By: Karen Santamaría
It is well known that illicit trade in tobacco products poses significant health, economic and security problems worldwide. It is estimated that one in every ten tobacco products consumed globally comes from illicit trade. The impact on humans is serious. Smuggling, whether of original or counterfeit brands, provides cheaper tobacco, which attracts younger consumers and other new customers, increases sales and consumption, and makes it more difficult for smokers to quit. This in turn impacts health care costs, worker productivity losses and increases the number of deaths worldwide due to tobacco use – 5.4 million lives per year, a figure estimated to rise to 8 million by 2030.
The illicit tobacco trade continues to be in the spotlight. The illegal tobacco trade attracts organized crime because it is profitable and less risky than drugs or other types of contraband.
Illicit Tobacco Trade Between The United States And Mexico
In a study by COLLEDGE III, John W, demonstrated with clear and convincing evidence that the illicit tobacco trade between the US and Mexico has been taking place for at least 167 years. Historical records since 1845 show that the US used to be the country of origin of illegal tobacco between the two countries.
The world’s leading transnational tobacco companies, known as the ‘Big Four,’ include Philip Morris International (PMI), British American Tobacco (BAT), Japan Tobacco International (JTI) and Imperial Brands. China National Tobacco Corporation is the world’s largest tobacco producer. However, it is a state-owned entity that focuses on its domestic market. The tobacco industry seeks to improve its public image and argues that its products are less harmful to health than illicit tobacco of undetermined origin with no quality controls.
Tobacco smuggling on Mexico’s northern border is a phenomenon that has persisted over the years, generating significant impacts on both the economy and society. The proximity to the United States, where tobacco taxes are considerably higher, has created an attractive black market for smugglers seeking to profit from the price differential. In addition, smuggling is linked to other illegal activities, such as drug trafficking and money laundering. Combating corruption and smuggling is an ongoing challenge that seems to have no end in sight.
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Tobacco smuggling has been a constant concern for Mexican authorities, as it directly affects the country’s legal economy. It is estimated that billions of dollars are lost annually due to tax evasion and the smuggling of tobacco products in the northern region of the continent. This situation not only impacts tax collection, but also creates unfair competition for legitimate sellers.
These problems persist in some areas because the Mexican government allows it through bribes to officials in the border strip, the omission of customs controls, and the cooperation of authorities with criminal organizations.
A Global Problem
Tobacco remains one of the cornerstones of international crime. It is linked to trafficking in cocaine, fentanyl and other illegal drug imports. The UN estimates that the illicit trade involves losses in the order of two billion dollars a year, which includes $50 billion for tobacco alone, according to the World Bank. Between approximate figures and risky estimates, what is certain is that the big tobacco multinationals are obligated to adapt to changing times because a drop in the consumption of conventional cigarettes in favor of vapers, and greater public pressure due to the harmful effects of tobacco on health. In 2021, illegal consumption of tobacco is estimated to be about $50 billion in the European Union, according to a KPMG report. The high taxes on tobacco, for example 80% of the price in France, represents a key source of income for organized crime. The same is true in the United States, Mexico, Central America and in general throughout the Americas.
The largest production centers are in Asia, mainly China, but are also replicated in Europe. The main conduit of the illicit tobacco trade to the Americas is in Panama, which is at the epicenter of the world’s illicit tobacco trade. It is from here from where criminal organizations around the world begin their smuggled tobacco trade.
Large-scale smuggling, which is generally in the hands of organized criminal groups, is highly lucrative. Raymond Kelly, former director of the U.S. Customs Service, reported that “tobacco smuggling profits rival those of narcotics trafficking.”
One explanation lies in the fact that tobacco, based on its size and weight, is too expensive compared to most other products, making it ideal for smuggling large profits per load. For example, a standard pack of tobacco weighs only about one ounce (or 30 grams), and a carton of ten packs weighs much less than one pound.
On the other hand, it is possible to obtain tobacco for smuggling at much lower prices. First, counterfeit brands are easier to manufacture. Second, smugglers can obtain authentic packs of tobacco at factory prices by diverting them from the legal trade channels before duties or taxes are applied. Third, smugglers can buy tobacco legally in a country that sells it at low prices, smuggle it to a country that sells it at higher prices and thus profit from the illegal resale, evading import duties or taxes normally charged by the destination country. In Mexico, a pack of legal Pall Mall tobacco brand is priced at $3.60. Illegal tobacco distributors sell the pack for $1.15.
Packages Of Counterfeit Tobacco
Driven by technological innovations, the production of counterfeit tobacco packs is the fastest growing category of illegal trade. The creation of similar wrappers has become more accessible thanks to sophisticated printers and scanners at cheaper prices. It is estimated that tobacco counterfeiting will account for around 17 percent of the illegal trade worldwide, when combined with other forms of illegal tobacco production, such as the manufacture of legal brands outside of permitted hours.
The Tobacco Cartel
The so-called Cartel del Tobaco is led by three brothers: Carlos Alberto, Hugo Antonio and Genaro Cedano-Filippino, allegedly former federal agents, who run at least three cigar factories in the states of Jalisco, Mexico State and Campeche.
Diversification is key for Mexican cartels to obtain new sources of income outside of the drug activities that originally established them in the criminal business. They currently produce cigarette packs through three registered companies – Sijara International Manufacturing, Braxico Manufacturing and Burley & Virginia Tabaco Company – that do not comply with tax and sanitary regulations, according to Milenio.
The organization has also been known to use violent methods such as extortion to coerce suppliers into selling Tobacco International Holdings exclusive products through the companies listed above. The group is behind the production of at least 24 cigarette brands.
Although the three companies have registrations that make them legitimate, none of them have the security codes that demonstrate their compliance with the Tax Administration Service (SAT), in addition to the fact that they lack the security code that tobacco products must have in Mexico, without which, according to the SAT, they lack any validity.
The cartel produces more than 30 brands of cigars with prices approaching $1.90 per pack, when the price of regular cigars fluctuates between 50 ($2.88) and 70 ($4.03*) Pesos. In addition, about 19% of the cigarettes consumed in Mexico are illegally produced, as reported by Oxford Economics.
The path taken by counterfeit cigars, which began in China and then continued in the West, reflects the determination and ingenuity of their traffickers. This is how an illegal trafficking route likely works:
- From rural areas where they are difficult to detect, Chinese counterfeiters generally operate clandestinely.
- Decentralized operations in these rural areas help traffickers evade authorities: in one location, tobacco is manufactured; in another, tobacco packets are produced; and, in a third location, tobacco is hand packed.
- After the containers with these imitations enter the shipping channels, they circulate through gateway ports such as El Paso, Texas, or Los Angeles, California ready to generate large profits for the operators.
Forms Of Tax Evasion
In addition to smuggling and counterfeiting, there are other practices that evade taxes: these practices include Internet sales and cross-border purchases. Internet tobacco sales are on the rise. In the United States alone, more than 770 websites sold tobacco to smokers in 2006, with approximately half of the websites located outside the United States. That figure was up from approximately 40 domestic Internet tobacco sellers and buyers in the United States in the early 2000s.
Much of the tobacco sold by internet retailers is illegal, as neither the retailers nor the smokers pay the taxes. Internet retailers also provide a useful outlet for smuggled or counterfeit tobacco, and very few of them protect underage smokers from illegal purchases. Due to the rise of online marketing websites, it is possible for ordinary people who own computers to become home-based tobacco smugglers. Citizens of one country may cross a border to purchase tobacco in an adjoining jurisdiction with lower taxes and pay the required local taxes, or they may purchase tobacco when visiting the neighboring country for another reason. Upon returning home, the smoker usually provides cheaper tobacco to family, friends or co-workers. This practice is called cross-border buying.
*Exchange rate, December 14, 2023.
About the Author
Karen Santamaría is an independent journalist and video producer from Valencia, Spain who is working on the border. Santamaría has contributed to CNN International, Televisión Española and El Diario de El Paso, among other news outlets. She has also produced television series like “Rumbo a Santiago” and “La Colisión”. Santamaría has worked in México, Nicaragua, Spain and the United States.
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