New KPMG report presented in Brussels shows illicit cigarette consumption still at worrying levels in the EU

How organized crime is profiting from inefficient anti-smoking policies.

France reigns over the illicit cigarette market in Europe.

The trade in counterfeit and illicit cigarettes is booming in Europe. Criminal organisations are costing governments billions of euros in lost revenue and complicating efforts to get smokers to switch to much safer smoke-free products. Trade in illicit tobacco is rising at an alarming rate in some EU countries but declining in others, including in Italy, Poland and Romania. How can policy-makers learn from the approach of these member states to take on organised crime and tackle the problem?

EU member states have lost € 11.6 billion in tax revenue compared to  €11.3 billion in 2022,  with France leading the way. Illicit cigarette consumption continues to grow in the EU and reached € 35.2 billion cigarettes in 2023 across EU countries, according to the KPMG annual study, in collaboration with Philip Morris International.

The study presented in Brussels last week, revealed that the illicit market in the EU continues to be a major threat for public health, public security, and the economies of states. Counterfeit cigarettes remain one of the main sources of illicit consumption in the region, with 12.7 billion (36%) cigarettes consumed- as criminal networks increasingly target higher-taxed and higher-priced markets.

France is still leading the ranking as the country with the largest illicit consumption in all of Europe, with 16.8 billion illicit cigarettes and an estimated €7.3 billion in tax revenues lost

Crime Networks Moving In

“We are seeing an evolution of organised crime in Europe, increasingly locating production facilities close to Western European countries. This is a direct consequence of policies that have not done enough to curb illicit trade and reduce the spread of smoking, putting consumers, governments, legal businesses and society at risk,” said Christos Harpantidis, Senior Vice President External Affairs, PMI .

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Criminal organizations are getting smarter about where they operate, with many now shifting their production closer to Western Europe to be nearer major markets like France. In 2023 alone, authorities shut down over 110 illegal cigarette factories across the continent, but these crackdowns haven’t been enough to stop the rise in black market activity.

Moreover, nearly 40% of the illegal cigarettes consumed were counterfeit, and this poses a huge health risk for the users, as the rogue factories don’t have to check any quality and safety boxes. Tobacco giant Philip Morris pins the authorities for this escalating situation.

“Countries like France display a true dissociation between the regulatory and reality. “Because it’s the only way to explain why in countries where more and more adult smokers are switching to the dark market, we continue to see excise duties increasing”, added Harpantidis. The PMI executive also referred to the upcoming EU regulatory updates, which seem to be surrounded in mystery: “We can not comment on what has not been made public. We remain confident that any EU proposals will not fail to take into account national policy choices that contributed to declining smoking rates and the resulting public health gains across an increasing number of countries in the EU and around the world.” 

Not Just a French Problem

France may be leading the pack, but the illicit cigarette trade is a growing issue across Europe. Although torn by war, Ukraine is the second-largest illicit market, 8.4 billion cigarettes being consumed illegally last year. Out-of-EU United Kingdom is also contributing to the rise in counterfeit cigarettes, with black market activity surging for the fourth year in a row.

Interestingly, former suppliers of illegal cigarettes countries, such as Poland and Romania, have managed to reduce their illicit markets to below 5% of total consumption. Italy joins this group, as the report shows a more promising picture in parts of Eastern Europe and the Balkans, where countries like Albania and Serbia are seeing much lower levels of illegal trade than Western Europe.

Luigi Scordamaglia , CEO of the Italian agricultural and food industry association Filiera Italia who participated in the Brussels presentation, insisted on the importance of collaboration between the public and private sectors. “The Italian model for combating the smuggling of illicit cigarettes has two ingredients. The first is full integration between farmers, those who produce and process, like Philip Morris, and those who sell, like the Federation of tobacconists, ensuring each their own margin and sharing together values and rules to respect. The second is a collaboration between the public and private sectors so that all stakeholders have up-to-date data on the evolution of the fight against illicit tobacco consumption, which is fundamental”.

Tax Policies Driving the Problem?

The report points to France’s high cigarette prices, driven by heavy taxation, as a key reason why so many smokers are turning to the black market. With packs of cigarettes in France costing close to €11, smokers can buy illicit versions for a fraction of the price, often smuggled in from countries with lower taxes.

KPMG estimates that €7.3 billion in lost tax revenue could have been used to fund public services like healthcare and law enforcement. “If we could magically eliminate illicit trade in cigarettes in the EU, we could pay for over three-quarters of the security and defence EU budget from 2021-2027”, declared the PMI Vice President External Affairs.

Christos Harpantidis, responding to a question from Jack Parrock, the event’s moderator, pointed to a situation similar to that of France: “in The Netherlands media is reporting about how the latest tobacco tax hike led to consumers crossing the border to buy cigarettes and to criminal gangs moving in the country to supply a larger number of illicit cigarettes. Mr. Harpantidis added “The Minister of Finances in The Netherlands publicly acknowledged last week that, instead of a 400 Million Euros forecasted gain, it is now expecting a 100 Million Euros shortfall.”

A Call for Smarter Policies

While some countries have made progress in reducing illegal cigarette trade, the report calls for a more coordinated approach across Europe to tackle the problem. The KPMG reports suggests that tougher enforcement needs to be paired with smarter policies, including ongoing assessment of policy enforcement and making smoke-free alternatives more accessible to adult smokers who don’t quit cigarettes altogether.

Countries like Poland and Italy have seen success in reducing illicit trade through better enforcement and education. And, as the report makes it clear, France’s illicit cigarette market isn’t shrinking anytime soon unless policies shift. A focus on education, law enforcement, and public-private partnerships is needed to clamp down on the black market, while balancing taxes to avoid further incentivizing illegal trade.

For now, though, France remains the biggest player in Europe’s booming black market for cigarettes- a problem that’s only getting more difficult to tackle.

For the first time since 2006, the year in which KPMG’s annual study was launched, the research scope has been expanded to a total of 38 countries, namely the 27 EU Member States plus Albania, Bosnia and Herzegovina, Kosovo, Moldova, Montenegro, North Macedonia, Norway, Serbia, Switzerland, Ukraine and the United Kingdom. This broadening of the analysis allows us to state today that the problem affects the Western region (France, the United Kingdom, Ireland) and the Scandinavian-Baltic region (especially Norway, Finland and Lithuania), where the cost of cigarettes and taxes are higher, compared to the countries in Southern Europe (Spain, Portugal and Italy).

Picture credit: Julia Anisenko

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