Organized Crime Research (kvl-homepage) The Nicotine Racket. Trafficking in Untaxed Cigarettes: A Case Study of Organized Crime in Germany, by Klaus von Lampe

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The Sale of Untaxed Cigarettes

The Beginnings of the Sale of Untaxed Cigarettes

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 Street Sale of Untaxed Cigarettes and the Vietnamese Community in Germany

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 Clandestine Sale of Untaxed Cigarettes

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.

Trends in the Development of the Consumer Market for 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).

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