dynamic for any business, and they are a business at the end of the day. Any further increase clearly does put pressure not just on our business, but on all the businesses associated with our product, and it is around 30% of the turnover of many retailers. It is significant, in terms of its contribution.

Chair : We would like to have a private session with you now, if you do not mind hanging back for a few minutes. Can I thank members of the press and the public for attending, and perhaps ask if you could leave the room now? Thank you very much.


[1] Panorama: Smoking and the Bandits, BBC One, 7 March 2011

[2] Witness correction: In the first three months of 2011, cigarette prices went up by between 52p and 66p per pack.

[3] Panorama: The Great Fuel Robbery, BBC One, 17 October 2011

[4] “ £900 million to tackle non compliance in the tax system ”, HM Treasury News Release , 20 September 2010

[5] Witness correction: The increase would be over £1.00 per pack for a smoker.

Prepared 6th December 2011