The cost of ignoring the impact of failed policies

28 Jun 2023
Today, KPMG released the data from its annual report on illicit cigarette consumption in the EU, Moldova, Norway, Switzerland, the U.K., and Ukraine.
Failed policy cost landscape

The 2022 report, which estimates the size and scale of illicit trade categories such as counterfeit and contraband cigarettes, points to an increasingly divided European continent.

On the one hand, there is a cluster of countries that are doing a good job at standing up against criminal networks profiting from illicit trade, even as clandestine manufacturing operations continue to move within EU borders. These countries have adopted reasonable tax levels or have recently implemented an innovative set of measures to counter illicit trade while deterring cigarette consumption. The combination of fiscal calendars with stringent penalties against criminals—as well as impactful enforcement of the rule of law—is helping to make a difference against illicit trade.

On the other hand, we find a second group of nations with alarming levels of counterfeit consumption. Most of these countries are mainly relying on traditional tobacco control policies, mostly focused on price, but are not having a positive impact on reducing smoking prevalence. In this sense, the KPMG report highlights a concerning scenario: 13.1 billion fake cigarettes were consumed in the EU last year alone. And the trend now shows the illicit cigarette problem concentrated in a handful of countries in the region, with France alone accounting for 61.5 percent of the total consumption of counterfeit cigarettes in the entire EU.

For the countries with the worst trendlines, we see a lack of innovative approaches that can support the continued decline of cigarette consumption while also reducing illicit trade. Lack of such policies may inadvertently contribute to pushing millions toward the illicit market.

This is deeply concerning. The KPMG report notes that, if we consider both counterfeit and contraband cigarettes, France accounted for almost half of the total illicit cigarette consumption in the EU last year (47 percent).

With criminal networks now indisputably leading the cigarette market in France, we are witnessing a “French syndrome,” by which excessive taxation is not only failing at reducing cigarette consumption, but is benefitting organized crime, while the French state is losing an extraordinary EUR 7 billion a year in tax revenue. And this is happening in a country that is not enabling proper access to better alternatives to cigarettes to its millions of adult smokers.

Seeing criminal networks thriving from the illicit cigarette trade is not a unique trait of France. Unfortunately, this could happen elsewhere, as the base of operations for illegal cigarette manufacturing moves closer to other high-priced markets in Western Europe to meet the demand.

Critically, in some countries, illicit activity also flourishes while governments remain skeptical about adopting measures that can truly contribute to making cigarettes a thing of the past. Belgium and France are two countries that—after decades of enforcing increasingly restrictive tobacco control frameworks—seem to be one extreme price hike away from their legal consumer goods market falling prey almost in its entirety to organized crime, as smokers stock up on illicit cigarettes.

More needs to be done to counter the illicit market

First, European citizens should be reminded that the illicit cigarette market is not a victimless crime. Adult smokers need to learn about the dangers behind easily available illegal goods, often produced in substandard conditions and without proper oversight, depriving the state of tax revenues and bringing with it criminal profits that finance other serious crimes.

Next, governments need to establish policies that are regularly assessed for impact and unintended consequences, and that are designed to include everyone, especially the most vulnerable in society. Criminal organizations preying on adult smokers that resort to the black market to continue smoking should be vigorously pursued and penalized.

Novel regulatory approaches can build from Europe’s expertise in crafting policies that improve people’s lives and consumer behaviors, as was the case when encouraging the food industry to reduce salt and sugar levels, or car manufacturers to produce electric and hybrid cars.

Finally, it all comes down to changing consumer behavior and accelerating the decline in cigarette smoking. When combined with existing strategies to discourage smoking and crack down on illicit trade, smoke-free products can help to rid the world of cigarettes. We need more forward-thinking policies that can encourage adult smokers who don’t quit to switch to affordable, better alternatives instead of turning to unlawful and cheaper alternatives like illicit cigarettes.

Policymakers should follow the positive examples of countries such as Poland and Romania, where illicit consumption continued to decline in 2022, reaching the lowest-ever incidence since KPMG began publishing its annual studies. These nations are benefiting from the enforcement of sensible and predictable fiscal calendars and efficient law-enforcement actions to deter illicit trade and discourage criminal organizations that seek to profit from it.

The KPMG report should not be just another add-on to the stack of evidence, but a tipping point. We need to accelerate the end of cigarettes, and provide the millions who don’t quit with the necessary tools to switch to better alternatives. There are still an estimated 100 million adult smokers across the EU alone, which should serve as a stark reminder of the urgency to act now.

The cost of ignoring this issue and doing nothing is unacceptable and it touches us all: Tax revenue losses for governments, unlawful and substandard products for consumers, increasing profits in the hands of ruthless criminals, and most importantly, continued greater health risks for those smokers who don’t quit. By failing to act, we are failing our society and our most vulnerable communities.