FOR IMMEDIATE RELEASE
OCTOBER 19, 2000

INCENTIVES TO SMUGGLE AND TRADE ILLEGAL TOBACCO PRODUCTS OUTWEIGH RISKS OF PROSECUTION – AN ICPS/CIPR RESEARCH REPORT FINDS.

CRIMINALLY ORGANIZED TOBACCO SMUGGLERS SOLD (UAH) 700 MILLION WORTH OF CIGARETTES IN 1999 EVADING (UAH) 660 MILLION IN TAXES.

LINKS BETWEEN TOBACCO SMUGGLING AND OTHER CRIMES MUST FORCE LAW-ENFORCEMENT AGENCIES TO RE-ADJUST PRIORITIES.

KYIV, OCTOBER 19, 2000 – Incentives to smuggle and trade illegal tobacco products in Ukraine greatly outweigh the risks of criminal penalties and prosecution – an International Center for Policy Studies (ICPS) research report commissioned by the Coalition for Intellectual Property Rights (CIPR) found. 

“Tobacco smuggling into Ukraine and illegal cigarette sales have grown into an extremely serious social-economic problem,” the report’s co-author Tatiana Sytnyk said.  “Transparent borders with neighboring countries, the uncoordinated and ineffective work of law enforcement agencies and marginal penalties and fines are all conditions facilitating the growth of illicit tobacco products in the local market,” she said.

The first of its kind industry-wide report “on the causes and effects of the illegal import and circulation of tobacco products in Ukraine” unveiled a highly organized network of smugglers and illegal tobacco traders.  This network includes cross-border transporters, firms that store and distribute illicit tobacco products and retailers who supply the country’s open markets and urban street corners with low quality contraband cigarettes. 

The ICPS/CIPR report estimates that in 1999 tobacco smugglers earned (UAH) 200 million in net profits ($50 million US equivalent) on black market cigarette sales of (UAH) 700 million ($170 million US equivalent).  The report further noted that smugglers cheated the state budget of (UAH) 660 million in tax revenues.  Approximately 18.6 billion sticks, or 27% of the total cigarettes consumed in Ukraine, are contraband.  The country’s tax administration reported that sales of contraband tobacco products during the first quarter of 2000 resulted in the evasion of (UAH) 367 million worth of tax revenues, a two-fold jump from the previous year.

“A strong correlation exists between cigarette and alcohol smuggling and the illegal trade of drugs and arms,” the report found.  It noted “individuals involved in illegal tobacco sales regularly bribe public servants to avoid financial sanction and the seizure of goods.”

“The problem is indeed growing,” report co-author and ICPS publications director Hlib Vishlinsky said.  The State Customs Service, State Tax Administration and the Ministry of Internal Affairs are three key law-enforcement agencies charged with controlling smuggling and illegal cigarette sales.  The report revealed a lack of agency coordination in eradicating tobacco smuggling.  Furthermore, the report found agencies were “disinterested” in conducting a complete investigation and disclosing the network of illegal tobacco importers and distributors.

“The ICPS/CIPR report uncovers a link between tobacco smuggling and other criminal activities,” Coalition for Intellectual Property Rights Ukraine representative Myron Wasylyk said.  “A crack down by law enforcement agencies on tobacco smuggling will have a chain effect in reducing other related crimes,” he said.

Contraband and counterfeit cigarettes are frequent violations of intellectual property rights, which lead to a number of socio-economic problems.  Consumers health is endangered from substandard goods, existing investors’ market share and profits are undercut, tax evasion from illegal sales lead to state budget revenue shortfalls and potential investors shy away from market entry due to inadequate brand protection.

 “Prolonging the implementation of coordinated law-enforcement efforts against tobacco smugglers only benefits criminals and hurts Ukraine’s consumers, local business, the state budget and the country’s economic attractiveness to potential investors,” Wasylyk said.  He continued, “the government’s economic reform policies must be matched by adequate law enforcement efforts and strengthening the rule of law.” 

The ICPS/CIPR report clearly states that adjustments to the excise duty rate alone, proposed by some government agencies and their allies in the Rada, will not decrease contraband levels, and might even make matters worse. By decreasing excise duties on cigarettes, state budget revenues will continue falling while smuggling and illegal cigarette sales will increase.  Fiscal measures only hurt legal manufacturers and importers.

The ICPS/CIPR report identifies a number of policy recommendations, which if implemented, would punish criminals, cut down on illegal trading, increase budget revenues, protect consumers and benefit investors.  These recommendations include:

• Government implementation of the Rada’s April 20, 2000 law on increasing incarceration periods and higher penalties for smugglers and illegal traders.

• Speedy court trials for offenders.

• Destruction of seized tobacco products and a clear break with State Tax Administration practice of selling confiscated substandard goods to the general public.

• Simplification of regulatory conditions that facilitate legal retail trade of tobacco products.

• Promote a negative public attitude toward tobacco product smugglers.

• Increase protection of state borders.

“Implementing these policy recommendations will greatly reduce existing incentives that lead to smuggling and trading of illegal tobacco products,” Wasylyk said.  “At the same time, society will benefit as related crimes will also be reduced,” he said.

Today’s roundtable discussion held at the International Center for Policy Studies is a first step in raising public awareness about the social-economic problems associated with intellectual property rights violations in the tobacco industry.  The ICPS is a non-governmental, non-profit research organization founded in 1994 by the Open Society Institute.  Its mission is to provide intellectual support to government decision-makers involved in the formulation and development of public policy.  For more information about ICPS see www.icps.kiev.ua.

The Coalition for Intellectual Property Rights (CIPR) is a private-public partnership dedicated to advancing intellectual property rights protection, enforcement and reform in the Baltic States, CIS countries and other nations of the former Soviet Union.  Through public education, legislative action and legal reform, CIPR works with its government and private sector partners to establish transparent IPR regimes that adhere to international standards.  The ICPS/CIPR report is available on the CIPR web-page www.cipr.org.

For more information contact Myron Wasylyk or Serhiy Movchan (38-044) 464-1240.