Thursday, August 4, 2016

Terror Financing and the Black Market Cigarette Trade - Eliot Bakker

by Eliot Bakker

The nanny state regulations that help fill the coffers of our enemies.

In Pennsylvania last month, state representatives Russ Diamond and Rick Saccone challenged a $1-per-pack cigarette tax increase (which was later passed into law), arguing that the price hike would regressively target poorer smokers and encourage black market sales. More critically, the two lawmakers pointed out that increased sales of smuggled tobacco would put more money in the pockets of violent extremists who wish to do Americans harm.
That argument raised eyebrows in the press, but the point made by Diamond and Saccone is a critically important one. A major 2015 report from the State Department identified tobacco smuggling as a major threat to national security, noting that selling illegal cigarettes is a relatively “low-risk, high reward” activity for criminal networks and terror groups, who often join forces to exploit the illicit trade. The Pennsylvania representatives had especially good reason to be concerned about their state’s exposure to smuggling, since it sits on one of the most lucrative smuggling routes in the country.
Cheap cigarettes from Virginia regularly pass through Pennsylvania and Delaware on their way to being illegally sold in New York and New Jersey, where high taxes applied by liberal state governments have pushed smokers into the arms of smugglers. Last year, a court in Brooklyn sentenced Basel Ramadan to 12 years in prison for his role as the ringleader of a major trafficking ring that supplied Arab markets in New York and New Jersey. More recently, Pennsylvania state troopers caught a man with 66,600 smuggled Virginia cigarettes in his trunk at around the same time Reps. Diamond and Saccone were addressing the legislature.
Overzealous lawmakers keen to boost tax revenues have always seen smokers as an easy target. Liberal politicians and public health groups argue that hiking taxes on tobacco products will cut smoking by making the habit prohibitively expensive. The inconvenient reality, though, is that there is little evidence small, incremental rises in tobacco taxation have any real effect on smoking levels. In fact, a 2012 National Bureau of Economic Research paper found that tobacco prices would need to double to reduce adult smoking by just 5%. 
Instead of cutting consumption, rising tobacco prices encourage poorer smokers to look to the black market. Across the country, the Tax Foundation estimates that smuggled cigarettes make up a substantial portion of tobacco consumption – greater than 20% in some states. In New York, the illicit tobacco capital of the US, smuggled cigarettes made up 58% of the total cigarette market in 2013, according to the foundation. In addition to putting their health at risk by exposing them to counterfeit cigarettes, the influx of consumers into the shadowy underground tobacco market also means their money can end up in the hands of criminal groups and terrorist organizations.  In what might be the best-known such case, Mohamad Youssef Hammoud is serving 30 years in prison for using millions of dollars in proceeds from tobacco smuggling to purchase equipment for Hezbollah in his native Lebanon.
Radical Islamist groups and other terror organizations have long viewed tobacco smuggling as one of their most reliable sources of income. Despite groups such as ISIL denouncing smoking as un-Islamic and producing propaganda images of its fighters burning piles of cigarettes, these organizations have absolutely no qualms about funding their activities with money made selling illicit tobacco to “kuffar” in the west. The leader of African militant jihadist organization Al-Mourabitoun, Mokhtar Belmokhtar, has been dubbed “Mr. Marlboro” due to his reliance on funds raised through the sale of illicit tobacco. That money has allowed Belmokhtar and his fighters to conduct deadly attacks on Westerners in Algeria, Niger, Mali, and Burkina Faso.
High tobacco taxation is having the same effect over in Europe. KPMG’s latest snapshot of the illicit cigarette market in the EU, Norway, and Switzerland found that nearly 10% of all tobacco consumed in the bloc last year was illegal. One of Europe’s smallest countries, Malta, lost €10 million ($11.15 million) in tax revenue to tobacco smugglers in 2015 alone. Some of the crooks-turned-jihadis behind some of Europe’s shocking recent attacks – including last year’s Charlie Hebdo plot – traded in counterfeit cigarettes and used them to fund their activities. 
Astonishingly, the European Commission recently decided to give up one of its best weapons against the illicit tobacco trade – an Anti-Contraband and Anti-Counterfeit Agreement with Philip Morris International – because of pressure from activists over compliance with the UN’s Framework Convention on Tobacco Control (FCTC). According to the FCTC’s article 5.3, policymakers should avoid all contact with tobacco reps – and while the article isn’t binding, officials have been enforcing it religiously, even if it means weakening their hand in fighting tobacco smuggling.
It’s no surprise that terrorists and organized crime groups are taking advantage of the illicit tobacco trade. Profits are high, and selling smuggled cigarettes is much safer than tracking weapons, drugs, or people. Regressive tax rises on cigarettes bring in relatively little money, have a minimal impact on overall smoking levels, and effectively help fund the greatest threat Western liberal democracies has faced in living memory – Islamist terrorism.

Eliot Bakker is a strategic consultant and American expat based in Brussels, where he advises American businesses operating throughout Eurasia on regulatory issues.


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