On Tap Europe Series
On Tap Europe: Organized Crime and Illicit Trade in Tobacco, Alcohol and Pharmaceuticals
Purpose of the report
This report examines the illicit trade in tobacco, alcohol and pharmaceutcial products. The most prevalent methods used by OCGs involved in this trade will be discussed in further detail below, but the overview provided here illustrates the scope of their activities.
There are two principal ways in which OCGs are involved in the illicit alcohol trade:
Smuggling genuine products: Mirroring the tobacco market, there are price differentials across the EU. Alcoholic beverages are purchased at a low price in one country and then smuggled into a more expensive market, evading the payment of excise duties and VAT. While some of this activity is conducted by opportunistic individuals, once again there is evidence indicating OCG participation in large-scale operations.
Manufacturing unlicensed or counterfeit products: Illicit factories produce unlicensed generic brand alcoholic beverages or direct counterfeits of genuine brands. Illicit or counterfeit alcohol products often use denatured ethyl alcohol that was not intended for human consumption.
Illicit alcohol trade
With regard to alcohol, the World Health Organization (WHO) offers estimates of ‘unrecorded’ alcohol in countries around the world, defined as ‘produced, distributed and sold outside [the] formal channels’. These estimates refer primarily to smuggled products on which duty has not been paid, or illicit production, including industrial alcohol. However, this figure is not a perfect measure as it also includes alcohol that has been legally produced at home for personal consumption. Moreover, as it does not distinguish between forms of illicit alcohol, it is not possible to draw any conclusions about the relative scale of different elements of the threat. Finally, the figures are also based on a 2010 survey, which is now a little out of date. However, despite these limitations, the WHO’s figures at least offer a useful estimate in an area largely devoid of public data.
There is also evidence of illicit alcohol production in EU member states, of varying scale. OCGs may label unlicensed low-quality product as an expensive brand, or produce counterfeit or unlicensed products using industrial ethanol (a type of alcohol) that was never intended for human consumption.
Industrial ethanol has a number of legitimate applications, from household cleaning products to decontamination sprays. In contrast to alcohol intended for drinks production, it is exempt from excise duty within the EU, which unintentionally creates opportunities for OCGs to make substantial profits if it is used to produce illicit wines or spirits. To prevent such exploitation, and ultimately protect consumers, there are regulations at both the national and EU level that require industrial ethanol alcohol to be ‘denatured’, that is rendered undrinkable through the addition of foul-tasting or foul-smelling chemicals. A blue or purple dye is often also added so that the product can be easily recognised.
However, OCGs can take steps to filter out and remove these denaturants by, for example, using diatomaceous earth or simply adding forms of bleach. The resultant products are potentially extremely harmful due to the nature of the alcohol used and the often unsanitary production facilities. Moreover, there have also been instances of methanol industrial alcohol being used in error. Highly toxic once metabolised by the human body, methanol poisoning can cause blindness and death, as was highlighted in the Czech Republic in 2012 when dozens of people died and many more suffered permanent health damage.
The illicit alcohol products are sold as either counterfeits of genuine brands or are unlabelled. When producing counterfeits, the forgery goes beyond the product’s label, often including bottle designs and caps. Alternatively, OCGs may refill genuine bottles. In Romania, there are indications that staff in bars and clubs are sometimes complicit in this activity, not only providing empty bottles, but taking care when removing plastic wrappers so that they can be replaced.
An official quietly stamping paperwork; a lorry passing across internal EU borders; an innocuous parcel in a postman’s van: this is what organised crime looks like in Europe. It is, of course, only one side of a multifaceted threat, but while the more violent elements of organised crime demand our attention, illicit trade is quietly capitalizing: infiltrating our economies, bringing dangerous goods into our communities and diverting billions of euros away from EU governments.
The illicit trade is the epitome of modern organised crime in its reflection of legitimate business: groups are quick to recognise and respond to opportunities; they diversify their activities to minimise risk and maximise investment; they capitalise on new technologies; they build a network of contacts with varied expertise; and they cooperate with international partners.
Across Europe, this is not the organised crime threat that law enforcement was designed to tackle. Law enforcement is used to fighting strict hierarchical groups, but organised crime groups (OCGs) no longer have this structure; they are becoming ‘loose, undefined and flexible networks’.
But while law enforcement needs to evolve, there are also new allies to support them in their task. International bodies, industry regulators and affected sectors all have a role to play in reducing organised crime; as technology, infrastructure and regulation have advanced to facilitate legitimate business and cross-border trade, OCGs have found ways to similarly utilise these mechanisms, making them unintentional enablers of the illicit market. Efficient global commerce is an integral part of modern life, but the balance has not yet been found between facilitating trade and ensuring security.
The approach to prosecution and sanction across the EU also requires reform. At present, member states are ineffective in deterring both new entrants to illicit trade and repeat offenders. Fundamentally, the rewards are too high and the risks are too low. Until this balance can be altered illicit trade will remain a key aspect of organised crime activity and continue to be a threat across the EU.
This report is the culmination of an eighteen-month study conducted across five EU member states: Greece, Italy, Poland, Romania and Spain. The research team worked closely with law enforcement agencies, gaining some operational experience of both the threat and the methods undertaken to tackle it. In addition to desk research and fieldwork interviews with experts from the public and private sector, five workshops were held in the countries selected as case studies.
The country-level research has also been supplemented by further work to examine assessments of, and responses to, illicit trade at the European level. This included a two-day conference in Brussels, examining the major themes raised by the research with representatives from law enforcement agencies, research organisations and European institutions, as well as the tobacco, alcohol and pharmaceutical industries.
European and International Institutions
International standards must be established for free-trade zones (FTZs) to prevent their descent towards lawless territories that enable organised crime. FTZs are being exploited by OCGs, who take advantage of their limited oversight to re-document shipments and conceal their true origin, or even to conduct parts of the manufacturing process. There are no enforceable interna onal standards governing FTZs, o cials described some FTZs as descending towards lawless territories. While FTZs are an important part of global trade, the balance has not yet been found between facilita ng trade and ensuring security.
States are unlikely to act alone as national measures would undoubtedly reduce efficiency, potentially driving legitimate business to competing FTZs. Instead, clear, unambiguous global regulation is required. The World Customs Organization is ideally placed – but currently too weak – to impose international change and should be reformed, following the model provided by the Financial Action Task Force (FATF) in regulating the international financial system. Europol and the European Border and Coast Guard Agency (Frontex) should establish a dedicated centre to support member states in tackling corruption within the public sector. Corruption at European borders is a critical enabler of illicit trade. Corrupt officials can undermine otherwise strict controls and enable the EU’s outer defences to be easily breached by OCGs importing counterfeit or unlicensed goods. While some corrupt officials are prosecuted, there are reports of many more cases where corrupt officials were quietly transferred or dismissed and concerns that yet more remain undetected. The volume of illicit goods reaching EU markets would also seem to suggest that corruption is still a serious problem.
Europol and Frontex should jointly establish a dedicated anti-corruption centre to provide expert guidance in establishing vetting procedures, offer training for the detection of corruption among officials, and support member state investigations. Europol and the European Anti-Fraud Office (OLAF) should establish a joint review of intelligence-profiling in postal systems, given the tactics used by OCGs to obfuscate the origins of parcels. OCGs are making increasing use of postal and courier systems, sending lower volumes of goods with greater frequency. Unable to scan the vast quantities of post entering the country, member states have instead employed intelligence-profiling to target parcels from locations considered high risk. However, OCGs are adapting to this strategy, transporting goods into the EU through other means before distributing them through the post, or specifically routing production through states with ‘trusted’ postal systems. In light of this evolving approach, strategies for detection at postal hubs need to be reviewed. The EU should review the regulation of private courier services. As OCGs increasingly send goods in smaller shipments, and often directly to online customers, private couriers are at risk of exploitation – just like national postal services. While new customers may see their parcels inspected by a courier, there are suggestions that returning customers may be more trusted, creating opportunities for OCGs to exploit.
In addition to major companies, there are reports of substantial numbers of small businesses offering courier services across member states, often established to provide a legitimate service between expats and their families. However, these services run a substantial risk of being used for illicit trade, with small vans regularly transporting hundreds of parcels across borders after collecting only minimal details from senders. There is also a broader security concern here, as many illegal items – not just tobacco, alcohol and pharmaceuticals – may be transported in this manner. Requirements for company registration, Know Your Customer (KYC) procedures and parcel inspection should be reviewed and strengthened.
Sanctions for illicit trade must be reviewed and revised to increase consistency across member states. Current sanctions for illicit trade do not act as an effective deterrent – they fail to deter both new entrants and repeat offenders. There is also increasing evidence that the sanctions within member states influence decisions by OCGs about where to conduct operations or which routes to take when transporting goods across the EU. Increased strength and increased consistency in the penalties for activity in the illicit trade should therefore be an important objective.
First submitted by the Commission in July 2012, the Protection of the Union’s Financial Interests Directive includes provisions to directly address this objective; however, the draft text is the subject of disagreements within the Council and, at the time of writing, remains on hold. Measures must be adopted to protect consumers unwittingly involved in the illicit trade. The internet is a primary enabler for the sale of illicit goods across Europe, particularly pharmaceutical products. While many consumers intentionally purchase goods illicitly, others are deceived into believing they are making a genuine purchase, with OCGs creating increasingly professional websites. OCGs are also adapting their methods for different audiences: lifestyle products are sold relatively openly on forums and social media, but there are also reports of OCGs targeting those with serious illnesses, posing as bereaved parties who want their loved one’s remaining medicine to be of use.
Alongside work to reduce the demand for illicit products, steps must also be taken to protect those who purchase illicit products unwittingly. The introduction of the common EU logo for online pharmacies is a promising step; however, in order to be effective it must be accompanied by major public awareness campaigns – it can only protect those consumers who know to look for it.
EU Member States
Law enforcement agencies must develop internal strategies to combat illicit trade; they cannot focus solely on the border for detection and disruption. There is growing evidence of illicit goods being manufactured within the EU in order to reduce both transport costs and the risks associated with transiting the EU’s external border. While the border will always represent a key intervention point, intelligence-gathering and disruption strategies must also encompass domestic activity, including goods being sent through the post.
Law enforcement agencies should form temporary national task forces to tackle OCGs, following the format of international joint investigation teams (JITs). Across the EU there is evidence of OCGs becoming active in multiple crime types. Flexible network structures produce agile groups who are quick to recognise and respond to market conditions, moving between crime and product types as opportunities arise. In contrast, law enforcement agencies often work in silos, with separate departments or agencies focusing on specific crime types.
National agencies tackling organised crime should mirror the flexible networked approach of their targets, following the format of international JITs. Investigators should be considered subject matter experts, able to join together as temporary task forces to identify the most efficient and effective way to disrupt an OCG. To facilitate this approach, they should be supported by a team of analysts, sifting intelligence to identify where investigations overlap. Such an approach would retain critical specialist knowledge, while ensuring efficient use of resources through early identification of overlapping investigations. Moreover, where appropriate, this approach could encompass experts from multiple agencies, such as police and customs. There is a need for a new model of public–private partnership across the EU to facilitate information sharing. OCGs are increasingly establishing, infiltrating and simulating ‘legal’ businesses to obscure their illegal activities. The appearance of legitimacy can facilitate importing or exporting illicit goods across national borders and, in the case of shell companies, can also hinder attempts by law enforcement to identify the individuals profiting from the activities.
Member states must ensure that there are mechanisms in place to allow industry regulators and members of the private sector to share data and suspicions with law enforcement agencies to reduce vulnerabilities through early detection. Section 7 of the UK’s Crime and Courts Act 2013 offers an example of a successful non-coercive mechanism, permitting information sharing without imposing any undue obligations. National regulators must have a stronger role in combating crime in their sector, with clearly defined responsibility for performing due diligence in relation to both new and existing companies. OCGs are also penetrating the specific sectors in which they are trading, registering for wholesale or retail licences in order to infiltrate legal supply chains. Regulated sectors at risk of infiltration by OCGs must ensure that stringent due diligence is applied to both new and existing companies. While in some cases this may require reform, if enacted, such reform has the potential to increase protection of legitimate supply chains and frustrate the activities of OCGs. Member states should establish dedicated prosecutors who specialise in organised crime and illicit trade. In the fight against illicit trade, the successful prosecution of OCGs is crucial if the disruption of their activities and networks is to be substantial and enduring. The value of prosecutors who understand illicit trade within the context of organised crime was repeatedly highlighted during field research. Subject matter experts can be as valuable here as during investigations. The Italian experience in establishing dedicated anti-mafia prosecutors (Direzione Nazionale Antimafia, or DNA) offers an example of the potential impact of specialised prosecutors in areas of complex crime.
Asset recovery and financial penalties must be used to strengthen deterrence. Fundamentally, illicit trade is attractive to OCGs because the financial rewards are vast and the associated risks are low. Strong, effective asset recovery regimes would help to alter this balance. Member states must ensure that law enforcement agencies have the authority, skills and resources to conduct financial investigations, and to freeze and ultimately recover criminal assets.
There is a need to improve the data on which assessments of the scale and scope of illicit trade are made; wherever possible, comparable methodologies must be adopted to enable analysis across time, place, products and criminal methods; this is vital to inform the effective prioritisation of law enforcement resources. Limitations in the methodologies available to estimate the scale of illicit trade must not become a barrier to their application. For example, while empty-pack surveys may not capture each element of the illicit tobacco market, they still offer a valuable indication of scale and scope; their use by law enforcement agencies alongside seizure data is testament to the potential value of even imperfect methodologies.
Innovation in relation to other criminal products and methods should be similarly explored and supported, for example: measuring the chemicals in sewage and contrasting the result with the levels expected based on legal prescriptions; or combining measures capturing difficult elements of the market, such as alcohol tax-gap estimates and unexplained imports of industrial alcohol.
Given the evident value to industry in reducing the illicit trade, major companies should consider funding such endeavors.
The demand for illicit goods must be tackled alongside the supply. Social acceptability is a key enabler of the illicit trade across the EU, creating an environment in which demand for illicit products is tolerated. Research should be undertaken to understand what would be the most effective means of reducing the social acceptability, and therefore the demand, for illicit goods. There is a pressing need to understand what messages are effective, from what sources, through what medium and under which circumstances.