Part 1 * Part 2 * Part 3 * Part 4 * Part 5 * Part 6 (Notes)
The market for untaxed cigarettes as we know it today emerged
in the wake of the demise of the post-Stalinist regimes in Eastern
Europe. Western brand cigarettes, like other merchandise, became
available in those countries. In the absence of high taxes and
customs duty cigarettes were legally sold at prices far below
the level charged in the West. A carton of ten packs of cigarettes
could be purchased in Poland for about 15 Deutsche Marks, one
third of the regular price to be paid in a German store. This
difference in price constituted a strong incentive to buy cigarettes
in Poland, smuggle them into Germany and sell them at a profit
of about 100 percent. It seems that Polish tourists traveling
to nearby West-Berlin around 1989 were the first ones to systematically
offer these cigarettes on flea-marktes and on the street to passers-by.
Soon, especially after the economic and currency-union was established
between East and West Germany in June of 1990, four months prior
to reunification, vendors of untaxed cigarettes became a common
sight near metro stations and supermarkets in Berlin and other
East German cities.
The example of Polish tourists was followed by citizens from other
Eastern European countries who travelled to Germany for the purpose
of selling untaxed cigarettes. Very early on, however, Vietnamese
began to dominate the street sale. There are no indications that
force or violence was used by the Vietnamese to push competitors
out of the market. Rather it seems that the Vietnamese are the
survivors of a selection process brought about by law enforcement
efforts. Apparently Vietnamese, more than others, had the prerequisites
for successfully withstanding the adversities connected with operating
an illegal business out in the open, without having to rely on
the corruption of law enforcement officials. In fact, no case
has become known in which street vendors have bribed customs or
police agents(11).
Vietnamese workers had been recruited in great numbers by East
Germany since 1985 for stretches of four to five years in order
to fill up the ranks of its chronically understaffed work force.
By the time communist rule collapsed in 1989, some 60.000 Vietnamese
laborers lived in East Germany. Within a year, most of them had
been laid off as factories were forced to rationalize or close
down completely, causing many to return to Vietnam. About 20.000,
however, stayed behind in search of new sources of income(12).
Since Vietnamese had been wheeling and dealing with textiles and
other rare products under communist rule it seems like an obvious
decision that many of them now turned to the sale of untaxed cigarettes(13).
Especially during the early years Vietnamese vendors of untaxed
cigarettes proved largely immune against law enforcement. Proceedings
against Vietnamese suspects have to overcome several specific
difficulties. Problems arise with entering Vietnamese names into
data systems(14). A street vendor may be arrested several times
without facing criminal charges as a repeat offender, simply because
his name is registered in different ways. As a first time offender
he is only fined and has his merchandise forfeited. The language
problem also makes investigations and criminal proceedings against
Vietnamese difficult as qualified and reliable interpreters are
not always available in sufficient numbers for electronic surveillance,
in police interrogations and in court proceedings during criminal
trials(15).
Even if criminal charges are pressed, street vendors have a good
chance of receiving only lenient sentences, allowing them to return
to their business after each arrest. In Berlin, after their third
arrest, vendors face a suspended sentence of three months with
probation. With one previous conviction vendors receive a suspended
sentence of six months with probation(16). While every vendor
regardless of his ethnic background benefits from such leniency,
Vietnamese, at least until recently, have an additional advantage
over other foreigners insofar as they run a lower risk of deportation,
because Vietnam, like no other country in the world, requires
an entry-visa even from its own citizens. The visa is denied to
those who have violated Vietnamese laws, which, for example, make
it illegal to apply for political asylum in another country. The
visa is also denied unless the applicant states that he wishes
to return to Vietnam voluntarily(17).
The strict visa requirements do not concern former contract laborers
as much as they concern Vietnamese who have come to Germany illegally
after reunification. Several thousand illegal immigrants from
Vietnam are believed to live in Berlin, and for Germany as a whole
estimates go as high as 45,000. They have no legal status once
their application for political asylum is rejected which occurs
in more than 99 percent of all cases. According to official sources,
these illegal immigrants have replaced the former contract laborers
as street vendors of untaxed cigarettes(18), resulting in additional
problems for law enforcement. Illegal immigrants tend to use forged
documents with different identities and places of residence, and
they seem even less inclined to cooperate with authorities(19).
In 1995 a treaty between Germany and Vietnam went into effect
intended to facilitate the extradition of illegal immigrants.
The Vietnamese government agreed to grant reentry to 40,000 Vietnamese
from Germany until the year 2000(20). During the first three years,
however, the implementation of the treaty had gotten off to a
slow start. Instead of 20,000 returnees to be sent back to Vietnam
by the end of 1998, only about 5,000 were actually extradited(21).
Even if a cigarette vendor is extradited, it has no effect on
the business insofar as he or she is immediately replaced by a
newly arrived immigrant from Vietnam. Vendors who are now apprehended
for the first time usually have just arrived in Germany a few
days earlier(22). Apparently alien smugglers have made a profitable
business out of recruiting prospective vendors who are charged
several thousand dollars that they have to either pay in advance
or work off by selling cigarettes(23).
The street sale of untaxed cigarettes is a phenomenon that has
been largely confined to East Germany and East Berlin. In West-Berlin
and West-Germany untaxed cigarettes are primarily sold through
clandestine distribution networks. Typically German middlemen
buy cigarettes from smugglers or dealers by order of friends and
colleagues. These middlemen either belong to existing criminal
networks otherwise used for the distribution of contraband or
stolen merchandise, as an informant interviewed for this study
stated, or they establish business relations with Vietnamese street
vendors who arrange for the supply of larger quantities of cigarettes.
In some cases vendors sell cigarettes they have smuggled into
the country themselves(24).
It is not easy to explain why the clear geographical division
of the market exists. One reason may be that only in East Germany
Vietnamese live in any great numbers and that they in effect are
the only ones having the necessary prerequisites for sustaining
the pressures exerted by law enforcement on the open sale of untaxed
cigarettes. Another reason could be that perhaps West Germans
are less willing to openly engage in illegal activities such as
the purchase of untaxed cigarettes, whereas East Germans may be
more defiant of prohibitive laws as either an after-effect of
the shadow economy prevalent under communist rule or as a sign
of opposition against a legal system that has been rigorously
transfered from West Germany(25). Additionally, the level of income
is markedly lower in East Germany(26), thus creating a much stronger
economic incentive for the purchase of cheap untaxed cigarettes.
The market for untaxed cigarettes has undergone some significant
changes. The street sale in East Germany expanded quickly in 1990
and 1991, allegedly leading to a drop in legal sales of cigarettes
by one third(27). In Berlin untaxed cigarettes could be purchased
at some 1.200 public places, mostly in the Eastern districts of
the city, the sale taking place almost unimpeded as the customs
service, the agency in charge of enforcing tax and customs regulations,
was overcome by the sheer magnitude of the problem(28). Street
vendors could display their merchandise openly on long rows of
cardboard boxes used as make-shift counters.
In the mid 1990s efforts to control the trafficking in untaxed
cigarettes were intensified before the backdrop of violent conflicts
between rivaling Vietnamese gangs involved in the extortion of
street vendors. Systematic raids against and stiffened sentences
imposed on street vendors as well as the more vigorous targeting
of consumers(29) led to a profound restriction of the street sale
of untaxed cigarettes. The fact that street vendors were increasingly
drawn into the violent conflicts between extortion gangs may also
have had an impact, just as the implementation of the German-Vietnamese
extradition treaty. In any case, by the end of 1996 from 1.200
public vending places in Berlin only about 100 had remained(30).
After the police succeeded in breaking up the major gangs in 1996
and 1997, resulting in a sharp decline of violence within the
Vietnamese community, the number of public vending places in Berlin
increased once again, but only up to about 400 in 1998(31).
(Slide: Changes in the Street Sale of Untaxed Cigarettes)
The mode of operation of the street sale has changed parallel
to increased law enforcement pressure. It seems that in most cases
now cigarettes are not directly handed over to a consumer. Instead
buyers are either led to hidden places were cigarettes and money
are exchanged, or they have the cigarettes delivered to their
home. Accordingly street vendors have no cigarettes on them except
for an empty pack or a pack of legally purchased cigarettes they
display to attract customers. In fact, a Vietnamese in conjunction
with a pack of "West" or "Marlboro" has become
an easily recognizable trademark. The merchandise is kept in small
amounts at different locations to limit the potential loss through
confiscation, and money is immediately passed on to accomplices
to conceal its origin. In addition street vendors now operate
in combination with several look-outs as a safeguard against raids(32).
These security measures are remarkable because they mean that
under intensified law enforcement pressure the organization of
the street sale of untaxed cigarettes has become more complex
and more sophisticated. Originally street vendors, as far as can
be told from the available data, operated as individual entrepreneurs(33).
Today a street sale operation involves a number of participants
occupying different positions in a division of labor, namely vendor/advertiser,
look-out, storeman, and cashier. To what extent a vertical differentiation
of hierarchical levels exists is not clear. Claims to that effect
are plausible but not bolstered by facts and may be mere rhetoric(34).
The clandestine sale of untaxed cigarettes, it seems, is not exclusively
the result of intensified law enforcement, because it partly predates
the restriction of the open market in the mid 1990s. Information
from various sources indicate that members of criminal networks
were attracted to the cigarette business as a profitable and safe
alternative to other illegal activities. Apparently through these
networks, in a movement from East to West, untaxed cigarettes
gradually became available all over Germany(35),
while East Germany remained the main consumer market(36).
Today, annual sales in Germany as a whole are estimated at about
four billion untaxed cigarettes(37), compared with close to 140
billion cigarettes sold legally(38).
Apart from the growing sophistication of street sale operations
as a reaction to intensified law enforcement efforts, and the
spread of the clandestine sale of cigarettes, mainly in West Germany,
another trend that might have been expected cannot be confirmed
from the available data: the centralization or monopolization
of the retail market for untaxed cigarettes.
No information exists about the relations between the various
vending operations. One possible, though by itself inconclusive,
evidence for a concentration process would be a more or less uniform
increase of the retail price for untaxed cigarettes. In the early
1990s the minimum prices for a carton of 200 untaxed cigarettes
ranged from 18 Deutsche Marks in West Berlin, offered by Polish,
Rumanian and Bulgarian dealers, to 23 Deutsche Marks in East Berlin,
offered by Vietnamese vendors(39). In the mid 1990s these prices
have in deed gone up significantly. Since 1995 a sales price of
about 30 Deutsche Marks has almost uniformly been reported in
the media, pertaining to the street sale in East Germany as well
as the more conspiratorial sale in West Germany(40). The detectives
branch of the customs service (Zollfahndungsamt) in Berlin is
likewise, though with more precision, reporting prices between
27 and 30 Marks for Western made cigarettes and 25 Marks for less
popular Polish made "Marlboros"(41). This may or may
not be the expression of an exercise of market power by a cartel
or a monopoly enterprise, either on the lower or on the upper
level of the market. It is at least as likely that the price increase
is a mere reflection of the increased costs of doing business
in the face of intensified law enforcement pressure. Providers
of illegal goods and services by necessity pass on these costs
to their customers in the form of what has been called a crime-tariff(42).
Organized Crime Research (kvl-homepage)
The Nicotine Racket. Trafficking in Untaxed Cigarettes: A Case Study of Organized Crime in Germany, by Klaus von Lampe
