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 Smuggling and Wholesale Distribution of Untaxed Cigarettes

The Major Channels of Supply for the Consumer Market for Untaxed Cigarettes

The retail market for untaxed cigarettes in Germany is supplied through four major channels:

1. the smuggling of Western made cigarettes legally purchased in non-EU countries,

2. the smuggling of cigarettes legally manufactured and purchased in non-EU, primarily Eastern European countries,

3. the diversion of cigarettes manufactured in Germany or other Western countries officially designated for export to non-EU, primarily Eastern European, countries, and

4. the illegal re-import of cigarettes manufactured in Germany or other Western countries after having been legally exported to non-EU countries.

While the first two supply routes are characteristic of the early stages of the development, the latter seem to be the more important ones today. (Slide: Supply Routes for the Illegal Cigarette Market)

The Sophistication and Concentration of Smuggling Operations

In contrast to the sales end, the upper levels of the business, the smuggling and wholesale distribution of untaxed cigarettes, have not only become much more sophisticated over the years. They also show clear signs of a concentration process. However, no evidence as of yet points to the excercise of market power.

The first dealers of untaxed cigarettes in Germany, it seems, were smugglers and vendors in one person, bringing into the country only the amount of cigarettes they could sell themselves. But very early on a specialization between smugglers, primarily from Eastern Europe, on the one hand and vendors, mostly Vietnamese, on the other could be observed(43). Along with this division of labor the smuggling of cigarettes took on new proportions. While individuals have continued to bring small amounts of cigarettes across the border, reports on the confiscation of contraband cigarettes indicate that soon the major supply for the German consumer market came from shipments ranging from the size of a full car trunk, about 50.000 cigarettes, to entire containers holding several million cigarettes, being brought into the country in all imaginable forms of disguise(44).

Parallel to the extended use of traditional smuggling methods more elaborate schemes to put large quantities of untaxed cigarettes on the black market have evolved. Dummy corporations are set up to legally purchase tax-free cigarettes by the truck loads from companies in Germany and other Western countries, even the U.S., supposedly to be exported to Eastern Europe. Before the cargo reaches the border, however, it is unloaded and sold to illegal wholesale dealers. The trucks are then either supplied with false documents or customs officials are bribed to issue genuine documents in order to keep the impression that the cigarettes have in fact been transported out of the country. In one case discovered in 1992, Polish smugglers had paid two German customs agents 10.000 Marks each per truck for confirming the proper crossing of the border(45). In recent years big time operators have turned to exporting bulk shipments of legally purchased cigarettes to Eastern Europe, only to smuggle them back into Germany later with false customs declarations. Presumably this is a less risky alternative, namely because the bribing of German customs officials is not required while the danger of contraband being detected at the border is rather limited(46).

The legal procurement of large quantities of untaxed cigarettes is apparently linked to a concentration process on the upper levels of the black market. While it is the cheapest and potentially most profitable way to obtain untaxed cigarettes, it is open only to a few rather sophisticated and well funded operators. A carton of 200 cigarettes designated for the export to Eastern Europe costs between 6 and 9 Deutsche Marks and can be resold to illegal wholesale dealers for between 12 and 25 Marks(47). A truck load of cigarettes, including the service of drivers, carriers, forgers and various small time accomplices, according to one estimate, costs about 500,000 Deutsche Marks and produces net profits of close to 1.5 million Deutsche Marks(48).

In Berlin during the mid 1990s, according to information supplied to journalists by a former high level insider of the business, the wholesale market was divided up between three so-called cigarette syndicates(49). One can surmise from the available data that this oligopoly had come into being only because of the economies of scale involved and not through efforts to actively restrict access to the market. No indications exist of any violent competition or, reversely, of any cartel agreements.

The Concentration on the Wholesale Level

The concentration on the top level of the market has apparently lead to a similar development on the wholesale level. Assumptions to that effect are plausible because it seems unlikely that truckloads of untaxed cigarettes would be sold directly to great numbers of vendors. For practical reasons and to reduce the risk of detection, top level operators will be inclined to deal with as few customers as possible. In the case reported by the above mentioned former high level insider, a smuggling ring of Polish, Lithuanian and German membership operating in the Berlin area sold its merchandise exclusively to one Vietnamese wholesale dealer who in turn passed the cigarettes on to several intermediate distributors(50). Interestingly, this dealer supposedly maintained excellent relations with the Vietnamese embassy in Berlin. The embassy, the informant claims, was used several times to complete cash payments. Embassy members are also suspected to assist Vietnamese in money laundering operations(51).

The Overall Structure of the Illegal Cigarette Trade

In sum, the sale of untaxed cigarettes takes place in two geographically and technically divided sub-markets, an open market primarily confined to East Germany and a clandestine market gradually expanding primarily in West Germany. The retail market as a whole is increasingly supplied by large-scale smuggling operations who are capable of procuring large quantities of untaxed cigarettes from legal sources.(Slide: Basic Model of a Distribution Network for Untaxed Cigarettes).

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