Smugglers are gonna smuggle

A Malaysian woman was recently sentenced to two years in an Australian jail for orchestrating a sophisticated money laundering and tobacco smuggling operation on behalf of a large-scale global criminal syndicate.

AFP telephone intercepts overheard her telling one of her underlings that the cigarette imports were "only about the dodging of tax, so Customs should not be interested".

Across the Tasman, the New Zealand Customs Service is increasingly concerned at the record volume of illegal cigarettes entering the country through Malaysian criminal syndicates, with around seven million cigarettes intercepted in Auckland over the past six weeks alone.

Covid, it seems, has provided an enormous boon for smugglers and criminal syndicates as authorities focus on enforcing closed national borders.

But the uncomfortable truth is, if smuggling isn't the world's oldest profession, it's likely a smuggler was one of its first customers. As soon as a tax or regulation was imposed on trade, smuggling will have occurred.

Smuggling is not only ubiquitous but has also influenced world affairs. For example, Britain's heavy-handed attempts to prevent its US colonies from trading with the Spanish empire, which was circumvented by smuggling, stirred the desire for independence.

The Chinese government's efforts to stop opium smuggling in the 1840s led to the opium wars, two outcomes of which were Britain's acquisition of Hong Kong and China's distaste for foreigners. And of course, smuggling of alcohol into America during the prohibition years gave a huge boost to organised crime and led to the creation of the FBI.

In the twentieth century, the prohibition of recreational drugs led to smuggling becoming a highly successful multi-billion-dollar transnational industry. Laws passed to suppress it, in many cases fundamentally at odds with a free society, achieved very little.

Given all that you might expect the Australian government to be wary of creating another opportunity for smugglers. As the saying goes, those who fail to learn from history are doomed to repeat it. Yet Australia now faces a large and growing smuggling industry as a consequence of its massive increases in tobacco excise.

Most countries impose taxes on tobacco, for which two justifications are offered. One, not heard very often, is that it can raise a lot of revenue. The other, mentioned frequently, is that it discourages smoking. The first is the truth; the second may once have been true in Australia, but it is not now. Rates of smoking are not falling.

Australia's big increases in tobacco excise began in 1992. However, it really took off in 2010 with a 25% increase followed by increases of 12.5% every year from 2013, with the latest in September this year. By 2019 the excise rate was about 270% higher than in 2012.

As a consequence, cigarettes in Australia are the most expensive in the world at about $1.20 per stick (depending on brand) at retail level. Tobacco excise contributes almost $18 billion dollars a year to government revenue.

With the price of an entire pack costing less than $1.20 in some countries, there is an enormous incentive to smuggle tobacco products into Australia. It is said that even if nine out of ten containers of illicit tobacco products are intercepted, the profits on the tenth are sufficient to not only cover the losses but also reward the smugglers handsomely.

Smokers, a large proportion of whom are on low incomes, have responded positively. The annual survey of tobacco consumption undertaken by KPMG found illicit tobacco increased from 14% of the market in 2018 to over 20% in 2019. A total of 3.1 million kilograms of tobacco, loose and packaged, were smuggled into the country, avoiding $3.41 billion in excise. This occurred despite a 46% increase in tobacco seizures by Australian Border Force.

To some extent this is of no great concern to anyone except the federal government. Cheap smokes are no more dangerous than the legal kind and, as the Malaysian woman said, the smugglers are merely evading taxes, not something most of us would seriously criticise.

The real problem is that the people smuggling tobacco are also smuggling other things. They are organised, sophisticated, dangerous criminals. Profits from tobacco smuggling are funding these other activities, including human trafficking. According to the US Department of State, traffickers are denying nearly 25 million people "their fundamental right to freedom, forcing them to live enslaved and toil for their exploiter's profit."

The ILO says that at any given time in 2016, there were 40.3 million victims of modern slavery, including 24.9 million in forced labour and 15.4 million in forced marriage. 1 in 4 victims of modern slavery are children.

The response of the federal government has been to boost deterrence and interdiction efforts. Penalties have been increased and, in 2018, it established an Illicit Tobacco Taskforce to "proactively detect, disrupt and dismantle serious organised crime syndicates that deal in illicit tobacco". The result is increased seizures but, as the KPMG survey shows, it is yet to make any difference to the market.

The question is whether it should even expect to make a difference, given smuggling's history. You would have to search long and hard to find where smuggling has been substantially suppressed through law enforcement, particularly in a country that respects legal rights and due process. If the enormous resources devoted to the control of drugs have failed to limit their availability, why should it succeed with tobacco?

The obvious solution would be to remove the incentive to smuggle tobacco into Australia by reducing the excise. Smokers would buy their favourite legal brands if they were cheaper, legitimate tobacco retailers would not be competing against illicit suppliers, and less money would be spent on law enforcement.

Regrettably, learning from history is not something that governments are good at, even when smuggling has such a long history. On tobacco, they never learn.