Download Illegal trade in tobacco in MERCOSUR countries

 Illegal trade in tobacco in
MERCOSUR countries
WORKING PAPER
Alejandro Ramos, MSc. June 2009
ACKNOWLEDGEMENTS This Report was prepared by Alejandro Ramos, M.Sc. (CIET, Uruguay) based on intelligence gathered and reports submitted by a team of researchers in MERCOSUR countries during September 2007‐January 2008. The author bears final responsibility for the current text. Contributions were received from Gustavo Sónora, Bolívar Moreira y Dardo Curti (Uruguay), Roberto Iglesias, Marcelo Soares, Maira Fernández (Brazil), Gustavo Piñeiro, Mabel Rehnfeldt, Andrés Duarte y Rubén Caballero (Paraguay), Mario Virgolini, Mirta Molinari, Juan Pablo Alonso, Julia Caterenine, Martin González Rozada and César Genes (Argentina). This Report is part of an ongoing study into illicit tobacco trade in the MERCOSUR region. Mark Teuten and Kris Hansen assisted with translation. . 2
THE CENTER FOR RESEARCH INTO THE TOBACCO EPIDEMIC
(CIET URUGUAY) AND THE AUTHOR WISH TO EXPRESS
THEIR THANKS TO THE BLOOMBERG FOUNDATION FOR
FUNDING THIS RESEARCH
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TABLE OF CONTENTS TABLE OF CONTENTS ...........................................................................................................................4 CONCLUSIONS.........................................................................................................................................6 CHAPTER I ..............................................................................................................................................13 A. INTRODUCTION ..................................................................................................................................13 B. OBJECTIVE.........................................................................................................................................13 C. METHODOLOGY AND INFORMATION SOURCES..................................................................................14 D. MERCOSUR...................................................................................................................................15 1. Background...............................................................................................................................15 2. MERCOSUR Customs Code (CAM) .........................................................................................16 CHAPTER II .............................................................................................................................................18 A. THE TOBACCO INDUSTRY IN MERCOSUR COUNTRIES ......................................................................18 1. The tobacco industry in Paraguay ...........................................................................................18 2. The tobacco industry in Brazil ..............................................................................................23 3. The tobacco industry in Argentina .......................................................................................25 4. The tobacco industry in Uruguay .........................................................................................26 B) SITUATION OF THE MULTINATIONAL TOBACCO INDUSTRY WITH REGARD TO TOBACCO SMUGGLING ..28 C) SMUGGLING IN MERCOSUR COUNTRIES AS THE MAIN MODE OF ILLEGAL TRADE IN TOBACCO ........29 CHAPTER III ............................................................................................................................................32 A. TYPES OF ILLEGAL TRADE IN CIGARETTES IN MERCOSUR COUNTRIES ............................................32 1) Forms of “wholesale smuggling” through ports and regional and international trade facilities.33 2) Undocumented smuggling (associated to retail smuggling)..........................................................34 B. EVOLUTION OF OPERATING BASES AND DESTINATION COUNTRIES FOR SMUGGLING ORIGINATING IN
PARAGUAY .............................................................................................................................................37 . First route: High Paraná – frontier with Brazil (main route until 2002, still in use).....................38 . Second route: Itapúa – border with Argentina ..............................................................................38 . Third route: Ñeembucu – border with Argentina – connection with High Parana towards Brazil.39 . Fourth route: Canindeyu – border with Brazil – also connection with High Parana .....................39 . Fifth route: Asunción – Transchaco (to date).................................................................................39 . Sixth route: the waterway formed by the Parana River and the Paraguay River towards the River
Plate...................................................................................................................................................40 C. PERSPECTIVE ON THE ILLEGAL PARAGUAYAN TRADE INTO ARGENTINA ..........................................41 D. PERSPECTIVE ON SMUGGLING BY LAND, RIVER AND THE ITAIPU LAKE INTO BRAZIL.........................46 E. BORDER-REGION SMUGGLING INTO URUGUAY ...................................................................................48 CHAPTER IV............................................................................................................................................50 A. QUANTIFICATION OF THE LEGAL AND ILLEGAL MARKET FOR CIGARETTES AND TOBACCO .................50 B. QUANTIFICATION OF FISCAL LOSSES IN MERCOSUR COUNTRIES FROM ILLEGAL CIGARETTE TRADE 53 CHAPTER V.............................................................................................................................................55 A. B. C. D. E. RELEVANT LEGISLATION IN THE FOUR MERCOSUR COUNTRIES ..................................................55 FINAL DESTINATION OF CONFISCATED MERCHANDISE ....................................................................58 ASSET LAUNDERING .......................................................................................................................58 SUMMARY OF SIMILARITIES AND DIFFERENCES ..............................................................................59 REGIONAL AND INTERNATIONAL AGREEMENTS, MECHANISMS FOR COORDINATION VIA
AGREEMENTS BETWEEN CUSTOMS AGENCIES AND POLICE FORCES IN THE MERCOSUR REGION ..........63 CHAPTER VI - RECOMMENDATIONS...............................................................................................66 4
A. B. C. D. OPTIMIZE LEGISLATION AND IMPLEMENTATION .............................................................................66 FIGHT CORRUPTION IN CUSTOMS AGENCIES AND OTHER LAW ENFORCEMENT BODIES ...................66 IMPROVE THE QUALIFICATIONS AND TRAINING OF CUSTOMS AGENTS AND PERSONNEL .................67 IMPROVE INTELLIGENCE AND COORDINATION AMONG CUSTOMS BUREAUS AND OTHER LAW
ENFORCEMENT AGENCIES IN THE FOUR COUNTRIES. ...............................................................................67 E. GOVERNMENTS SHOULD TAKE A MORE DIRECT APPROACH TO CROSS-BORDER SMUGGLING ..........68 F. THE FIGHT AGAINST CRIMINAL SMUGGLING ORGANIZATIONS WILL BE MORE SUCCESSFUL WHEN
SUPPORTED BY A STRUCTURE OF SOUND INTELLIGENCE .........................................................................68 G. RECOMMENDATIONS BY COUNTRY AND FOR MERCOSUR ...........................................................68 1) Argentina.......................................................................................................................................68 2) Brazil .............................................................................................................................................69 3) Paraguay .......................................................................................................................................69 4) Uruguay.........................................................................................................................................70 5) MERCOSUR..................................................................................................................................70 ANNEX A..................................................................................................................................................72 JURISPRUDENCE: EXAMPLES OF LEGISLATION APPLIED TO CONTRABAND GOODS AND
CIGARETTES IN MERCOSUR COUNTRIES ....................................................................................72 Argentina ...........................................................................................................................................72 Brazil .................................................................................................................................................72 Paraguay ...........................................................................................................................................73 Uruguay.............................................................................................................................................73 5
CONCLUSIONS 1. Results of our research do not point to tobacco multinationals
currently being the major actors in the illicit cigarette trade that they
were in the 1990s. Present operators appear to be part of criminal
organizations, and this has ramifications not only for countries in the
region but also internationally. Gangs dominate the market and have
links with, or directly own, cigarette factories in Paraguay.
2. The illegal cigarette market is an enormous source of income but
carries low penalties for criminals who are apprehended compared to
drug and weapon trafficking. Gangs linked to these other forms of
illicit trade are therefore tempted to enter the cigarette business, while
smugglers bring their expertise to other illegal businesses. Illegal
networks are consequently created which share logistics, contacts
and also resources for money laundering, and generally seek the
extension and consolidation of their markets. Authorities are highly
concerned about this development and are devoting closer attention
to it which may in turn pave the way for more rapid and coordinated
responses to cigarette smuggling in MERCOSUR countries.
3. In contrast to what is occurring in Member States of the European
Union, where contraband mainly concerns counterfeit cigarette
brands and hand-rolled tobacco (for example in the United Kingdom),
illegal trade in low-priced little-known brands predominates in the
MERCOSUR region. For its low-income smokers, price is the main
determinant rather than the allure of well-known brands manufactured
by multinational tobacco companies.
4. Although counterfeiting of international brands exists, market
characteristics mean this is not the principal strategy of illegal
cigarette manufacturers in the region. Tobacco companies mainly in
Paraguay, but also to an extent in Brazil, produced forged products
where they find markets exist. A more important problem seems to be
the theft of brands whereby some Paraguayan companies openly
start production of popular regional brands from multinationals. When
taken to court, they take advantage of lengthy judicial processes and
possibly corrupt judges.
5. Recently, another form of illegal or near-illegal cigarette trade has
developed as a response to policy measures that have changed the
structure of tobacco taxation, particularly in Brazil and Argentina.
Companies are initiating litigation via administrative and judicial
procedures to challenge policies they consider favour large
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companies. In some cases they obtain court protection and are
consequently able to reduce, avoid or defer tax payments on cigarette
sales. On the one hand, companies may be fighting for a higher share
of the market. On the other hand, they are increasingly relying on
dangerous on quasi-illegal tactics to do so. Some of them are being
uncovered as being plainly illegal operators, and the estimated extent
of illegal production in Brazil (some 9 billion cigarettes per year)
implies that the problem has reached significant proportions. Given
the relative weakness of controls and the slowness of the judicial
procedure, companies may believe that the opportunity costs of illegal
activities are not high.
6. Differences between retail and wholesale contraband are less distinct
in the MERCOSUR region compared to other parts of the world.
People who transport small volumes of illegal cigarettes by road and
across isolated border crossing do so on a daily basis, and
sometimes several times a day. But these activities form part of the
strategy of organizations on both sides of the border, and frequently
involve their employees. This form of smuggling functions closer to an
actual wholesale market rather than the “family” operation typical of
retail contraband in other parts of the world. There is also an
economic reason for carrying small consignments as penalties mainly
involve the seizure of the merchandise. The offender is either not
apprehended or is quickly released.
7. The wholesale form of contraband trade, however, relies on
containers via rivers and ports in the region and is presumably more
important in volume and is less visible. This form of smuggling
benefits from the lack of controls on regional container movements
and the solid growth in this type of regional trade through ports in
Buenos Aires, Montevideo, Santos, Rio Grande, and others. In this
situation, cigarettes originating mainly from Paraguay are hidden in
containers with “in transit” documentation directing the cargo to free
zones and ports. Often they are unloaded to serve the domestic
markets of other MERCOSUR countries.
8. Paraguay is the largest illegal cigarette supplier in the region. There
are commercial and tax benefits for locating factories in the country,
such as loose controls and low wages, but the primary reason for the
growth of the illegal supply of cigarettes in Paraguay can be traced to
changes in Brazilian policies to fight contraband in the latter part of
the 90`s. Those policies, designed to control “export-reentry” devices
by companies such as Souza Cruz (BAT) backfired. Some former
managers and engineers relocated to Paraguay becoming owners of
illegal trade factories. Traditional Paraguayan cigarette manufacturers
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also took advantage of the opportunity to expand their activities not
only towards the clandestine market of Brazil but also to other
countries in the region and, increasingly, the world.
9. The Paraguayan city of Ciudad del Este shares the Triple Border with
Argentina and Brazil and is one of the more active worldwide centers
of brand forgery and illegal trade in cigarettes, electronics, weapons,
drugs, clothes, jewelry, spirits, and other articles. Illegal operators of
dozens of nationalities congregate there where authorities exercise of
low or zero control and there are high levels of corruption and
violence. Most of the cigarette factories established in the past 10
years are in this area.
10. Quantifying the extent of the illegal market in the MERCOSUR region
is no simple matter. Based on the potential cigarette production in
Paraguay, we estimate that around 70 billion cigarettes could have
transported illegally in 2007 through more than two dozen tobacco
companies, subsidiaries and their associates. In the MERCOSUR
region illegal cigarette trade is estimated at 45 billion units (sticks) per
year, mostly coming from Paraguay, with Brazil absorbing 90% of this
figure. Around 9 billion sticks could have originated from factories in
Brazil. The rest of the illegal cigarettes leaving Paraguay that do not
end up in Brazil and MERCOSUR countries is estimated in 30 billion
sticks. These are smuggled to other Latin America countries, to
Panama and Aruba which are major distribution centers for the rest of
the world. Based on recent estimations of the worldwide illegal
cigarette market (600 billion sticks), Paraguay would be the source of
around 11% of this trade, with the MERCOSUR region accounting for
12,5%.
11. Fiscal losses due to illegal cigarette markets in the four countries of
the MERCOSUR are estimated to be around USD 900 million per
year, with Brazil accounting for 71% of this.
12. Governmental approaches to combating contraband in general, and
cigarettes in particular, vary in MERCOSUR countries but are
insufficient in all of them. Authorities frequently view the problem as a
domestic issue and policy measures have proved inadequate in
relation to the versatility and resources available to smuggling
organizations that are increasingly regional and international in their
nature, contacts and, presumably, their networks.
13. Confiscations in the MERCOSUR region constitute only a small
percentage of the estimated contraband trade in cigarettes, as is the
case with confiscations of other illicit products. The strategies, routes,
logistics and products plied by smugglers involved with contraband, in
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addition to the limited capacity for control and the corruption of civil
servants in participating law enforcement agencies, facilitates the
operations of a highly profitable illegal trade.
14. Apart from occasional exchanges in information, which are not always
fluid, there is inadequate collaboration between enforcement
agencies in MERCOSUR countries. Customs agencies in the region
maintain intensive intelligence contact with each other and tend to
cooperation effectively but coordination is not always sufficiently
adequate to translate this into an increase in seizures.
15. Law enforcement agency operations to pursue smugglers’ illegal
trade networks involve long periods of intelligence work. Customs and
police institutions in the MERCOSUR region are often eclipsed by the
criminal gangs they fight against when it comes to resources,
organization, systems and motivation. Agencies have problems in
adequate coordination with judges and public prosecutors.
Nonetheless, Brazil has been relatively successful in recent years in
dismantling a number of high-scale illegal operations. Still, it remains
the country which is most affected by the illegal cigarette trade.
16. The impulse given to regional and international trade promotion over
recent years has unfortunately stimulated flows of contraband
cigarettes and other products. Regional trade agreements among
MERCOSUR Parties were from the beginning oriented towards
facilitating the circulation of goods and the establishment of a
customs union. Instruments for the development of regional
commerce set up by MERCOSUR, via arrangements such as free
trade zones, free ports and customs transit procedures, have,
however, provided mechanisms which benefit activities by illegal
traders. Considering the thousands of containers that circulate around
the Parana-Paraguay river waterway, ports and transit zones, there
are inadequate registries of importers and exporters and also
inadequate customs controls on traffic zones and warehouses.
17. Argentina is progressively implementing satellite tracking of
merchandise during transit operations, and a system of tracking and
product location for the primary processing sector of cigarette
industry. Brazil is implementing a track and tracing system in
secondary processing and distribution of cigarettes. But for these
initial efforts to be successful calls for a wider policy approach to
smuggling control.
18. MERCOSUR countries have implemented criminal and fiscal
legislation against contraband in general. Contraband legislation,
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however, is applied only partially or not at all or is not being applied
effectively to combat illicit trade.
19. Throughout the MERCOSUR region dealing in contraband goods is
considered as an offense punishable by imprisonment or restriction of
liberty. However, participation in contraband activities in the four
countries does not usually carry prison sentences except when other
criminal components applied simultaneously increase the sanctions.
These concern: a high market value of the goods, money laundering
and conspiracy to commit an offense.
20. Even in such cases, however, a person often escapes imprisonment
as the case is not forwarded to criminal authorities either for
procedural or other reasons, or proceedings are suspended,
imprisonment is not applied, conditional sentences are given. And in
many cases the criminal procedure is incomplete and the case is
filed.
21. Some countries in the region (such as Argentina and Uruguay) regard
contraband as a customs infringement when the value of the goods
does not exceed a specified amount. In these cases, sanctions are of
a general civil nature resulting in fines, costs, the payment of overdue
taxes, and the seizure of goods and in some cases in Argentina and
Uruguay result in destruction of the tobacco involved.
22. In Brazil, all custom`s seizure proceedings go before the courts, but
the result is the same in so far as there are very few judgments that
result in prison sentences being imposed, except in cases involving
large criminal organizations, of which there are few.
23. Legislation in some of the countries (excluding Argentina) does not
distinguish between contraband tobacco and its by-products. Brazil
distinguishes between the “re-routing”, or illegal trafficking of legal
products (“descaminho”), and contraband which refers to the illegal
sale of illegal products. This leads to lower sanctions being applied in
the case of, for example, contraband cigarettes concerning a brand
which is legally sold in Paraguay, as opposed to that involving a
forged brand of cigarettes.
24. Some countries in the region apply additional sanctions where a
product arising from illegal commerce is forged, or when it is a
dangerous drug. Nicotine and other substances contained in tobacco
have not been classified as addictive or dangerous to health under
legislation in MERCOSUR countries.
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25. Impounded cigarettes are required to be burned or destroyed (except
in Paraguay). At times, delays in legal procedures lead to a proportion
of cigarettes re-entering the market as a result of corruption.
26. General fiscal and criminal legislation against contraband is in place.
27. Contraband goods are illegal in all MERCOSUR countries, resulting in
imprisonment or other restriction of liberty, dependent upon
circumstances.
28. Legislation covering money laundering is recent and there are
insufficient resources to apply the regulations in full.
29. In the MERCOSUR region, the perception exists that criminal gangs
are never actually identified and penalized as only rarely do matters
come before criminal courts. Tobacco-related cases are regarded as
being “light” offenses, of low priority, with imprisonment being unlikely.
The goods involved are handed back and there is a general lack of
any serious consequences.
30. In Argentina, Paraguay and Uruguay, the majority of proceedings
involving contraband do not fall under criminal jurisdiction because
the quantities involved are low and, accordingly, cases remain at the
administrative level. In some countries, such as Argentina, cases
concerning falsification are sent to criminal courts more often than
those involving contraband. In the three countries mentioned it is
unusual for judicial files to take into account previous offenses
involving contraband or customs infringements. Nor are they
combined with offenses regarding conspiracy to commit offenses,
forgery of trademarks and fiscal stamps or money laundering. In
summary, little or no serious consideration is given to the importance
of matters that might lead to more significant penalties.
31. The problem of obsolete or inadequate legislation is compounded by
a lack, or absence, of specialized prosecutors and judges to confront
drug trafficking and money-laundering. Offenses are often committed
by gangs operating in several countries in the region, with
international allies and contacts. This requires a high degree of
specialization in the judicial field. The problem is compounded by the
shortage of trained personnel in public prosecutors offices and courts
who can address contraband, drug trafficking and money laundering.
While there is legislation against money laundering, it is recent and
there is a lack of qualified personnel who can extract maximum
benefit from new regulations.
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32. Management capacity for controlling illicit commerce is also limited.
Technology is essential for stepped-up controls. For example, scans
for inspecting containers and satellite control for tracking. Technology
is incorporated too slowly due to budget limitations. Scanners recently
installed in customs border controls and ports are clearly insufficient.
Argentina, Paraguay and Uruguay lack adequate monitoring of flight
movements, and there are insufficient radar installations. With the
exception of Brazil, legislation does not authorize forcing down of
aircraft which violate airspace. Brazil is the exception in being a
country where contraband by air constitutes an aggravated crime and
a radar system controls the country’s airspace.
33. Problems in controlling smuggling also stem from cultural acceptance.
Handling illicit merchandise is socially accepted in frontier areas such
as the Triple Border between Argentina, Brazil and Paraguay as well
as in other border regions such as the land borders between Uruguay
and Brazil and between Paraguay and Argentina.
34. Governments may also be ambiguous in their view as to whether to
intensify the fight against illegal commerce. Their efforts have been
neither systematic nor sufficient, as evidenced by the slowness of
approval of the MERCOSUR Customs Code and the elimination of
chapters on illegal trade penalties from the agreement. One reason
for this could be that contraband across land and river borders may
be implicitly considered as a “traditional” kind of bootlegging activity
and a significant factor in creating “employment” and the circulation of
money in the region’s economies. Governments may fear there are
no clear formal alternative forms of employment in the short term.
35. Consequently, the perception remains throughout MERCOSUR
countries that identifying and prosecuting criminal gangs involved in
smuggling is the exception. Rarely do gang leaders appear before
criminal courts. Contraband cases are mostly treated as low priority
misdemeanors that end with the release of the prisoner and
sometimes even include the restitution of goods and/or vehicles
involved.
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CHAPTER I
A. Introduction This research stems from an initiative by the Research Center for Tobacco
Epidemic (CIET, Uruguay) and the Associações de Controle do Tabagismo
(ACT, Brazil),1 which saw the need to investigate and publicize the illicit tobacco
trade in the region with the aim of ensuring tighter controls and reducing
access to tobacco products.
The stimulus for this task lies in governments’ ratification of the WHO
Framework Convention on Tobacco Control by which, under Article 15, Parties
pledge to act to tackle the illegal trade in tobacco.
Additional momentum in this direction was provided by the decision of the
Second Conference of Parties to the Framework Convention (COP2), held in
Bangkok in July 2007, to begin negotiations on a protocol to the Convention
concerned specifically with the illicit trade in tobacco. This foresaw the need for
greater information and intelligence on illicit trade, for an improved insight into
its logistics in different regions, the legal framework and the success or
otherwise of current strategies, and ways of improving national and regional
control strategies.
B. Objective
Based on an analysis of the situation concerning illicit tobacco trade in
MERCOSUR countries, the goal is to identify strategies for strengthening
controls through the involvement of civil society and member governments.
1
The Ministries of Health of the MERCOSUR also expressed their interest via the Intergovernmental Committee on the
Control of Tobacco (CICT)
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C. Methodology and information sources
This study examines the background to the illicit trade in tobacco in each of the
four MERCOSUR countries based on primary sources, such as interviews with
law enforcement agents and customs agencies and, where possible, with
participants and former participants in the illicit trade, and through secondary
sources of information including journalistic, legal and institutional reports.
The work was conducted in Argentina, Brazil, Paraguay and Uruguay. Studies
in Argentina were coordinated by Lic. Mario Virgolini (Ministry of Health) with
support from the World Bank. In Brazil, the work was undertaken by Roberto
Iglesias (ACT Brazil). The author supervised the work in Paraguay and
coordinated a small intelligence gathering team in Uruguay.
The report is structured as follows. First, a brief description is presented of
MERCOSUR, its Customs Code and patterns of trade and treatment of tobacco
control at a regional level.
By way of an analysis of illicit trade in the MERCOSUR there then (Chapters 2
and 3) follows a summary of intelligence compiled by teams in the four
countries at the end of 2007. These studies were based on an in-depth review
of the journalistic record over the past four years (10 years in Paraguay), on
interviews with various actors and analysis of the legal framework and case law
in each country conducted by experts on the issue.
The logistics of illicit trade (modalities, routes, agents, special features) are
identified in each country and there is an analysis of existing information about
counterfeit cigarettes, money laundering, corruption and the strengths and
weaknesses of efforts to suppress the trade.
In Chapter 4 an estimate is made of the volume of illicitly traded tobacco in the
region, mainly in response to the role of Paraguay but also considering data on
production and consumption in each country. Subsequently, the study examines
the extent of fiscal losses due to smuggling in the four countries.
Chapter 5 is devoted to the analysis of legislation in each of the four countries
related to smuggling, and a table compares the situation in regards of key
juridical issues.
In Chapter 6, finally, the main findings of the report are drawn together and
recommendations are proposed for engaging civil society and governments in
the region.
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Annex A presents case law collected by teams in each country regarding cases
involving contraband cigarettes.
D. MERCOSUR
1. Background The Southern Common Market (MERCOSUR) was established in March 1991,
via the Treaty of Asuncion, by Argentina, the Federal Republic of Brazil, the
Republic of Paraguay and the Republic of Uruguay. All Parties have a voice and
a vote, with decisions being reached by consensus decision of all four
countries.
MERCOSUR covers an area of 11,863,000 km2 and has a total population of
246 million people.
MERCOSUR is an intergovernmental institution having a distinct legal entity
under international law and independent of its member countries; a status that
allows it to negotiate with third countries or sub regions. It can exercise its
powers to pursue efforts required in achieving its objectives, in particular by
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concluding contracts, acquiring assets and real estate, appearing in court, and
establishing and transferring funds.
The main objective of the block is the integration of the four States via the free
circulation of goods, services and the means of production among countries.
Other objectives include the establishment of common external tariffs and the
the adoption of a common trade policy in relation to third countries, or groups of
countries, coordination of macroeconomic and sector policies between State
Parties, as well as the harmonization of legislation in relevant areas to ensure
the strengthening of the integration process.
Since January 1995, MERCOSUR has been a free trade area covering all
goods circulating in the region. It has also established a customs union - whose
details are not yet finalized - with a common external tariff (AEC).
In 2000, a new step in the regional integration process was decided (the "Relaunching of MERCOSUR") not only to enhance its economic strength, but also
to give priority to important issues including: employment and social security;
environmental protection; education; and technological development. Some of
these issues had already been implemented to a lesser extent, though lower
priority had been given to the pace of development.
A key feature of MERCOSUR is the marked difference that exists between
members on geographical and commercial levels and in their size and
population. This has led to weakness and fragility in the process of integration.
Advances have also been slow due to economic crises and for political,
legislative and infrastructural reasons.
Factors such as these have led to the lack of effective cooperation on
objectives, strategies and activities to control illicit trade.
2. MERCOSUR Customs Code (CAM) Following a transition period, once general guidelines and instruments for the
functioning of the customs union were in place, MERCOSUR decided to ensure
full operation of the Customs Code by its four members. The process has been
slow, however, and is not yet entirely complete.2
Recently, a set of definitions and guidelines to be used in drafting the
MERCOSUR Customs Code (CAM) were accepted via Resolution No. 40/06 of
2
During the first stages of discussion, acceptance and agreement of the date of entry into force was hampered by lack
of agreement and the need to approve an additional document containing aspects not envisaged in the original draft.
This document could not be approved. For work undertaken since 1997, there was a need for continued internal
consultations between countries, the scheduling of new activities and meetings in order to obtain final approval.
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the Common Market Group (GMC). An ad hoc group of experts worked
intensively during 2007 and 2008 but outstanding differences between Parties
have prevented adoption of the CAM.
Consequently, despite efforts over a number of years, the Code had not been
approved as of July 2008.
Points of contention preventing adoption of an earlier version, and which have
still not been addressed in the final document, include customs offenses, fines,
the definition of actions for demanding payment and the tax liability of foreign
trade operators.
Irrespective of any final approval, it is clear that up to now governments in the
MERCOSUR region have avoided applying the Customs Code as an instrument
for harmonizing financial penalties associated with breaches of tax liability or
illegal customs operations. This problem has its roots in the asymmetries of the
block and differences in national legislation in the four countries.
Governments’ lack of background in, and sensitivity to, these issues has led to
discussion of these specific points being postponed.
3. Intergovernmental Commission for Control of Tobacco in the MERCOSUR Aiming to expand and set priorities for the initial MERCOSUR Working Group
for the Control of Tobacco, formed in 2003, health Ministers set up the
Intergovernmental Commission for Control of Tobacco (CREST) to promote an
integrated tobacco control policy in the region and implement agreed regional
strategy.
Still pending is progress in other areas such as coordinated national and
international policies concerning pricing and taxation and regulatory measures
against illicit tobacco trade which the FCTC sees as major elements in reducing
access to tobacco products at the regional level. 17
CHAPTER II
A. The tobacco industry in MERCOSUR countries 1. The tobacco industry in Paraguay
The tobacco industry in Paraguay ballooned from three companies in 1993, to
17 by 1998, reaching 33 companies in 2004 – an expansion of more than
900%. These are official figures which exclude a number of clandestine
enterprises.
Some sources cite an even larger number of companies but it is difficult to
distinguish manufacturers from purely distributors which are linked in some way
to one or other of the main manufacturers.
While it has been established that there are a significant number of new
tobacco companies in Paraguay, it is reasonable to believe that not all are
independent. Many may not be involved in manufacture but confine themselves
to trading.
In 2007, 21 tobacco companies were identified as operating in Paraguay, based
on registrations with the Paraguayan Revenue Service. In contrast, another
official database (the Sofia foreign trade registration system for Customs) listed
25 firms as tobacco and cigarette importers and 40 exporters. All of those listed
by the tax authority were corporations, barring two firms having limited liability
status. However, a study of customs declarations by the “Centro de
Importadores” (a chamber of importers) reported that least two importers and
three exporters of tobacco products had provided personal names. This would
indicate that some companies operate under several names, sometimes using
incorporated or public limited companies or even middle names as a front
operation.
It is also interesting to compare the number of tobacco manufacturing firms in
relation to employment data.
Employment statistics from Paraguayan tobacco companies can serve to
differentiate between firms engaged in industrial activity versus those in
commercial trade, or entities created for tax purposes. Of the 35 tobacco
companies registered with the Ministry of Industry and Commerce in 2007, only
11 firms were recorded as having employees or workers. And 86% of the
workforce was concentrated in only 4 companies.
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However, this could point to a large section of cigarette manufacturing in
Paraguay being clandestine, with no industrial activities being reported to the
authorities.
Official data for the tobacco sector are sketchy in Paraguay. Particularly lacking
are precise figures on domestic production of cigarettes.
Tobacco leaf production is officially recognized as being around 15,000 tons per
year, harvested from 7,000 hectares. The level of production is small by
international standards and does not point to Paraguay being as important a
tobacco leaf producer as Argentina or Brazil.
Regarding industrial production of cigarettes, the situation is more complicated
since most of the industry produces or operates illegally. There are no official
figures for domestic production of cigarettes, so the extent of the industry has to
be indirectly evaluated via data for the number of primary and secondary level
cigarette manufacturing firms, sectoral value added, labor employed, foreign
trade and consumption. This data, in turn, reveals some conflicting evidence.
Nonetheless, based on various assumptions estimations are made later in this
report regarding the size of legal and illegal markets.
Number of firms The number of firms has grown rapidly since 1993, when there were three.
Official figures from the Ministry of Industry and Trade reported 17 firms by
1998, rising to 33 by 2004. The actual number may be higher in the event of
wholly illegal operations. It is unclear whether firms are manufacturers or
commercial distributors. In 2004, 28 cigarette companies reported exporting
cigarettes but this number halved in 2006, according to OCIT, a private
consulting firm that gathers foreign trade data in Paraguay.
In 2003, based in official figures, a private consulting firm reported 33 factories
producing an estimated total of 41 billion cigarettes. (Rodriguez Silvero)
This estimate was based on data for locally grown and imported tobacco.
There is conflicting data concerning labor employed.
19
Labor employment by tobacco company, Paraguay 2007
Tabacalera del Este SA
553
Tabacalera Hernandarias SA
294
Veneto
140
Compañía Tabacalera San Francisco
78
Tabacalera Boqueron
164
Sub total
1229
%
92%
resto
110
%
8%
Total
1339
Source: Instituto de Prevision Social, Paraguay
According to these official figures, the absolute number of tobacco firms is deceptive as
only five firms account for 90% of labor employed. (In the Table above, BAT is listed
among “Others” (‘resto’) having only 12 employees. PM is entirely absent).
It therefore appears that the number of companies reported as being “tobacco firms” in
Paraguay may be misleading when actual manufacturing activity is taken into
consideration. The majority of production is carried out by relatively few firms.
Considering the quantities of cigarettes illegally produced in Paraguay, there may, of
course, be some under-reporting of labor employed, and possibly some totally informal
operations. For instance, in the 2002 Industrial Census, the Bureau of Statistics,
Surveys and Census (Dirección General de Estadística, Encuestas y Censos) reported
there were a total of 2,204 personnel within the 14 tobacco firms they surveyed.
(Reported by Dr. Rodriguez Silvero)
Some qualified observers believe that the real number of direct and indirect jobs in
tobacco manufacturing and trade may be close to 10,000.3 This may be more in line
with the actual size of illegal operations.
Value added in cigarette manufacturing The discrepancy between actual and reported figures for tobacco manufacturing
in Paraguay is also highlighted by the data on sectoral value-added.
Tobacco sectoral valued added, 2006
000´s USD
%
tobacco & beverages
164.336
13,51%
tobacco
41.084
3,38%
total industrial sector
1.216.363
100,00%
Source: Based on data from the National Accounts, Central Bank of Paraguay
3
As reported by Dr. Margarita Diaz de Vivar, Paraguayan Customs Bureau Director, La Nación, Buenos Aires, 21
November 2005
20
The Table shows the minimal significance of “legal” tobacco manufacturing in
Paraguay, which accounts for less than 3.5% of total industrial value-added.
However, the growing significance of the sector is underlined by the following
statistics. The tobacco sector is an important commercial and industrial activity
in the country (refer to Chapter IV, below). According to estimates, it produces
around 70 billion cigarettes a year and in 2006 generated around USD 612.5
million. (Calculated from 70 billion cigarettes, or 3.5 billion packs, at an average
factory price of USD 0.175). This compares to an estimate of USD 588 million,
based on production of 41 billion cigarettes, arrived at by consultants in 2003.4
Production capacity for primary and secondary processing Number of firms Activity Annual capacity (number of sticks) 6
Tobacco primary
processors
63,900,000,000
26
Cigarette manufacturers
154,701,780,000
1
Cigar factory
240,000 units
Source: Ministry of Industry and Trade, Paraguay, 2004
The Table above reveals a further inconsistency in official figures for the
tobacco industry in Paraguay. In 2006, Paraguay imported nearly 40 million
kilos of tobacco leaf and raw tobacco and waste, from which no less than 60
billion cigarettes could be produced. This amount is in line with the primary
manufacturing capacity indicated above.
Output capacity from primary processing is compatible with a high use of
domestically produced leaf tobacco (equivalent to around 9 million sticks per
year) and imported raw tobacco for cigarette manufacturing amounting to
around 70 billion cigarettes per year. (Chapter IV outlines how this figure is
calculated).
However, the 26 factories listed as cigarette producers would, according to the
Ministry of Industry and Trade, have production capacity far exceeding the
combined sum of primary processing plus imported cut tobacco.5 In fact, the
4
ESTUDIO SOBRE LA ECONOMÍA DEL TABACO EN PARAGUAY, Rodriguez Silvero y Asociados. Unpublished manuscript, abstract in: www.rodriguezsilvero.com.py/doc/proyectos.estudios/2004/noviembre/proyestud1104001.pdf 5
Ownership of tobacco companies in Paraguay is estimated to be 60% in the hands of Brazilians, 30% owned by Paraguayans and 10% by Uruguayans. In other words, foreign interests are strongly represented. This is in line with changes in cigarette production and trade in Brazil over the past ten years, as discussed below. (Source: Ministry of Industry and Trade, Paraguay) 21
above figure for reported cigarette production capacity is close to the cigarette
consumption of Brazil over an entire year.
This is inconsistent, unless a significant amount of unused production capacity
exists for cigarette manufacturing in Paraguay, which is unlikely.
However, the above Table implicitly points to a huge gap between production
capacity, domestic consumption and legal exports. This difference is, namely,
due to illicit production and trade.
Even were some of these figures to be overstated, conservative estimates still
indicate huge levels of clandestine cigarette production in Paraguay. (See
Chapter IV, Quantifying legal and illegal markets)
Quantification of size and extent of illegal cigarette production has to be
tentative, given the limited information available.
Estimate of the legal market for cigarettes in Paraguay In 2006, a typical tobacco firm in Paraguay would have incurred estimated total
factory costs of around USD 0.05 per pack of 20 cigarettes (based on export
prices averaging USD 0.11 in 2006, considering that this is a high margin
industry) and would sell the same pack on the domestic legal market for a profit
of USD 0.32. (i.e. the sum of the retail price USD 0.60 less USD 0.05 in unit
cost, less tax of USD 0.086 and a retail and distribution margin of USD 0.15).
This huge profit margin of 86.5% (before income tax) makes the domestic
market highly attractive. But the size of the market is very small.
As the government has not imposed higher taxes, it can be assumed that at
current prices for stamped cigarettes in Paraguay (average price of around USD
0.60 in 2006) the industry is “collecting” a total profit of around USD 0.32 per
pack, or USD 48 million per year.7
Considering the above assumptions and calculations, the total size of the legal
cigarette market in Paraguay, based on annual sales of 150 million packs
containing 20 cigarettes at an average price of around USD 0.60 per pack,
amounted to USD 78 million, excluding tobacco tax and value added tax.
The total amount of taxes on tobacco in 2006 is estimated at around USD 15
million. When nominal tax rates on tobacco products are compared in relation to
6
The tax structure (10% specific tax plus 12% value added) is levied on the factory price, so actually it is one of the
lowest in the LA region.
7
The amount of USD 48 million is somehow higher than the value added figure of the previous Table (41 million) but all
these figures are rough approximations
22
the final retail value of sales, the effective rate of tax is an average of 14%. This
is far below the effective rate of tax in relation to the retail price of tobacco
which is over 65% in the other three MERCOSUR countries.
Estimate of the illegal market for cigarettes in Paraguay Not unexpectedly, the illegal market offers less profit per pack but in turn an
unlimited potential for growth.
A first approach to estimating the size of the illegal market starts with the
estimated volume of illegal manufacturing by Paraguayan firms of 70 billion
cigarettes (i.e. 3.5 billion packs of 20 sticks, see Chapter IV for details).
Considering a factory cost per pack of USD 0.05 and a retail street price in
neighboring countries of USD 0.50, a factory selling cigarettes to a smuggler
would charge a price (per pack) of at least USD 0.10 in order to make an
immediate almost risk-free 100% cash profit. The cost may rise to USD 0.25 for
small orders to cover the smuggler’s profit and costs of the operation (bribing
Customs and police agents, transportation costs, retail margin, etc.). This then
averages USD 0.175 per pack, so the value of Paraguay’s illegal cigarette
market would be around USD 612.5 million per year.
The industrial value-added of the illegal cigarette industry in Paraguay is at least
around 88.6% of gross sales (15.5/17.5), meaning USD 542.5 million, or 13
times the “official” value-added as estimated in the National Accounts of the
Central Bank.
2.
The tobacco industry in Brazil8
The total volume of the domestic Brazilian cigarette market (both legal and
illegal) is estimated at 7,000 million packs of 20 sticks (140,000 million
cigarettes).
Souza Cruz (BAT) has a 78% share and PM 13% of the market for "legal"
Brazilian cigarettes. Between them the two multinational subsidiaries dominate
91% of the legal market. In 2006, there were also 14 other local tobacco
manufacturing companies that controlled 9% of the legal market and had an
undetermined stake in the country’s illegal market. The size of the illegal market
is hard to evaluate; some observers put it at a 30% of total sales.
This significant proportion of illicit trade prompted authorities into action in the
mid-1990s. Changes in the Brazilian domestic market in recent years have in
part resulted from efforts by the tax authority (Receita Federal) and changes in
the supply of illegal cigarettes.
8
Principales puntos de la investigación sobre el contrabando y el mercado informal en Brasil. Main points in the
research on smuggling and informal cigarette markets in Brazil. Working Paper. Roberto Iglesias ACT Brasil, written for
the Mercosur team on the illegal cigarette market, April 2008
23
Many lessons can be learned from Brazil’s experience in controlling the illicit
tobacco trade.
For most of the ‘90’s, Souza Cruz (BAT) was the main beneficiary from a
triangular trade involving cigarettes produced in its factories in Brazil being
legally exported to neighboring countries, especially to Paraguay, and then
reintroduced illegally into Brazil, thus avoiding paying taxes in the domestic
market.
Another illegal tax evasion scheme involved diverting cigarettes intended for
export back into the Brazilian domestic market. To combat this, the government
approved a decree, in December 1998, placing a 150% tax on exports of
cigarettes to Latin America and the Caribbean.
The government changed the tax system from an ad valorem to a specific type
of tax (a fixed sum per pack) which taxed lower-priced cigarettes relatively more
heavily.9
Brazil’s cigarette market (and tax administration and collection) began to
increase in complexity with different strategies being adopted by small tobacco
companies operating in the market:
•
Some companies took Receita to court for having introduced the new
tobacco tax rate (IPI). The companies continued to pay taxes based on the
more favorable previous ad valorem tax rate;
•
Other firms continued to pay the IPI but started administrative litigation
against the tax authority. This may have led the Receita to cancel the special
registration allowing companies to manufacture cigarettes. But some of the
small tobacco companies affected challenged the administrative decision by the
Receita through the courts. Judgments are still awaited following several years
of litigation;
•
Some companies that refused to pay the tax, or were in arrears with
respect to the new specific tobacco tax, then proceeded to file an administrative
complaint against the Receita and obtained a judicial injunction permitting them
to continue operations. The Receita lost its case for revoking production
permits.
In this context of litigation, with small companies and a significant illegal market,
Brazil’s tax authorities have had great difficulty in raising taxes on cigarettes.
This has hampered achieving health policy objectives which depend on higher
taxes and prices. In recent years, the Receita has tended to reduce the real
9
The government’s decision may have its source in lobbying by Souza Cruz to make its cigarettes more competitive,
and as a compensating scheme following the loss of the “triangulation” operation with Paraguay and other border
countries.
24
burden of IPI, as demonstrated by an uneven response of the specific level of
tax to variations in inflation in Brazil.
Another rapid change that followed the adoption of controls and export taxes in
Brazil in the late ‘90's was the remarkable export of entire factory machinery
and qualified personnel to Paraguay. At first, the new export tax affected only
cigarettes in order to combat the triangular scheme. Then, in 2000, the Brazilian
government extended the export tax to tobacco leaf. However, the growing
tobacco industry in Paraguay sourced its tobacco from elsewhere, particularly
Argentina.
The impact of export taxes introduced by the Brazilian government probably led
to substantial changes in the organization of the tobacco industry in the region,
and accounts for what is an unexpected and complicated situation.
A Uruguayan tobacco company successfully sued the Brazilian government
through a MERCOSUR court alleging a breach of free trade regulations in the
custom union. Brazil reversed its policy of taxing tobacco exports to neighboring
countries in 2003. Nonetheless, the triangular system and tobacco leaf exports
to Paraguay have not re-emerged.
The illegal market is well established in Brazil. Competition for lower-priced
segments is fierce and the confused legal situation regarding small companies
is driving new schemes for avoiding paying taxes on at least a portion of
production. For instance, some companies (an example being the well-known
situation of a company named SUDAMAX) that own factories in Paraguay and
Brazil manufacture in Brazil but label the product as Paraguayan, pretending it
had been introduced illegally by other agents in Brazil. The Federal Police
uncovered this operation but it is believed that other companies may be
involved in similar activities.
3.
The tobacco industry in Argentina
Argentina has a domestic market of 2,000 million packs a year (40 billion
cigarettes) which is shared mainly between two multinationals with factories in
Argentina: Philip Morris (Massalin Particulares) and BAT (Nobleza Piccardo).
Together they have 96% of the Argentinean market; approximately 70% and
26%, respectively. The remaining 4% is shared between nine small start-ups.
The setting up of new small local firms in Argentina became important after
2002, a year of severe economic crisis with significant decreases in real
household spending. This drove the market towards low-priced cigarettes, and
some new operations quickly expanded.
25
Coimexpor S.A., for example, opened its doors in January 2004 with only 20
employees and now has 200 personnel; 110 being factory workers. According
to company statements, it is presently producing 2 million packs of cigarettes
per month which are sold nationally.
Some of these companies sell the same brands that are produced in Paraguay,
for example Rodeo, which is the main brand smuggled from Paraguay. A
scheme similar to that by SUDAMAX, in Brazil, could be operating in Argentina.
In reaction to market changes, the two multinational tobacco companies, PM
and BAT, have, since 2000, renewed agreements with Argentina’s Ministry of
Economy regarding minimum tax payments. This scheme establishes a target
floor for tax payments by means of a cigarette tax rate of 75% on the retail price
of the best-selling brands. The latest of these agreements, signed in 2007 and
in force until 30 September 2008, included an increase in floor tax payments
and targets. These agreements were endorsed by government decrees and so
became mandatory for the entire tobacco sector, placing a burden on small
companies selling cheaper cigarettes. The latter complain they are unable to
“cross subsidize” lower-priced cigarettes as they do not produce more
expensive brands on which more tax would be paid.
The position of small cigarette manufacturers was strengthened after 2001 by
favorable court decisions that overturned their obligation to comply with the
agreement between tobacco multinationals and the government. To confront
this threat, tobacco multinational companies launched cheap-priced brands in
an attempt to recover market share which had fallen from 13 to 4%.
The situation of small firms in Argentina is similar in some respects to their
Brazilian counterparts. In both countries, small firms are owned by domestic
operators and capital; they are active in the market for low-priced cigarettes, are
verging on illegality and attempt to persuade courts to rule in their favor
concerning non-payment, or reduced payment, of taxes.
In both Argentina and Brazil, a number of small firms may also be linked to
contraband tobacco from Paraguay, which suggests that there are agreements
that allow businesses to confuse the country of origin of cigarettes and exploit
weaknesses in governmental control systems.
4.
The tobacco industry in Uruguay
The Uruguayan tobacco market is in a distinctly different situation compared to
most other MERCOSUR countries. The Uruguayan-owned and operated
company Compañia Industrial de Tabacos Montepaz S.A. long ago established
a position as the leading firm compared to the two other operators, the
26
multinationals Phillip Morris (operating locally under the name of Abal Hnos.
SA) and British American Tobacco (BAT).
Montepaz S.A holds a 70% share of the domestic market for legal cigarettes. It
is also responsible for a lucrative triangular scheme supplying Brazil through
cigarette exports to Paraguay, and also owns a factory in Paraguay to export
cut tobacco produced at its primary processing plant in Uruguay. The two
brands owned by Montepaz and exported to Paraguay are Calvert and
Broadway; they are not sold in Uruguay.
The scheme involves import and production of these two brands, selling them
via Paraguay’s retail market, where their market share is insignificant, and
selling to “operators” who introduce the two brands into Brazil, where they are
well-known in the southern states and also extend to Brazil’s northern states.
This operation is unique: foreign trade statistics from Paraguay show these
cigarettes imports from Uruguay to be practically the only cigarettes imported by
Paraguay from MERCOSUR countries.
Montepaz’s exports, mostly to Paraguay, amounted to around 2.5 billion sticks
in 2006, together with cut, leaf and other tobacco raw materials (about 3 million
kilograms this year). This represented twice the volume of the company’s sales
in Uruguay.
Philip Morris entered the Uruguayan market in 1979 by buying a local company
(Abal Hnos.SA). It owns a cigarette factory and imports some of its international
brands. Its market share is around 25% of the domestic market for cigarettes.
There are virtually no exports.
British American Tobacco (BAT) began manufacturing cigarettes in Uruguay in
1997. Unable to increase its low market share of 6%, it ceased manufacturing in
2003. It serves its current market share of under 4% by importing brands from
Argentina.
In Uruguay, a small firm named Eurolíder, ran a cigarette factory at Rivera on
the border with Brazil between 1996 and 2004. It produced its own branded
cigarettes which were mainly exported to Paraguay.
The cigarettes were sold mostly in the free zone near to Rivera. The company’s
owners sold the cigarettes illegally to Brazil through a scheme that nominally
sent the goods to Chile by truck.
Once Uruguayan authorities uncovered the operation the zone’s owners were
arrested, or fled. Affected by the loss of its primary client, Eurolíder dismantled
its factory and moved it to Paraguay in 2003.
27
Eurolíder’s Brazilian factory had previously been closed in 1996 and relocated
to Rivera. As with Brazilian factories that set up shop in Paraguay after 1999, it
shows that small factories in the region can be highly mobile and take
advantage of opportunities often created by changes in government policy to
combat illicit trade.
Presently, no evidence exists of illegal cigarette production in Uruguay which
instead suffers from smuggling from Paraguay that accounts for around 12% of
the domestic market.
For many years, a regime of cigarette sales to free shops located in various
towns bordering Brazil acted as a means for the re-entry of cigarettes through
illegal sales. Legislation permitting sales in these shops allows for reduced
taxes exclusively on sales to foreigners, as is the case in many other parts of
the world. Most of these cigarettes - the leading brands smoked by Uruguayans
- are reintroduced into the country.
Another scheme providing a form of legal status to dubious or plainly illegal
operations is the “entrepot” system by which tobacco companies can sell duty
suspended cigarettes to the crews of ships operating in the area or based in
Uruguayan seaports. The amounts sold, and the lack of controls, point to yet
another scheme used to circumvent internal taxes on cigarette sales since most
of these cigarettes find their way back to the Uruguayan territory.
B) Situation of the multinational tobacco industry with regard to tobacco smuggling Both Phillip Morris (Argentina) and BAT (Argentina and Brazil) have significant
shares of domestic markets in the region, except in Uruguay and Paraguay
where the largest domestic market shares are held by the locally-owned firms
Tabacalera del Este and Boquerón, in Paraguay, and Montepaz, in Uruguay.
In recent years, multinational tobacco firms operating in the region have publicly
“lobbied” against smuggling and the illicit trade of cigarettes, which has been
consistently highlighted as an obstacle to the consolidation of legal industries,
permanent jobs and above all, payment of taxes.
This lobbying strategy places distance between multinationals and illicit trade
and has a dual purpose: for the majors to appear as socially responsible firms in
the eyes of the public and governments, but also to place the blame for the illicit
trade on a lack of adequate government controls, while also accusing smaller
national competitors of breaking the rules.
28
As discussed above, however, Souza Cruz (a subsidiary of BAT in Brazil) has
been accused by independent observers of being the main beneficiary of a
system of tax evasion that functioned until 1998 by which cigarettes were
exported to neighboring countries and which "distributors" then illegally reintroduced into Brazil.
More recently, multinationals have faced greater competition from new
manufacturers, especially from Paraguay, and from the increasing trend
towards “control” of the illegal market. Particularly damaging for multinationals is
brand falsification or even brand theft.10
By way of response, multinational tobacco concerns in the region changed their
strategy towards supporting agreements with national Customs authorities
concerning combating smuggling and the illegal market.
Growth in the volume of illicit trade of cigarettes from Paraguay has been so
significant that even the powerful Souza Cruz company, the BAT subsidiary in
Brazil, has been affected and has promoted an "ethics committee" together with
companies in other business sectors that are also affected by smuggling, such
as the brewer AMBEV.
C) Smuggling in MERCOSUR countries as the main mode of illegal trade in tobacco Smuggling is the most comprehensive and oldest form of illegal trade.
Traditionally, it has been separated into "bootlegging", or small-scale
smuggling, and wholesale smuggling.
The defining element is the involvement of gangs, whether organized or not.
Bootlegging is conducted by individuals or families not forming part of a
network. It generally involves tax-paid cigarettes being conveyed across a
border. Profits are generated by differences in retail prices between two or more
countries.
MERCOSUR countries do experience smuggling that approximates to
bootlegging. Primarily young people who live in towns close to national borders
serve as drivers for transporting cigarettes.
Generally, though, this young and low-paid workforce of smugglers is part of a
criminal network. The product is not purchased legally, as in traditional
10
In 2003, one of the main tobacco companies in Paraguay arbitrarily began production of two main Argentinean brands
(Derby and Jockey Club) owned by BAT in Argentina. After BAT took the Paraguayan firm to court in Paraguay, the
local firm won the first case and continued manufacturing for a number of years. Original and counterfeit packages were
identical. Reported by Mario Virgolini, source: Diario La Nación, 23 May 2004 http://www.lanacion.com.ar/603522;
Diario La Nación, La Nación, 26 September 2003 http://www.lanacion.com.ar/530380
29
bootlegging, but it is bought "wholesale" from the factory without domestic taxes
being paid.
An illegal product bought in one country is then shipped illegally for illegal sale
in another.
Two elements implicit to traditional bootlegging are missing in the region:
a) Operators do not buy tax-paid cigarettes in one country to carry them to
another country;
b) The small-scale operation involving young people is the final link in a chain of
“sales”. The system is mainly used by gangs to thwart official checks as
quantities smuggled are typically too small for an offender to be sent to prison.
Terming this “small-scale” is often misleading: having passed border controls,
cigarettes are stored in secret warehouses in the destination country prior to
subsequent distribution and retail sale.
Even though the small-scale operators transporting cigarettes across borders
may be "freelance", they actually have a closer relationship to their vendors
than do retailers to wholesalers in the legal market.
c) The traditional bootlegger can generally no longer operate truly
independently in the region, as they did until a few years ago, for risk of being
assaulted or robbed by gangs. Small-scale operators used to travel to Paraguay
and buy cigarettes directly from factories there. But larger-scale operators and
criminal activity along the borders made it increasingly dangerous to travel long
distances carrying money and merchandise. Small groups and families
therefore remained in business by becoming part of large networks.
Thus, larger-scale land-based smuggling operations crowded out smaller
operators. Larger organizations are also apt to be more efficient in terms of
purchasing, transportation and identifying and paying corrupt customs officials
and police to prevent confiscations.
From the conceptual point of view, it therefore seems more useful to dispense
with the traditional definitions of bootlegging and wholesale smuggling and use
a different approach. This is to simply distinguish between patterns of
smuggling based on: i.) the use of land and river borders between two or more
countries (typically by bus, truck, boat, or car) versus, ii.) smuggling that relies
on seaports and overseas trade facilities in MERCOSUR countries, under
agreements promoting international trade, such as free port areas, processing
zones and with special transit permits. The latter makes extensive use of the
rapidly expanding use of container shipping in international trade.
Port facilities are a convenient additional means for smuggling cigarettes and
other goods since thousands of containers enter and leave every month.
30
Customs procedures involving opening containers are not routine. There are
few resources for this and it implies further delays and higher port costs which
are strongly resisted by private operators such as importers and forwarders.
Scanners which check the contents of containers could offer a solution but few
of them are used in regional ports.
There are clear differences between these forms of smuggling. Smuggling
operations which take advantage of trade-promotion clauses in treaties and
domestic legislation in MERCOSUR countries generally move wares by ship.
Containers of cigarettes have the necessary documentation for international
cargo movements but there are a variety of ways of hiding that they are
contraband cigarettes.
In the case of illegal trade across land or river borders (including the use of light
aircraft), the common feature is to avoid being subjected to customs controls.
Goods are hidden when crossing border posts, and carry either no valid
documentation or circumvent controls via corrupt officials. Intelligence collected
in border towns points to corruption of officials as the main way of reducing the
risk of an operation since there are few roads and most are highly controlled.
Avoiding possible confiscation depends on an organization which can move
smuggled cigarettes. Gangs in border areas have highly-organized and
sophisticated means of communication, operate using a wide variety of forms of
transport and vary both routes and smuggled products, as needed. Sometimes
they will transport cigarettes, at other times consumer electronics, medicines, or
prohibited products such as agricultural chemicals or illicit drugs.
In conclusion, it appears that smuggling operations in border areas continually
respond to changing policies and improved controls by mobilizing more
resources, improving upon technology and organization and by corrupting
officials at different levels. The old days of bootlegging activities are long gone.
31
CHAPTER III
A. Types of illegal trade in cigarettes in MERCOSUR countries Illegal trade in tobacco products, as set out under Article 15 of the FCTC,
comprises illicit manufacturing, smuggling and counterfeiting. Illegal trade
means operators do not pay taxes on retail sales of cigarettes. Illegal operators
benefit from the realities of international trade which are characterized by a lack
of adequate regulation.
Governments are chiefly interested in promoting trade and attracting investors.
These objectives are framed in a range of treaties and policy instruments.
Treaties, agreements between countries and domestic legislation serve to
promote intra-regional and international trade through customs transit facilities,
free trade zones and free port areas, and duty free shops, for instance.
On the other hand, border controls are weak, there are instances of corrupt
officials, and it is often difficult to formally prove the existence of an illegal
operation or activity concerning international trade.
Illegal trade does not necessarily involve cross-border movements. There are
manufacturers who operate outside the legal framework within a given country,
especially regarding non-payment of domestic tobacco and other taxes.
Cigarettes may or may not be counterfeit in these situations. In both Argentina
and Brazil there are examples of illegal cigarette production in which the
manufactured items could be counterfeit versions of well-known brands but
where, for reasons of profiting from lower-priced segments in the domestic
market, they are instead counterfeits of a Paraguayan convenience brand and
marked “Paraguayan made”. The intention is to divert the attention of the
authorities away from illegal manufacturing by presenting this as another case
of smuggling from Paraguay. Legally established operators in the domestic
market are sometimes involved in such activities.
Intelligence information collected by the analysis team and compiled by CIET in
Paraguay established how “closed factories” can engage in clandestine
production. Companies produce cigarettes legally during normal working hours
but outside of these times manufacture cigarettes illegally using trusted workers
and staff. This form of operation has been recorded in Brazil.
The three main forms of illegal trade in cigarettes - illicit manufacturing,
smuggling and counterfeiting - are to be found in MERCOSUR countries. In
Argentina, Brazil Paraguay all three forms have been recorded. In Uruguay,
32
there appears to be no illegal manufacturing or counterfeiting by local
manufacturers.
1) Forms of “wholesale smuggling” through ports and regional and international trade facilities The following section describes the more common procedures for illegal
cigarette operations via international trade. It is based on information uncovered
by enforcement agencies:11
•
Alteration of certificates of origin and forgery of public documents
This mechanism is widely used in smuggling various goods including cigarettes.
Merchandise that has been certified as originating in one MERCOSUR country
and being shipped to another is partially or completely free of import taxes. The
Certificate of Origin must specify the products’ point of shipment. Products are
considered as being of origin when wholly manufactured in one of the member
countries.
Cigarettes have been intercepted coming from outside the region – from China,
for instance. But they have been described as having been manufactured in a
MERCOSUR country. The purpose is to avoid paying duty on products
originating outside the MERCOSUR.12
•
Entry of merchandise claiming temporary importation
What is referred to in Argentina as “imported merchandise in suspension”
(“temporary”, in Paraguay, and “temporary admissions” in Uruguay) is a special
“drawback” type of customs regime that allows raw material to enter
MERCOSUR countries without payment of custom duties or other taxes on the
basis of it being exported later as a part of a processed product.
The smugglers´ strategy here is to declare a fake address for where processing
supposedly takes place and so hide the real destination of merchandise
entering the internal market, without paying taxes due. It is common for cloth,
paper, leather, computer parts and even fuel to enter countries via this means.
Little use is made of schemes of this kind for cigarettes, however.
•
Entry of merchandise under the “in transit” regime
Merchandise arrives at a MERCOSUR port to be reshipped to its final
destination abroad, or through another customs post in the same country.
Under present regulations, as a mechanism to aid trade, tax is paid only at the
11
Based on Mario Virgolini and J. Caterenine: Strategies for tobacco smuggling and control measures in Argentina.
Unpublished working paper (sp), Buenos Aires, Argentina, April 2008
Carlos del Frade, Southern Postcards. Cited in Virgolini M. and Caterenine, J. Strategies for tobacco smuggling and
control measures in Argentina
12
33
final destination and it is not paid in advance or at the moment merchandise
arrives in the country of transit.
At some point along the way, the merchandise is “lost”. This is not difficult to
arrange in view of problems inherent to following consignments and ensuring
that everything from the point of origin reaches its final destination.
•
Under invoicing
A substantial percentage of smuggling in the region is carried out via underinvoicing and by presenting forged invoices.
The reasoning is simple, according to a former employee of the AFIP in
Argentina: “Why conceal smuggling when there are no documents if the safest
way is to present forged papers?” Invoices are scanned or dispatches are
submitted via fax. After a time they become increasingly illegible leaving no
basis of proof.
In Brazil, the means by which merchandise enters the country legally through
ports and airports but at under-invoiced prices or with forged invoices or
irregular product classification is referred to as “importgling”. According to an
authority within the Receita Federal,13 São Paulo is replacing Paraguay as an
important centre for this kind of activity as it is much safer for buyers of products
entering the country illegally and those which are forgeries.
•
Product substitution
Officially, a low-cost product is declared (for example ground glass) but the
container actually contains cigarettes. This is often conducted using containers
which are declared as being empty or are filled with stones or sand but which
are actually filled with cigarettes or a combination of cigarettes and other illegal
merchandise.
2) Undocumented smuggling (associated to retail smuggling) This is the other main form of cross-border smuggling. It is termed “bootlegging”
in most countries but has taken on certain special characteristics in the
MERCOSUR region, as outlined below.
13
Mauro del Brito. Coordinator of Smuggling and Piracy, Repression of the Receita Federal, Brazil. Presented in Public
Hearing at the Chamber of Deputies, August 2007. 34
a) Characteristics While smuggling activity tends to be concentrated at certain points and in
frontier cities, smugglers take advantage of the enormous length of land-based
and river line borders in the region and the inability of security forces to control
all points of entry.
A further aspect assisting smuggling is border culture that does not regard
smuggling as a crime. This view is shared by large sections of the region’s
inhabitants, even those who do not live near the borders.
“In our culture, smuggling is not an offense,” according to Abinzano.14 “Many
people survive by bootlegging and do not recognize or accept it as a crime.”
This perception is extensive, particularly in border zones of the four countries.15
One of the main smuggling areas is the Triple Frontier region formed chiefly by
the cities of Foz de Iguazú (Brazil), Ciudad del Este (Paraguay) and Puerto
Iguazú (Argentine); an area of approximately 2,500 square kilometres. Its
population has expanded over eleven fold since 1961 and current stands at
nearly 700,000 people.
One of the initial impulses to the population increase was construction of the
Itaipú dam which provides cheap energy to business in the region, as well as
employment that attracted large numbers of workers. It is a region where
different cultures merge: Arabs, Argentineans, Brazilians, Chinese, Koreans,
Paraguayans and the descendants of Germans and Italians. This intercultural
mix adds unique colour to an area undergoing permanent socio-cultural
upheaval. “Some 300,000 people who migrated to Brazil when the Itaipú
hydroelectric dam was under construction are called ‘Braziguayans’. They have
settled on Paraguayan soil, their children were born in Paraguay, grew up and
went to school there, but they still maintain their own traditions and believe that
at some point they will return to Brazil,” according to academic investigator
Roberto C. Abinzano.14
14
Roberto Carlos Abinzano: member of the Investigations Department of the National University of
Misiones in Argentina, has spent more than a quarter of a century analyzing societies and their
relationships to frontier.
15
Bolivar Moreira. Interview with an ex-smuggler. CIET March 2008 and an interview with a Customs
Officer, CIET, April 2008.
35
The Triple Frontier is renowned
for being a region steeped in
illicit activities, with Ciudad del
Este at its heart. Historical
references to this date back as
far as colonial times. A parallel
can be drawn with the boom of
illegal commerce during the
Peruvian Viceroyalty in Buenos
Aires.
b) Impact of illegal activity in the Triple Frontier region Criminal activity is mainly based
on forgery and smuggling of a
variety of products including
cigarettes, electronics, drugs and
weapons. What is particular to
the region is the extent of trade.
Illegal trafficking in goods occurs
in a region where it has proved
extremely difficult to impose
control, especially when people
in the Southern Cone have a
perception of Ciudad del Este as
a region where items such as
electronic goods can be obtained
cheaper than on the internal
market. It is far from being a
hidden or exclusive region for the
large-scale
development
of
illegal trade. It also serves
tourists in search of products.
Piracy
and
marketing
of
smuggled goods in Ciudad del
Este is facilitated by Paraguayan
legislation that allows patenting
by non-resident companies in the
National Registry of International
Brands.
BOX Nº 1 ‐ Interview with a representative of an illegal cigarette factory in Ciudad del Este, Paraguay. Life in the region is enhanced by general commerce, be it legal or illegal. There are several tobacco factories, each of which operates in harmony with its neighbours. Nobody trespasses on another’s territory. Modus operandi: ‐ Step 1: There is a “godfather” who carries a lot of weight. (No prosecutor has ever issued a warrant to search the factories). ‐ Step 2: Have good merchandise, a factory and materials: paper, filters, tobacco, boxes, etc. ‐ Step 3: Have contacts. Clients that pay; and good “operators” who are in charge of opening markets. No tobacco factory functions without “operators” as it is extremely risky to conduct business directly with the client. The “operator” is the person who secures the order, stipulating the price, quality, brand name and quantity. There are two ways of manufacturing: if the client wants to use his own brand; or if he prefers to use one already existing in the market. For the latter, there is a “master” who is in charge of making the formula and obtaining the closest flavour. Normally, own‐brand orders are only of short duration. ‐ Step 4: Production and storage. Production is as in any industry, but manufactured goods are not stored in the plants. Merchandise is sent to different well‐guarded storage locations. Delivery preparations are made and final delivery is by a variety of smaller trucks. ‐ Step 5: Delivery. Depending on the place of delivery, goods are transported in trucks, ships, barges, light aircraft, etc.. Delivery is always under escort. A “leader” communicates the route and is in charge of logistics. Another leader accompanies the merchandise. The communications leader maintains contact with authorities en route and distributes the “crown royalties”. Their responsibility extends up to the frontier or to shipment in free ports. ‐ Step 6: Quality control by client. “It is important to know whether the client is satisfied with the product”. A repeat order is an indication of things having gone according to plan. All payments are in cash. 36
Ciudad del Este is estimated to be one of the most important cities in the
Americas in relation to its commercial market. It turns over around USD 10
billion dollars a year via the flow of imports and exports, many of which are
illegal.
B. Evolution of operating bases and destination countries for smuggling originating in Paraguay16
Where changes to smuggling routes and operating bases have occurred it has
been due to diplomatic offensives and efforts by Argentina and Brazil to combat
criminal activity rather than enforcement policies by Paraguay. It is well
corroborated that neighbouring countries efforts in deploying security forces and
through more aggressive fiscal policies have cause smugglers to change final
destinations of products as well as their own procedures and operating bases.
The following section highlights the main routes for smuggling that originates in
Paraguay and involves cigarettes and a range of other merchandise including
marijuana, weapons, clothes, electronics and cosmetics.
BOLIVIA
5ª RUTA
ASUNCION-TRANSCHACO
BRASIL
4ª RUTA
CANINDEYU-BRASIL
1ª RUTA
ASUNCION
ALTO PARANA - BRASIL
ARGENTINA
3ª RUTA
NEEMBUCU – ARGENTINA
ENLACE CON BRASIL
2ª RUTA
ITAPUA - ARGENTINA
16
This part of the investigation is based on: Rehnfeldt, Mabel: Report of cigarette smuggling in Paraguay, Asunción, Paraguay, November 2007, that in turn gathers information from the archives of the newspaper ABC Color from Asunción, Paraguay. 37
. First route: High Paraná – frontier with Brazil (main route until 2002, still in use) It comprises:
- by land: the so-called Friendship Bridge on the Brazilian border.
- by water: Lake Itaipú (250 square kilometres, uncontrolled); the Parana River
and illegal posts along the way.
- by air: the first illegal runways for light aircraft were located in this region and
in the Chaco zone.17
This first route is the ‘traditional’ one that survived the dictatorship of General
Stroessner and the first years of democracy in Paraguay after 1989. The High
Parana became accessible by land, water and air; smuggling was made easier
by its proximity to Brazil and Argentina, the Triple Frontier, and the existence of
the Friendship Bridge.
. Second route: Itapúa – border with Argentina This was one of the main routes from 2002 until 2004 and is still in use.
The appearance of this new route followed a number of successful efforts in
2003 and 2004 aimed at containing smuggling.
Even during this period, however, air, land and river routes across the High
Parana continued to be used but were less visible due to smaller quantities of
smuggled goods being confiscated by neighbouring countries.
This route comprises:
- by land: a direct line towards the High Parana, entering Brazil.
- by water: illegal ports along the Parana River with a direct line of entry into
Argentina.
- by air: significant use of light aircraft specially equipped to deliver large
cargoes into Argentina. (Refer to information below concerning provinces and
Argentinean landing areas).
A second route which appears to be an alternative to the High Parana shows
there has been an evolution not only in the base of operations but also in the
classic forms of transportation used for smuggling. Barges and gliders have
17
According to evidence from Paraguayan military source (ABC Color, January 12 2000). In Brazil, however, there are
no significant mentions of cigarettes being transported by plane. It is feasible that planes are being used for the
transportation of illegal drugs. Illegal trafficking of cigarettes and marijuana by air is frequent in Argentina.
38
been used from the illegal ports of the High Parana, although in the region
around Itapúa there has been a higher concentration of smuggling efforts.
. Third route: Ñeembucu – border with Argentina – connection with High Parana towards Brazil This is one of the current routes mainly in use since 2001.
- by water: through illegal ports situated near naval bases on the Parana and
Paraguay rivers.
- by land: construction of a road to the department’s capital permitted relatively
unhindered movement through the eastern region of the country where cargo
could be stored prior to being moved towards any of the bordering countries.
- by air: this is one of the departments with the highest illegal light aircraft traffic
to date.
Ñeembucú is currently one of the favoured locations for trafficking by water,
land and air. This is due to access to two rivers, while its irregular geography
means illegal runways can be well-hidden by vegetation.18
. Fourth route: Canindeyu – border with Brazil – also connection with High Parana Also in use since 2001, it remains one of the main routes up to today.
- by land: cargo is transported along the land border in convoys sometimes
consisting of several vehicles.
- by water: the proximity of Lake Itaipú (250 square kilometres) allowed cargoes
to be disembarked on the Brazilian side, for example in Guaira.
In 2004, several legal cases ended in the confiscation of smuggled goods
destined for Brazil. The existence of several illegal warehouses on both sides of
the frontier has been recorded and there were reports of cover-ups and
smugglers being protected by local authorities.19
. Fifth route: Asunción – Transchaco (to date) - by land and water: several shipments of smuggled goods leave from the
capital of Paraguay. Asunción, Luque and other locations in greater Asunción
are bases of operation for cargoes that later go by the Transchaco road having
Bolivia, Chile and Peru as their final destinations. Warehouses in the central
region are also used to store large consignments that are later dispatched to
border countries.
18
19
See comments below on the situation in Argentina concerning the entry of cigarettes.
ABC Color newspaper, several editions, 2004
39
. Sixth route: the waterway formed by the Parana River and the Paraguay River towards the River Plate Nueva Palmira is located 140 km from the ports of Buenos Aires and
Montevideo where merchandise goes “in transit” to various Paraguayan regions
and is reshipped to ports overseas. Nueva Palmira itself has a special
Paraguayan zone to facilitate trade that was granted by Uruguay. The waterway
that begins in Puerto Cáceres, Brazil, is a navigable route crossing five
countries over a distance of more than 3,000 km.
This route (refer to map) is used for container transport of merchandise,
including cigarettes, from Paraguay. Port facilities in neighbouring countries are
used to re-export merchandise in transit. Or merchandise is cleverly reclassified
and shipped send to countries in Europe, North America, South East Asia,
Africa and to China.
Chapter IV presents initial estimates of volumes of illegal trade in the region
although it is believed that illegal sales from Paraguay reach various countries
around the world.
40
C. Perspective on the illegal Paraguayan trade into Argentina20
Cigarettes of Paraguayan origin illegally enter the NEA region of Argentina
(formed by the provinces of Chaco, Corrientes, Formosa and Misiones) in
volumes surpassing those of narcotics or electronics.21
. Transit zones for smuggled cigarettes
The map below indicates the main river line border crossings with Paraguay.
Lines show the main land-based smuggling routes, particularly routes 11 and 12
running to the west and east, respectively, of the river Paraguay/Parana as well
as route 14 west of the river Uruguay.
According to sources in tobacco factories, the illegal market formerly involved
high-priced and internationally-known brands or Argentinean brands of exported
cigarettes which were re-imported into the country tax-free. In 2003, it consisted
mainly of low-priced Paraguayan brands destined for low-income sections of the
public. Sources indicate that products of this kind account for 90% of smuggled
goods in the country and are marketed chiefly in the interior of the country,
throughout the entire northeast, along the rivers Parana and Paraguay and in a
number of the second belt regions around greater Buenos Aires.22
20
Sourced on: Intelligence collected and reported by Genes, César and Benítez, Rossana: “Characteristics and trends
of illegal trade of products of tobacco in the North-eastern Region of Argentine. Research Report” Corrientes,
December 2007, and a Report by Caterenine, Juliana , “Illegal trade of Tobacco in Argentine. Consulting Report”
FESP/BM/PNUD, National Tobacco Control Programme, Ministry of Health of Argentine, 2007.
21
According to statistics furnished by the Prefecture Nacional (Coast Guard Police), in the years 2004 and 2005 the
crime of smuggling increased in the various borderline regions. Formosa, Chaco, Misiones and Corrientes are part of
the crime route of the “cigarettes” that generate hundreds of “job sources
22
Clarín, 30/08/2003
41
It is common for only one kind of product, in this case cigarettes, to be shipped
from one country to another, especially when smuggling crosses a river.
However, combined shipments by air of cigarettes, drugs (mainly marijuana)
and weapons have been identified.
Their destinations are primarily the peripheral neighbourhoods of large cities.
Products are aimed mainly at low-income sections of the population, as well as
young people and teenagers who are new to tobacco.
Most informants agree that the transfer and sale of these cigarettes is
conducted by small groups of not more than six or seven persons who do not
normally handle volumes exceeding $30,000 in value (equivalent to around
USD 10,000) in order to avoid legal penalties. Those involved in transporting
the merchandise are often young people for whom this provides a means of
economic survival in towns where there are no other sources of work.20
Merchandise, kept in bags, is transported in canoes, high-speed launches,
modern vans, fast cars and small planes.
Those involved in transporting the product often handle distribution.
Alternatively, it can be stored in warehouses, which are generally improvised,
and then rapidly divided and offered to consumers.
Brands of confiscated cigarettes most frequently mentioned in newspapers
were: Rodeo, Eight and 51, of Paraguayan origin, and, less frequently, brands
from transnational companies located in Argentina, such as Philip Morris,
Viceroy and Derby. The latter are usually counterfeit, although the means of
verification is not specified. (The only mention concerns comparison of fiscal
stamps on confiscated cigarette packs, which were undoubtedly genuine).23
Reports by the Naval Prefecture between 2004 and 2008 showed that 62.5% of
confiscations involved the brand Rodeo, followed by Eight (10%), Mil (8%) and
51 (6%).24
23
Ya Misiones 11/06/07. http://www.yamisiones.com noticiaextendida&idnoticia - 4638
Virgolini, Mario and Caterenine, J. Tobacco smuggling strategies and control measures in Argentina. Working Paper
of the Mercosur Intelligence team. Buenos Aires, Feb. 2008
24
42
Clorinda
Paso de la Patria – Itatí Posadas – Santa Ana Colonia Oasis Puerto Rico . Air traffic
Use of light aircraft is another means by which criminal organizations illegally
import merchandise into Argentina. Reliance on aircraft appears to increase
where access by land or river becomes more difficult, although the use and type
of aircraft, and the route involved, are directly related to the weight and value of
the cargo.25
Light aircraft in use by smugglers cross the vast northeastern border on a daily
basis, transporting goods including cigarettes, clothes, drugs and weapons. It is
estimated that there are in excess of 1,000 flights per year along a length of
border exceeding 2,200 kilometres and that in northeastern forest regions there
are 895 clandestine landing strips, according to official reports released to the
press by senior sources in the security division.26
A modified Cessna aircraft can carry up to 500 kilos of any type of cargo.27
Depending on its size, an aircraft can transport between 20 and 80 boxes of
25
Diario Hoy, 02/09/2007
26
La Nación, August 20, 2007
La Nación, August 20, 2007
27
43
cigarettes. Boxes hold 50 cartons each of which contain 10 packs of
cigarettes.28
A security and defence expert attached to the Casa Rosada (the Presidential
house of government in Argentina) confided, “Transporting cigarettes or
marijuana from Paraguay is not the same as transporting heroin or cocaine. The
value of cigarettes and marijuana only justifies the use of piston engined
aircraft, or transport by foot, extending possibly as far as to the north of Entre
Ríos or the centre of Santa Fe. Otherwise the market price would increase.”
This source disclosed that dozens of flights violate the country´s air space,
defence of which rests with the Air Force.29
The country has roughly 4,000 official runways for medium-sized transport
aircraft, 150 of which are in Santa Fe.
. Main Argentinean provinces receiving smuggled goods
Corrientes:
According to a report by the 48th Squadron of Corrientes, “The region extending
from Itatí to Paso de la Patria, including the jurisdictions of San Cosme,
Ramada Paso and Puerto González, is an entry point that smugglers frequently
use in spite of strict controls by the National Police and other forces.”30
Secondary roads between the sites of Paso de la Patria, San Cosme, Ramada
Paso, Itatí, Paraje Ensenada Grande, National Route 12, are also “hot zones”,
including even roads and/or alternative paths leading to the banks of the Parana
River.31
Smugglers arrive by the Parana River and head along the Prayuí tributary.
Consignments of cigarettes or marijuana are left at the shore. Minor roads are
used to avoid controls. South of the city of Corrientes is a very dangerous “red
zone”. Neighbours told La República of having seen movements of various
types of vehicles around where the Pirauí flows into the Parana River.
Misiones:
In the province of Misiones, most operations are conducted on the banks of the
Parana River near Santa Ana (22%), Oasis (12%), Puerto Rico (8%), Posadas
(6%), Aristóbulo Del Valle (5%), Jardín América, Eldorado and Iguazú (4%) .
Cigarette shipments entered from Paraguay at three points: Paraje Nemesio
Parma, south of Posadas, and via Ituzaingó and Itatí, in Corrientes. In the case
of Parma, shipments were taken to a warehouse in Posadas. Trucks took
28
Hoy, La Plata, January 22, 2008-08
Hoy, 02/09/2007
30
http//www.diariolarepublica.com.ar/noticia. Pbp (30927 & 2007/09/03)
29
31
La República, 02/03/2007
44
shipments from locations in Corrientes directly to distribution centres in Venado
Tuerto, Santa Fe and Claypole, Villa Madero and Gregorio Laferrere, in Buenos
Aires. Cigarettes were then distributed to retailers.
In most cases, cigarettes were hidden under beer crates. But empty containers
going
to
the
Port
of
Buenos
Aires
were
also
used.
(http://misionesonline.net/paginas/detalle.php?db=noticias2002&id=47820
12-07-2002).
Formosa:
Clorinda, Prané and Tatané are the main locations in Formosa where
successful smuggling operations have been carried out. Clorinda is the
Formosan city on the northern border, neighbouring Asunción.
News reports mention intensive non-authorized air traffic coming from the south
of Paraguay and a substantial number of illegal runways in the Argentinean
provinces of Santiago del Estero, Corrientes, Misiones, Chaco, Northern Santa
Fe, Entre Ríos and Córdoba.
The most sought-after destinations are rural areas in Misiones, Corrientes and
Chaco.24
Territorial characteristics of the northeast offer generous opportunities for
landing light aircraft. In Chaco alone, landowners, aviation enthusiasts and
fumigators report more than 100 such sites. The number of similar, nonregistered, sites is unknown.
Santa Fe:
Flights to this province start from Pilar, in Paraguay, and other nearby locations,
all south of Asunción. Use of chartered aircraft is common, with unarmed hired
pilots to avoid major criminal charges should they be arrested and appear
before the courts.32
Dedicated cigarette smuggling organizations in Argentina, having their bases on
Paraguayan soil, have for at least the last five years been operating in the north
of Santa Fe using illegally-built runways in fields, combined with little-used
routes. Lack of radar installations means the government is unable to track
aircraft movements in the departments of San Cristóbal, 9 de Julio and Vera
and General Obligado “From Santa Fe capital and Paraná, cigarettes are
distributed up to Mendoza and Buenos Aires, as well as to other places in
Argentina. It is a weekly business amounting to two million pesos (USD 2
million, at that time). In order for it to function the illegal money circuit depends
32
DiarioLa Nación, October 10, 2005.
45
on the involvement of officials from various jurisdictions and members of the
security forces. There are no major controls on airspace or in the interior of the
large provinces.” 33
D. Perspective on smuggling by land, river and the Itaipu Lake into Brazil Routes leading from the Triple Frontier and to the south and north, from
Paraguay to São Paulo, are probably those with the highest incidence of
cigarette smuggling in the world.
An investigation of news reports, conducted by ACT Brazil, (see map) has
identified some of the cigarette smuggling routes from Paraguay.34
The first route leads directly from Foz do Iguazú to São Paulo. There are
numerous ways of reaching São Paulo that avoid highways and major roads,
such as BR 277 and BR 369, relying on state roads in Paraná and São Paulo.
Route 4
Route 1
Route 3
Route 2
Route 5
Route 6
33
34
Informe Análisis de Paraná. Misiones online, 20/09/2001 http://www.misionesonline.net/ This section is based on Roberto Iglesias, Summary of journalistic information, January 2008. ACT, Brazil. Working
paper for the Intelligence team on tobacco smuggling in MERCOSUR (unedited)
46
It is significant that smuggling operations cover large distances within Brazil
without being intercepted. In January 2008, the newspaper Estado de São
Paulo reported a confiscation operation concerning 750,000 packs of cigarettes
being transported in two fully-loaded trucks which were escorted by a car. After
crossing the Paraguayan border the vehicles had covered over 900 km before
Federal Police intercepted them near São Paulo. For a cargo of this kind to be
able to cover such a distance suggests complicity by several Federal and State
Police control posts.35
Based on retail prices the value of the confiscated cigarettes was around USD
500,000. This implies a significant gang operation having financiers,
intermediaries, transporters, bribed officials, substantial warehousing mainly in
and around São Paulo and a variety of distributors.
The second route is from Foz towards Curitiba, the State capital of
Paraná, where according to newspaper reports three out of every four
confiscations were made. The route continues to São Paulo and can be
considered as a variation on the first route.
The third route leaves Guaira,36 on the frontier with Paraguay, and heads
towards São Paulo via BR 272, passing through Umuarama, Cianorte and
Maringá. It overlaps with the first route and continues to São Paulo via
Londrina. However, there is a route that avoids roads with heavy traffic, bypassing Londrina, that is a fairly direct and safer route for smuggling which
finally reaches São Paulo via Sorocoba.
The fourth route leaves Ponta Porá, on the border with Paraguay near
Pedro Juan Caballero, via the BR 463 towards Dourados and then by BR 376
through Maringá and Londrina - where many confiscations have been made –
before joining other roads leading to São Paulo. However, a route that does not
use national roads goes via Campo Grande to the north and then towards
Presidente Prudente, Assis and Ourinhos where it merges with the route to
Londrina and São Paulo, as mentioned above.
The fifth route leads south from Foz de Iguazú to Porte Alegre, passing
through Passo Fundo. The distance to Porto Alegre is over 800 km.
Finally, the sixth route is one which, after reaching Passo Fundo, heads
southwards towards the border with Uruguay, feeding Santa María, Rosario do
Sul and Santana do Livramento (the sister city to Rivera, on the Uruguayan
35
Reported by Marcelo Soares for the Mercosur Intelligence Team on tobacco illicit trade, May 2008
Paraguay paved a road linking the counties of Hernadarias (a city neigboring Ciudad del Este) with Salto del Guairá.
This so-called ‘super highway’ facilitated the transportation of merchandise from Ciudad del Este to Salto del Guairá and
simplified the smuggling of goods across the more than 250 km of the Itaipu lake and the river Paraná. Reported by
Marcelo Soares for ACT Brazil. 36
47
side), leading on to Artigas and possibly Uruguayana, and by a southeastern
route from Passo Fundo to Cacapava do Sul and Bage, before going on to
Yaguarao on the border with Uruguay. It is possible there is also an alternative
route to Pelotas, Rio Grande and Santa Victoria leading to Chuy in Uruguay,
which is a shopping and free port centre.
Routes heading from São Paulo to the north of Brazil are not included here as
there are a wide range of possibilities and actual routes are extremely difficult to
determine.
E. Border­region smuggling into Uruguay As has been described, smuggled goods arrive in Uruguay through the
country’s ports and free zones, by crossing land borders with Brazil and via the
Uruguay River with Argentina. The land border not a significant source of
smuggling, which tends to make use of other avenues.37
Firstly, we consider bootlegging across frontiers and smuggling in containers
through ports.
The main access routes for cigarette bootlegging are on the land border with
Brazil (the departments of Cerro Largo, city of Aceguá, Rivera, Artigas, city of
Bella Unión) or on the western sides via the three international bridges on the
Uruguay River that separate Uruguay and Argentina (the cities of Salto,
Paysandú, Fray Bentos in Uruguay) and the river port of Colonia further to the
South, although the main smuggled item there is clothing.38 The main routes for
transporting smuggled goods to Montevideo and its metropolitan area are
highways 5 (Montevideo-Rivera),39 8 (Montevideo-Melo),40 9 (MontevideoRocha)41 and 18 (Treinta y Tres-Río Branco).
37
Bolivar Moreira, Study of illegal tobacco trade in Uruguay, review of printed press, CIET. Intelligence Report for the
Mercosur team. February 2008.
38
Bolivar Moreira, Interview with an ex-smuggler from Rivera, CIET, Report for the Intelligence team on Mercosur
smuggling, March 2008
39
El Pais, December 27, 2007
40
Ultimas noticias, May 10, 2005
41
El Pais, December 9, 2005
48
Coastline cities in Uruguay having bridges that cross the Uruguay River (Salto,
Fray Bentos and Paysandú) are the destination for Argentinean merchandise
and cigarettes originating in Paraguay.
Secondly, smuggling networks use the port of Montevideo and free zones in
Uruguay as entry points and rely on merchandise in transit in the port of
Montevideo.37
None of the news reports surveyed contained information on the use of illegal
airfields in smuggling of any particular tobacco product. However, there are
cases of such runways being used for drug trafficking by criminal organizations
that specialize in narcotics.42
Nonetheless, an expert source acknowledged that tobacco smuggling is
conducted by air. This source considered it as unacceptable that Uruguay lacks
a radar system covering its entire country: “They still come in by air. There are
200 illegal runways in the country.” 43
42
43
Diario El Pais, August 19 2007
Dr. Víctor Lissidini, former National Director of Customs in Uruguay, as reported in Diario El Pais June 27, 2002
49
CHAPTER IV
A. Quantification of the legal and illegal market for cigarettes and tobacco44 1) In general the legal trade in cigarettes between countries in the MERCOSUR
region is extremely small. Trade between Uruguay and Paraguay stands out,
however, and lower levels of trade occur between Argentina and Uruguay. With
respect to trade in raw materials, Argentina is the main supplier of tobacco for
cigarette manufacturing in the region although Brazil is much more important as
an international exporter.
2) Exports of cut tobacco and cigarettes from Uruguay to Paraguay in 2006
were valued at around USD 20 million and had a gross weight of 6 million kg.
This tended to involve blond cigarettes valued at around USD 16 million and
weighing 3 million kg; which implies around 2.5 billion sticks. Except for very
small differences, Uruguay’s export statistics match those for Paraguay’s
imports. As already outlined, the majority of cigarettes are not sold on the
Paraguayan market but are sold to operators who smuggle them into Brazil.
3) Argentina’s tobacco raw material exports to Paraguay were around
21.7 million kg half of which was tobacco leaf, the other half being tobacco
wastes of lower value. Cigarette exports from Argentina to Paraguay are
negligible. Official Argentinean exports trade statistics also basically match
those for imports into Paraguay. Cigarette exports from Argentina to Uruguay
are explained by BAT not having a cigarette factory in Uruguay. BAT competes
in the Uruguayan market by importing cigarettes from Argentina.
4) Brazil is the world’s largest exporter of tobacco leaf with exports amounting to
around 600,000 tons. A very small proportion of this ends up in the
MERCOSUR region. Tobacco exports to Paraguay were around 7,000 tons in
2006; the quantity was considerably lower in previous years. To a great extent
this is due to fiscal policies that Brazil introduced in 1998 in order to restrain
contraband from bordering countries. Refer to Chapter III above.
5) In 2006, Paraguay’s potential supply of cigarettes for the illegal market was
around 66 billion sticks. This figure is arrived by calculations based on imports
of tobacco raw materials (leaf and waste, other) of 39.2 million kg in 2006,
equivalent to a manufacturing potential of around 60.4 billion cigarette sticks,
44
Estimates made by Alejandro Ramos, CIET (Uruguay), based on data provided by Dardo Curti (Uruguay), Martin
González Rozada (Argentina), Andrés Duarte (Paraguay), Mabel Rehnfeldt (Paraguay), Roberto Iglesias (Brazil), from
official sources (legal commerce)
50
plus domestic Paraguayan tobacco leaf production of 15,000 tons which would
allow for additional production of around 14.6 billion sticks.
SUPPLY AND DEMAND OF TOBACCO AND CIGARETTES IN PARAGUAY, 2006
SUPPLY OF TOBACCO AND CIGARETTES
leaf and waste
tobacco
leaf and waste converted to
tobacco
cigarettes
(in kgs)
(000`s of sticks)
cigarettes
(in kgs.)
(3)
cigarettes
(000`s of
sticks)
(4)
TOTAL
(000`s of sticks)
(1)
9.523.810
(2)
14.652.015
Imports
. Argentina
. Brazil
. Uruguay
. Rest of the world
39.236.344
21.699.699
7.353.924
3.032.325
7.150.396
60.363.606
33.384.152
11.313.729
4.665.115
11.000.609
3.787.193
227.406
0
3.002.640
557.147
2.789.268
167.485
0
2.211.444
410.339
63.152.874
33.551.637
11.313.729
6.876.560
11.410.948
Total domestic plus imported
48.760.154
75.015.621
3.787.193
2.789.268
77.804.888
Paraguayan grown tobacco leaf and waste
(2) + (4)
14.652.015
DEMAND FOR TOBACCO AND CIGARETTES
converted to
cigarettes
(000`s of sticks)
4.265.094
6.561.683
1.567.783
1.311.717
3.000.000
kg
Exports of tobacco leaf and waste
Legal exports of cigarettes
Domestic cigarette consumption
Total domestic plus exports
Net available for illegal sale
10.873.400
66.931.488
NOTES:
Conversion coefficients of green tobacco to ready to industrialize tobacco were 40% in the flue cured (since it is mostly Virginia
type) and 12% in the primary processing
Other coefficients used in the calculations:
Each kg of cut tobacco and waste generates:
1.538 cigarettes, 0,65 g x cig
Imported cigarette: each kg contain
736,5 cigarettes
Each kg exported contains 836,67 cigarettes, each box weights an average of of 12 kg. and contains10000 cigarettes
Source: Estimates by Alejandro Ramos based on reports from the Intelligence MERCOSUR team
6) The estimate of 66 billion cigarette sticks being available to the illegal trade in
2006 is arrived at in the following way. Supply was around 75 billion locally
manufactured cigarettes, to which should be added net imports of 700 million
sticks (the balance of imports minus exports). From this should be subtracted:
tobacco raw material exports, equivalent to around 6.6 billion cigarettes, and
annual domestic consumption of 3 billion sticks. In summary, the calculation is:
60.4 + 14.6 + 0.7 – 6.6 - 3. Legal cigarette exports, however, amounted to only
51
2.5 billion sticks in 2006.45 Destinations were mainly the rest of the world rather
than MERCOSUR countries. This is shown by comparing trade statistics from
the four countries. (Only exports of tobacco leaf, waste, cut tobacco and
cylinders for cigarette filters were of relevance in trade with MERCOSUR
countries). In other words, it is estimated that, in 2006, Paraguayan operators
participated in “illegally exporting” a quantity of cigarettes that was 26 times
greater than the country’s legal exports.
7) Tobacco industry capacity in Paraguay may have permitted a larger volume
of production. During 2004, Paraguay’s imports of tobacco raw materials were
almost 22% higher than in 2006. Consequently, and applying this new figure to
the previous calculation, Paraguay’s potential for illegal cigarette sales in 2004
can be estimated at approximately 72 billion units. This is equivalent to almost
twice the annual cigarette consumption of Argentina, and half that of Brazil.
8) At this stage of intelligence gathering in the region it is extremely difficult to
determine the destination of Paraguay’s illegal tobacco production.
Nevertheless, it is possible to make an approximation. Experts consider that
contraband cigarettes arriving in Argentina make up between 7% and 12% of
total consumption. Assuming this to be 10% implies around 4.5 billion cigarettes
per year. Contraband cigarettes circulating in Uruguay account for 12% of
consumption, equivalent to around 0.4 billion sticks per year. If we further
assume that all illegal imports to Argentina and Uruguay came from Paraguay,
this would account for only 6% of the volume that Paraguayan dealers are
selling illegally outside the country’s borders. This therefore places Brazil at the
centre of attention.
9) A survey by VIGITEL46 assessed Brazil’s annual domestic consumption at
145-150 billion units, with illegal supplies from domestic factories of 9-10 billion
cigarettes.47 If the figure for the legal market is 111 billion48 the difference is due
to contraband, with around 2.5 billion sticks arriving through Paraguay from
Uruguay, and 28 billion being illegally produced and imported from Paraguay.
(Refer to the Table below). This means that more than 30 billion sticks coming
from Paraguay are contraband cigarettes destined for other Latin American
countries and the rest of the world.
10) In conclusion, a preliminary estimate is that the illegal cigarette market
within the four MERCOSUR countries amounts to around 45 billion sticks, and
that Brazil is the destination for over 90% of this trade. The remainder of the
estimated 30 billion illegal cigarettes coming from Paraguay appear to be
distributed in Aruba, Bolivia, Peru, Chile, Colombia, Ecuador and Panama,
45
Based on exported weight, since numbers of cigarette sticks are not normally reported in foreign trade statistics.
PesquisaVigitel Brazil 2006. Vigilância de fatores de risco crônicas y proteção para doenças (telephone survey). It is
should be noted that these surveys are made mainly in the capital cities of Brazilian States and do not extend to the
entire country.
47
Estimate by Roberto Iglesias.
46
48
Estimate by Roberto Iglesias based on data from IBGE and SINDIFUMO, Brazil 52
reaching Africa, Europe, the Far East and the United States. Based on a recent
estimation that the worldwide illegal cigarette market amounts to 600 billion
sticks,49 Paraguay would therefore account for 11% of this total. Taken together,
the MERCOSUR region would account for 12.5%.
ESTIMATES OF ILLEGAL TRADE IN CIGARETTES IN MERCOSUR COUNTRIES IN 2006
(In billions of cigarette sticks)
Demand Paraguay
Supply
Paraguay
Argentina
Brasil
Uruguay
Sub total MERCOSUR
rest of the world
TOTAL
0
0
0
0
0
?
0
Argentina
Brasil
Uruguay
rest of the
world
TOTAL
4,5
0
0
0
4,5
?
4,5
28
0
9
2,5
39,5
?
39,5
0,4
0
0
0
0,4
?
0,4
30,6
0
0
0
30,6
525
556,0
63,5
0
9
2,5
75
525
600
Source: Based on previous Table and other consumption and sales stats in MERCOSUR countries
This Table asumes that out of 66 billion cigarettes for illegal trade, 2.5 billion are actually a triangle operation
from Uruguay.
Total Brazilian consumption is now estimated at 150 billion sticks, 111 legal, 9 billion illegally supplied domestically
and the rest, 28 billion, from Paraguay
Although sizeable, this is lower than estimates made by tobacco multinationals
in the region and by experts such Cabral50 that have put the industrial capacity
for illegal cigarette production in Paraguay and Brazil (from the 10 illegal
factories identified in Brazil in 2000) at about 100 billion. Cabral estimates
Paraguay’s annual cigarette production capacity as being around 87 billion
units.
B. Quantification of fiscal losses in MERCOSUR countries from illegal cigarette trade The following estimate is based on data from the previous section of this report
regarding the extent of legal and illegal markets for tobacco in MERCOSUR
countries as well as information on countries’ levels of tobacco taxation.
The following Table is based on numbers of packs containing 20 cigarettes. The
information relies on the most recent estimations and hypotheses by experts in
each country.
In 2006, a survey carried out in Uruguay by ITC found that 12% of cigarettes
had been smuggled. This figure is for Montevideo and it may be somewhat
49
FCA, 2008, INB-1 Factsheet. How big was the illicit trade in 2006?, Framework Convention Alliance, Feb. 2008
Cabral M. of C., Comercio illegal de cigarillos, aspectos nacionales e internacionales, Presentation to the International
seminar on cigarette industry fraud, Secretaria de Receita Federal, Brasilia, August 2001
50
53
higher for the rest of the country.51 Prices are those for average retail domestic
sales.
ESTIMATES OF FISCAL LOSSES DUE TO CIGARETTE SMUGGLING IN MERCOSUR COUNTRIES
Average retail
smuggled price in USD of Average
price
Domestic
Smuggled cigarettes cigarettes in Nº of the stamped street price of effective tax rate of elasticity
consumption in Nº of as a % of total
20 cigarette
legal 20 cig. smuggled 20
all taxes on
of
Estimate of fiscal
20 cigarette packs domestic market
packs
Pack
cig. Pack
cigarettes
demand loss in USD per year
Country
Brasl
Argentina
Uruguay
Paraguay
7.500.000.000
2.250.000.000
137.500.000
200.000.000
20%
10%
12%
2000%
1.500.000.000
225.000.000
16.500.000
3.000.000.000
1,25
1,5
2
0,6
0,625
0,75
0,8
0,2
68%
70%
70%
13%
637.500.000
118.125.000
11.550.000
132.000.000
-0,5
-0,5
-0,5
-
899.175.000
Note: In the case of Paraguay the estimate of fiscal losses is just the amount figured to be illegally sent to bordering and other countries times the
estimated factory price to smugglers. Therefore, the resulting fiscal losses assumes that all of the 60 billion cigarettes sold to smugglers would continue
after the tax. In this case, the correct tax tax to use in the calculation is the factory tax rate, that is 22%
Therefore, fiscal loss: 3000000000*0,2*0,22=
132.000.000
Source: Calculations by Alejandro Ramos based on data gathered by the MERCOSUR intelligence team
Fiscal losses to MERCOSUR countries resulting from contraband and the entire
illegal market for cigarettes are calculated to be around USD 900 million dollars
per year. Some 71% of these losses occur in Brazil.
This suggests that fiscal losses in MERCOSUR countries constitute between
2% and 5% of the estimated worldwide loss due to the illegal tobacco trade.52
51
ITC/TTURC Survey of Smokers in Uruguay. Rosswell Park and School of Social Science, UDELAR, Uruguay, 2006The estimate of worldwide losses of USD 39 billion is being revised to consider the impact of a relatively higher price
elasticity of demand in low and average income countries. This would affect the above theoretical exercise to the extent
that the impact of the fiscal loss to MERCOSUR countries would be close to 5% of the global total.
52
54
CHAPTER V
A. Relevant legislation in the four MERCOSUR countries Refer also to jurisprudence in Annex A.
Analysis of regulations in MERCOSUR countries that relate to illegal commerce
in general, and tobacco products in particular, is a complex issue. It requiries
specialist knowledge of how different jurisdictions apply civil, administrative,
customs, fiscal and criminal provisions. Also, because provisions have arisen
from laws aimed at specific areas of concern, in this case regarding contraband
and tobacco.
A preliminary analysis reveals that legislation in Argentina, Brazil and Uruguay
is chiefly related to fiscal aspects and seeks to protect countries’ economic and
taxation interests. Little attention is devoted to health-related concerns or the
implications of illegal trade as the majority of cases are considered to be
customs infringements. In cases which may be regarded as criminal offenses,
society and administrative and judicial authorities do not view them as being
serious.
Argentina’s Customs Code regards dealing in contraband as an offense
punishable by imprisonment: as a common offense, a special offense or a minor
offense. The Customs Code stipulates the same punishment for attempted
offenses as for offenses which have been committed. Concealment of
contraband activities results in legal penalties which are heavier in the event of
the involvement of public employees, customs officials or members of the
security forces. Brazil’s Criminal Code defines illegal trafficking in illegal
substances, such as drugs etc., as a deliberate offense. In Paraguay,
contraband is considered to be a customs infringement and a criminal offense
to be handled by the public prosecutor. It carries a maximum sentence of five
years imprisonment. The quantities or the form of merchandise involved are not
considered to be aggravating circumstances. In Uruguay, contraband is viewed
as a customs infringement that leads to civil and criminal law procedures.
In Argentina, Paraguay and Uruguay, the competent authorities are customs,
security forces and various judicial bodies. In Brazil, prosecutions are
conducted by police authorities and a variety of judicial authorities.
Legal proceedings are conducted via administrative investigations performed
ex-officio by respective authorities or may be based on complaints from third
parties or those negatively affected by customs infringements. These may or
may not lead to judicial proceedings. In cases concerning contraband and
counterfeiting, the courts are obliged to intervene but this results in few
55
judgments either because those who are ultimately responsible are not detained
or because matters are not handled according to correct procedures. In general,
administrative and tax authorities are the competent bodies regarding customs
infringements. Contraband and counterfeit are regarded as being criminal
offenses.
In cases involving contraband and customs infringements, a variety of bodies
are involved including customs and security forces, (Port Police, Naval Police,
Aeronautical Police, and Federal Police in Argentina or State Police in Brazil,
Transport Police, specialised units, and judicial authorities). Legal procedures
are not always conducted in a coordinated way and sometimes result in
offenses being committed.
Customs regulations are focused on protecting the state against tax offenses
and only to a lesser degree deal with security or health risks.
Products which are addictive or dangerous to health are dealt with more
severely by Argentina and Uruguay.
Specific legislation concerning illegal trade has been set out in a variety of legal
fields via, for instance, the Customs Code, the Criminal Code, tax legislation,
legislation covering tax evasion, trademark law or intellectual property laws,
money laundering, falsification of public documents and those concerning illegal
associations. Provisions are generally not enforced in an integrated manner that
increases penalties and this is even less so in the case of tobacco.53
Legislation is also partially obsolete and incomplete in some MERCOSUR
countries. This works to the benefit of transgressors and is further aggravated
by public employees failing to discharge their duties, which encourages noncompliance. At the same time, defence lawyers tend to have a higher level of
expertise compared to prosecutors and the judiciary.
Each country differs in respect to how its legal procedures handle cases
involving contraband tobacco. Considerably less consideration is paid to
regulations covering health-related aspects. Addressing these deficiencies
would require changes to national legislation in some MERCOSUR countries. In
Uruguay, it could be achieved by means of an administrative resolution or by
Presidential decree. Brazil has adopted specific administrative legislation
covering tobacco but this does not extend to criminal law.
53
This is definitely an issue warranting legal discussion. On the one hand, variations in legal standards favours judges’
discretion, the weakness being that it removes criminal norms from the system. On the other hand is the vision that the
State has at its disposal a specific set of norms for each type of criminal offence, (for instance, in Brazil, offences
against tax law (Law No.8137-90), crimes against the National Financial System (Law No.4792-86), crimes against
contraband and re-routing (Art 334 of the Criminal Code), offences against public faith (Art 229.311) and the offence of
receiving illegal goods (Art. 180 of the Criminal Code)) and that this correctly harmonises the State’s response to a
crime in accordance with the principle of legality.
56
In some cases contraband is treated as a criminal offense, for instance in
respect of large-scale contraband in Argentina. Situations involving small-scale
contraband are customs infringements. Brazilian legislation also takes into
account the type of product, distinguishing “contraband” (the illegal trafficking of
illegal substances) from “re-routing” (illegal commerce in legal merchandise). In
contrast, Argentina and Uruguay take into account the monetary value of the
infringing products. In addition, there are aggravating situations such as illegal
association, falsification, and participation by public officials.
Repeat offenses are not penalized, except in Argentina, although there is no list
of offenders to ensure compliance.
The distinction between large-scale and small-scale contraband (except in the
case of Brazil) results in differences in legal sanctions:
In Argentina, the Customs Code (Law 25.8986 of 29/12/2004) states that in the
case of tobacco or its by-products an act is considered to be a customs
infringement involving lesser contraband when the market value of the
merchandise being smuggled or attempting to be smuggled is under 30,000
Argentinean pesos (approximately USD 10,000). The penalty in such cases is a
fine and confiscation of the merchandise. Above this figure an act constitutes an
offense subject to a penalty of up to eight years imprisonment.
In Paraguay, smuggling is regarded as a customs infringement and a criminal
offense to be prosecuted by the public prosecutor. It carries a penalty of up to
five years imprisonment. Paraguayan legislation does not consider either the
amount or type of merchandise as aggravating circumstances. Confiscated
merchandise, and the means of transport used in its conveyance, can be
handed over by customs authorities and courts and tribunals, based on the
earlier conclusion of the administrative investigation and payment of fiscal taxes
and fines. Paraguay has a regulation concerning low-value contraband of an
FOB value not exceeding USD 500 by which the merchandise is confiscated
and there is no criminal penalty.
If goods confiscated in Uruguay exceed a value of USD 20,000 there is a
presumption of money laundering. Penalties for imprisonment increase and a
prison sentence follows automatically.
In Brazil, the legal principle of insignificance is applicable to contraband or rerouting of merchandise, including cigarettes. Application of this principle means
it is possible that illicit conduct can be considered as being irrelevant under
criminal law, including cancellation of any tax due and costs of filing of
proceedings. Law 9.099/95 allows for conditional suspension of proceedings
under certain circumstances, for instance where no other crimes have been
committed or there is no evidence of re-offending in cases involving intentional
offenses, a criminal record, or the conduct and personality of the individual.
57
B. Final destination of confiscated merchandise In Argentina, the Customs Service confiscates and destroys merchandise. In
Uruguay, while the general principle is to auction confiscated merchandise,
cigarettes and tobacco pose a more complex problem. If counterfeit, they will be
destroyed. In Paraguay, goods can in principle be returned to the owner subject
to prior payment of taxes due but can be destroyed in the case of counterfeit
products or brands associated with large-scale offenses. This has rarely been
exercised, however. In Brazil, on the other hand, merchandise can be returned
in the event of prejudiced parties being third parties acting in good faith. Should
the product be a fake cigarette, however, it can be destroyed on the basis of it
not being fit for consumption.
Among MERCOSUR countries, Brazil is quickest to pass cases involving
contraband to criminal authorities whether infringements involve a trademark or
tax evasion. This applies to issues of falsified products, falsification of public
papers, illegal association or falsification, corruption, adulteration or alteration of
substances for human consumption. According to the Federal Court,
falsification of tobacco – which is considered as a substance for human
consumption - means that the offense can fall under the terms of the criminal
code and under legislation for protecting consumer rights, the latter being
considered as a special regulation under the former?
C. Asset laundering Paraguay is a multimillion-dollar center for money laundering derived from
drugs and other commodities such tobacco and weapons. Operations involve
the financial sector and other sectors of the country’s economy. Weak financial
sector controls, open borders and lack of enforcement mean that Paraguay is
one of the key centers of asset laundering in the region.54
In December 2007, parliament approved a new Criminal Code that includes
money laundering as a specific form of criminal activity punishable by up to five
years imprisonment. The law allowed for a one-year introductory period to allow
judges and prosecutors to prepare for the new regulations. Laws covering bank
secrecy laws hamper application of the new standards, however.
54
International Narcotics Control Strategy Report. Volume II: Money Laundering and Financial Crimes. Paraguay.
American Embassy in Paraguay, 2008.
58
Uruguay penalises asset laundering via Law No. 17.343, of 2001, and Law No.
17.835, of 2004. Law 17.343 defines offenses such as drug trafficking,
corruption, terrorism, contraband exceeding USD 20,000, illegal trafficking of
weapons, explosives, human organs, tissues or medicines, the illegal trafficking
of men, women or children, extortion, kidnapping, bribery, illegal trafficking in
nuclear substances, and the illegal trafficking of animals or antiques. Asset
laundering is considered as an autonomous offense to that of the other
underlying offenses. The courts have the power to impound and confiscate
properties, products or financial instruments relating to the activities of asset
laundering.
Law 17.835 significantly strengthens the regime against asset laundering in
Uruguay by including terms specifically related to the financing of terrorism and
to freezing of assets related to terrorist organizations. It also contains terms
regarding covert operations and monitored transactions.
The first arrest and trial for asset laundering following passage of Law 17.835
took place in October 2005.
D. Summary of similarities and differences In the following chart we outline the principal similarities and differences
concerning the legal treatment of contraband of cigarettes and contraband in
general within MERCOSUR countries.55
Contraband
ARGENTINA
BRAZIL
PARAGUAY
URUGUAY
-Criminal offense.
-Intentional criminal
offense.
-Customs infringement
-Customs
infringement.
-Customs
infringement (smallscale tobacco
contraband).
Customs Code -Criminal offense
actionable by public
prosecutor.
Yes
No
National Law
25.986 of 2004
General
Criminal
Criminal Procedural
Code
Penal Code (CP) and
Criminal Procedural
Yes
Yes
Law 2422 of 2004
Decree-Law
15.691 of 1984
Criminal Procedural
Code and Penal Code
Penal Code
55
Mirta Molinari. Special report on the legal aspects of cigarette smuggling in MERCOSUR. CIET, November 2007 &
January 2008.
59
Legislation
Code (contraband)
Civil
Legislation
No
No
No
Fiscal
Legislation
Yes
Yes
No
Specific
legislation on
illicit sale of
tobacco
Various forms
of general
legislation
applicable
Sanctions
Fiscal laws on
Criminal proceedings for
exports of
infringement via illegal
cigarettes,
trade in cigarettes.
containing health
warnings. Sanctions
according to market
value.
Tax laws, TM law
(Law 22.362)
Criminal Code: Art.
288 on falsification
of fiscal stamps.
Imprisonment.
Aggravated
sanctions:
attempted offenses
and covering up,
seizure, fines,
withdrawal of
concessions and
registrations,
prohibitions,
cancellation of
registration of
juridical persons
No
Yes
Trademark Law
regarding falsified
cigarettes.
Foresees
destruction,
criminal
procedure.
Foresees donation
to public or private
institutions, civil
procedure.
Tax laws, TM law
Tax reform law. TM law.
TM law,
Customs Code. Law on administrative and
Illegal association,
fiscal incentives for the
commercial laws,
falsification of public
promotion of investment.
drugs laws,
documents and
money laundering
commercial fraud (Penal
and others.
Code)
Imprisonment (for the
offense of contraband)
Aggravated sanctions:
when carried out via air
transport.
Imprisonment for not
more than 5 years,
payment of damages
and costs, taxes, fines
and seizures.
Seizure, payment
of taxes owed,
costs, fines and
special payments.
Aggravated
sanctions: illicit
association,
drugs, money
laundering.
Competence
National customs
office, national tax
office, AFIP and
judicial authorities
in the case of
criminal offenses.
Police authority. Federal
Prosecutors, first
instance Federal Court,
Federal Regional
Tribunal, Supreme Court
and Federal Supreme
Court.
Customs administration
and National Customs
authority. On occasion
the public prosecutor.
National customs
authority (DNA),
first instance
Courts and
customs Courts.
Civil appeal
tribunals.
Competent
Authority
DGA/DGI and
judicial authorities
Customs authority,
federal police and other
police who can identify
the offense and report it.
An individual can also
report an offense.
Customs authorities.
DNA, Naval Police
and police without
specific legal
authority but with
a duty to take
action against
illegal activity.
Uncovering of
offenses:
60
ANA/AFIP
Federal Police and
Provincial Police in
urgent matters, Port
Police, Naval and
Aeronautical Police.
Procedure
An investigation is
carried out by
ANA/AFIP.
Criminal procedures for
Customs authorities
Customs
infringements regarding conduct an investigation. authorities carry
illegal trade in cigarettes:
Common criminal
out investigation.
criminal process can be courts. The proceedings
Civil justice
Discovery of the
suspended on condition.
can be suspended
system if specific
offense, reporting of
There are no
conditionally if damage
sums are
such, formalities
consequences if these caused is compensated. exceeded. Fiscal
regarding customs
are complied with.
Provisional release in
representative.
infringements.
Justified revocation is
the majority of cases.
Criminal justice for
Judicial matters for
admissible.
offenses.
offenses: economic
and tax - criminal
justice courts and
federal courts.
Administrative
matters for customs
infringements:
ANA/AFIP and the
national federal
administrative court
and federal courts
(in the provinces)
Final destiny
of
merchandise
Large-scale
and smallscale
contraband
Tobacco as a
dangerous
substance
Seizure and
destruction of
tobacco.
Merchandise can be
returned if dealing with a
third party prejudiced in
good faith. If the product
is a cigarette they must
be destroyed since they
are not fit for human
consumption.
Restitution, subject to
previous payment of a
fiscal tax.
Destruction only when
the product is a falsified
trademark.
Insignificance
A fine for smallThe administrativePrinciple: considers
scale contraband of
judicial proceeding does
cigarettes. Exports conduct irrelevant for the not distinguish. Allows
for small-scale
and merchandise in Penal Code, allows for
contraband, with
transit of an amount
the cancellation of tax
of less than 30.000 debts and resuls in filing seizure and exemption
pesos is considered
of the complaint.
from criminal
a customs
proceedings.
infringement.
No
Falsification is treated in
a similar way to a
noxious substance for
consumption. Criminal
Code and Code for the
Protection of Consumer
Rights. (CDC)
No
Auction.
Adjudication.
Destruction,
donation and
occasionally sale
on the market.
Criminal
legislation does
not distinguish.
Cases involving
small quantities
are dealt by the
DNA
No
61
Free ports,
duty free
zones and
transit zones
Jurisprudence
Tax legislation and
customs legislation
for duty free zones.
Exempt from
payment of taxes in
certain cases plus
incentives for
exports.
No
No
50 matters were
Principle of irrelevancy
SPD in criminal cases
referred to federal
for small-scale
and some monetary
courts by the
contraband.
judgements. All
National Port Police
administrative
Habeas Corpus:
between 2006 and
investigations end in
contraband and money payment of tax. In cases
2007 for
laundering,
tax evasion
infringement of
of non-payment this is
and
unconstitutionality.
trademarks and Art.
effectuated via the sale
288 of the Criminal Frequent actions against
of the merchandise
minor offenders.
Code.
(rarely in the case of
Conviction for
cigarettes). Any vehicle
contraband but not for
used can be returned
tax evasion and no
during or at the end of
criminal conviction.
the proceeding. Any
Many matters await
precautionary measure
judgment or are
taken against the driver appealed.
who is never the owner will be lifted.
Customs
legislation
provides an
exemption from
payment of taxes
on imports.
Customs
infringement for
contraband
cigarettes with
civil and criminal
penalties.
Drug trafficking has links to the illegal cigarette trade as it involves people who
deal or have dealt in contraband cigarettes or other illegal goods.56 This calls for
a new approach, increased specialization and greater assistance for the court
system.
A spokesman for Uruguay’s Supreme Court recently argued there should be
specialized courts and prosecutors for drug trafficking, money laundering and
new offenses emerging from these areas. Operation "Cancerbero", which
exposed a large drug trafficking network operating out of Uruguay, showed that
current policing methods and judicial resources need to be strengthened. The
operation raised the question as to whether the country has the necessary
resources to tackle organized crime. According to the Supreme Court
spokesman, "Drug trafficking is taking place in Uruguay on a large scale and the
State and society as a whole have to be aware of this and have the resources
to be able to combat this reality."57
56
Cr. Roberto Gil, Secretary of Anti-Asset Laundering, Uruguay, personal communication, June 2008.
Supreme Court seeks specialized judges and prosecutors for drug trafficking. Interview to Raúl Oxandarabat, Radio el
Espectador, 03.06.2008 | 14.50. http://espectador.com/1v4_contenido.phpid=123451
57
62
E. Regional and international agreements, mechanisms for coordination via agreements between Customs agencies and police forces in the MERCOSUR region MERCOSUR countries are Parties to a number of regional and international
legal instruments relating to contraband, drugs, money laundering and
corruption.
Among these are the United Nations Convention against the Illicit Narcotic
Traffic and Psychotropic Substances (1988), the International Convention for
the Suppression of the Financing of Terrorism (1999), the Inter-American
Convention Against Terrorism (2002), the United Nations Convention against
Corruption and the United Nations Convention against Transnational Organized
Crime.
All four countries participate in the Inter-American Drug Abuse Control
Commission’s anti-money laundering expert group. Argentina, Brazil and
Paraguay, together with the United States, are members of the “Three Plus
One” mechanism that focuses on the security of the tri-border region.
They are also members of the Financial Action Task Force on Money
Laundering in South America (GAFISUD).
While analysis of the participation of MERCOSUR countries in these
agreements is not the subject of this report, the various mechanisms are
explicitly intended to promote approaches and cooperation for combating
problems such as transnational crime and money laundering.
Experts believe that coordinated efforts by MERCOSUR countries are
essential. Nevertheless, issues of sovereignty and tradition tend to hamper such
coordination.
Irrespective of treaties and diplomatic initiatives, the day-to-day reality of border
operations to combat smuggling involves mistrust and unfortunate incidents that
have their roots in inadequate cross-border collaboration.
For example, uniformed Argentinean police officers have been detained at the
Paraguayan border for illegally entering the country. An agreement between
Brazilian and Paraguayan customs officers to allow law enforcement officers
from Brazil to enter Ciudad del Este also fell through because of sovereignty
questions raised by Paraguay, even though this would have meant additional
resources for combating illegal operations.58
58
Report by Mabel Rehnfeldt, op.cit.
63
Border cooperation is also problematical when it is not backed by more general
agreements based on the participation of national authorities.
Agreements to combat tobacco crime and contraband in the MERCOSUR
Representatives of Interior Departments from MERCOSUR countries, along
with Bolivia, Chile and Peru, signed an agreement in December 2004 to combat
counterfeiting and contraband cigarettes and agreed to introduce measures
such as labels, seals and sealing waxes. The agreement was adopted as a
MERCOSUR decision.59
The Parties agreed to exchange customs information on cigarette trade in the
MERCOSUR, as well as information on the quantities of cigarettes
manufactured and data on domestic consumption.
The agreement also called for Interior Ministers to analyze the main problems of
piracy and illicit trade of regional significance, detailing geographic areas, forms
of criminality, the number of administrative cases and judicial sentences, as well
as details of merchandise and the values of seizures in operations to combat
smuggling concerned with factories and premises for illicit cigarette distribution.
The Parties also reported on legal cases involving individuals involved in illicit
trade and arrests and sentences for smuggling cigarettes and other products.
In 2006, the agreement was replaced by a MERCOSUR decision that led to a
new agreement between MERCOSUR and associated countries. Specific
regulations covering the illegal tobacco trade were absent from this new
agreement, however.60
The objective of the new agreement, which is yet to be ratified by most
countries concerned, is to safeguard security in the region by promoting wideranging cooperation between the Parties as well as reciprocal assistance in
preventing and combating illegal operations, particularly those of transnational
origin including illicit drugs, terrorism, money laundering, the illicit trade in
firearms, ammunition and explosives, illegal trafficking in human beings, the
smuggling of vehicles and environmental damage. Smuggling of cigarettes and
tobacco is not mentioned specifically.
The agreement included a new information system (“SISME”) which is intended
to ensure the effective exchange of information between Parties.
59
“Acuerdo Marco sobre Cooperación en Materia de Seguridad Regional entre los Estados partes del MERCOSUR” y l
“Acuerdo Marco sobre Cooperación en Materia de Seguridad Regional entre los Estados Partes del MERCOSUR, la
República de Bolivia y la República de Chile” aproved by Decisión CMC Nº 35/04, Dec. 2004
60
MERCOSUR/CMC/DEC Nº 16/06. ACUERDO MARCO SOBRE COOPERACIÓN EN MATERIA DE SEGURIDAD
REGIONAL ENTRE LOS ESTADOS PARTES DEL MERCOSUR, 64
One of the key provisions is that border police forces may enter the territory of
another Party without prior permission when engaged in the pursuit of criminals.
However, they have no legal jurisdiction and are required to request assistance
from their domestic counterparts.
The agreement is mainly an instrument for police forces and does not apply to
Customs agencies. This is because Interior Ministries were the original
signatories to the agreement, whereas Customs comes under the ambit of
Finance Ministries. This adds to coordination problems among enforcement
agencies in the region. Without adequate coordination on the national level the
treaty will have little effect.
The feeling that diplomatic efforts move faster than political will within
MERCOSUR countries is indicated by the agreement not having been ratified,
as of August 2008, by any of the Parties that signed it two years previously.61
Regional Customs agencies meet on an occasional basis but their meetings
have never focused on cigarette smuggling.62
Nonetheless, after having conducted several interviews in the course of this
report, there does appear to be a certain “esprit de corps”, whereby Customs
agencies in the region work in a coordinated fashion, although some are more
willing to cooperate and exchange information than others.
Standard working procedures are based on informal agreements and customary
practice. The Customs agency of country A alerts its counterparts in country B,
and possibly C, to evidence of a consignment of illegal merchandise leaving its
jurisdiction. This commonly results in Customs in country B opening a container
to verify its contents since forewarned Customs officials generally act on reliable
data. In the majority of cases this results in the seizure of illegal merchandise,
which frequently involves cigarettes.
Regional Customs bureaus face budget restrictions that prevent them from
meeting more frequently. The information network, although well established
and functioning, remains highly dependent on the will of highly placed figures in
Customs authorities. It is unhelpful that there is high degree of rotation due to
political decisions.
61
62
http://www.mercosur.int/msweb/portal%20intermediario/es/index.htm
Personal communication by the Director of the Uruguayan Customs Bureau, August 2008
65
CHAPTER VI - RECOMMENDATIONS
A. Optimize legislation and implementation •
Incorporate in legislation rules classifying the contents of cigarettes, such
as nicotine, as addictive substances. And, consequently, revise the Criminal
Code to increase sentences for trafficking in addictive substances.
•
Impose stiffer penalties for the repetition of smuggling offenses by
individuals or companies and ensure cases are submitted to criminal courts.
•
Increase sentences for government and public officials involved in
criminal activities related to illicit trade.
•
Introduce rules for the immediate destruction of illegally imported
cigarettes.
•
Create new specialized means for public prosecutors and judicial courts
to deal with organized crime and wholesale smuggling, devoting to the illicit
cigarette trade the same highly qualified and well-trained officers who track
down and deal with drug trafficking and money laundering.
•
Revise regulations regarding merchandise passing through free trade,
transit and free ports in order to reduce under-declaration and false
declarations. Penalties should be increased significantly to discourage the
smuggling of products, such as cigarettes, which are injurious to health.
•
Increase economic penalties for those caught dealing in cigarettes
distributors, including retailers.
•
Prepare and instigate public relations campaigns to promote law abiding
behaviour and disseminate information on the penalties for smuggling so that
citizens increasingly regard contraband as a crime and understand that
smuggling cigarettes is a public health issue.
B. Fight corruption in Customs agencies and other law enforcement bodies •
Establish more stringent mechanisms for supervising and evaluating the
activities of civil servants in Customs and law enforcement who are engaged in
controlling smuggling.
•
Explore an incentive scheme for agencies which rewards significant
seizures of smuggled cigarettes. Use Brazil’s “Fundo Nacional Antidrogas” as
an example and earmark a small percentage of fiscal returns from tobacco
taxation.
66
C. Improve the qualifications and training of Customs agents and personnel High priority should be given to improving the qualifications of Customs
personnel in MERCOSUR countries. This will help fill the current vacuum that is
being exploited by multinational tobacco companies which conclude
agreements with Customs authorities and supply training and equipment to
Customs agencies.
•
Strengthen the internal organization of Customs bureaus in the region to
provide improved career opportunities for personnel and ensure that personnel
identify more closely with the goals and objectives of a law enforcement agency
that is battling powerful economic interests.
•
Make greater use of options such as scholarships and internships to
send selected personnel to regional and international training centres and
educational institutes, including the WCO.
D. Improve intelligence and coordination among Customs bureaus and other law enforcement agencies in the four countries. The estimated annual fiscal loss of USD 900 million to governments in the
MERCOSUR region due to the illegal cigarette trade is a reason for them to
instigate immediate action.
Concrete measures are needed, in addition to international and regional
treaties:
•
Introduce specific practical mechanisms for coordination, for example via
periodic regional meetings that focus on cigarette contraband.
•
Promote inter-agency exchanges of qualified personnel for short periods
to enhance interaction and build up mutual acquaintances.
•
Increase the interlinkage of Customs information systems in the region.
•
Capacity building for Customs and enforcement agents in the use of
technology (radar, scanners, etc.), modern computerized systems and security
equipment for personnel.
•
Conclude legal agreements for patrolling the borders of the four
countries so that law enforcement officers receive rapid response assistance
from their counterparts without sensitive issues of sovereignty arising. It is
smugglers who profit from rigid “nationalistic” thinking by governments.
67
•
Establish strategies for controlling contraband cigarettes and include
these is a wider effort to curtail illicit trade, for instance in narcotics,
pharmaceutical drugs etc., and asset laundering.
E. Governments should take a more direct approach to cross­
border smuggling Combating contraband tobacco and similar forms of illegal activities calls for
extra resources and commitment to range of strategies for promoting more
rapid development in border communities by providing alternatives for local
economic progress and cultural change.
F. The fight against criminal smuggling organizations will be more successful when supported by a structure of sound intelligence Linking of intelligence work should be a core strategy for leading agencies in all
four countries, allowing faster data collection and more efficient responses in
field work.
G. Recommendations by country and for MERCOSUR 1) Argentina
•
Promote an institutional approach and a framework for greater
collaboration among law enforcement agencies including AFIP/Customs and
Internal Revenue (DGI), Naval Prefecture, National Gendarmerie, police,
prosecutors and judges.
•
Strengthen regulations and develop improved systems for the control of
national airspace control, in view of the significance of aircraft in transporting
contraband tobacco and drugs.
•
Impose heavier penalties on landowners and tenants in regions where
there is widespread use of clandestine landing strips for illicit activities.
•
Improve coordination and efforts to increase controls on the movement
of containers of illegal cigarettes using the port of Buenos Aires and its facilities,
as well as free zones in La Plata and elsewhere, plus other feeder ports serving
B.A..
68
2) Brazil
•
Fight corruption by imposing stiffer penalties and via other measures. It
is unacceptable that huge quantities of smuggled cigarettes and other illicit
goods are allowed to travel unhindered on a daily basis over long stretches of
Brazilian territory.
•
Improve inter-agency coordination and collaboration to ensure illicit trade
is combated effectively. Brazilian agencies tend to believe they are selfsufficient in terms of data and resources. But there is much to be gained from
enhanced intelligence cooperation and the sharing of resources.
•
Overcome the inward-looking approach to controlling tobacco smuggling,
ensure the problem is accorded greater prominence and additional capacity to
establish solid mechanisms for cooperation and coordination with governments
and law enforcement agencies in the region, including improved intelligence
and border controls.
•
Analyze an alternative approach involving amending regulations to
permit courts to include cigarette smuggling under laws against counterfeit,
resulting in longer prison sentences with no eligibility for early parole.
•
Establish standards to simplify the sale of seized vehicles, ensuring the
proceeds go to providing incentives to combat criminal activities.
3) Paraguay •
A necessary precondition is a change in the political attitude and
response to organized criminal activities. This applies to illegal operations
across the board, and not only to the cigarette trade.
In addition:
•
Increase levels of tobacco taxation and ensure that manufacturers pay
taxes on cigarettes destined for the domestic market. The government of
Paraguay is presently missing out on a significant fiscal windfall
estimated at USD 130 million. Confronting this problem would deliver a
bonus of reducing tobacco consumption and the prevalence of smoking
in Paraguay and other countries in the region.
•
Implement measures such as a system of “tracking and tracing” to
ensure all cigarette manufacturers in the country provide information
about their operations and products. This is in line with recommendations
of the CMCT, a treaty that Paraguay has already ratified.
•
Improve levels of qualifications within key law enforcement agencies,
such as Customs, and continue to improve the identification of personnel
69
with the values and goals of these agencies in order to strengthen
resistance to corruption.
4) Uruguay •
Promote the strengthening of the Customs bureau and raise the level of
qualifications of personnel in fighting corruption.
•
Pass a new Government Decree in line with legal regulations derived
from the Anti Drug Act to include nicotine as an addictive substance, by means
of which sterner criminal sentences for smuggling of cigarettes can be applied.
•
Ensure an increasing number of smuggling cases reach the criminal
courts by relying on existing regulations concerning third party accusation or
judicial intervention; money laundering laws, when smuggled goods valued at
more than USD 20,000 are confiscated; and association to commit a crime,
where more than one person is involved. Combined offenses carry higher
penalties. This demands close coordination between agencies and the court
system.
5) MERCOSUR
•
Promote adoption of a new chapter in the Customs Code relating to
violations. Or, if the Code is adopted as it currently stands, open negotiations on
a protocol including regulations on illicit trade.
•
All four countries should address domestic legislation that currently
allows for reduced or non-custodial sentences and the restitution of
merchandise or seized vehicles. They should also legislate to penalise repeat
offenses involving smuggling or other forms of illicit trade, for instance by
means of publicly available registries of criminals.
•
Continue to develop improved intelligence by Customs and law
enforcement agencies in MERCOSUR countries, based on acknowledgment of
this being an effective way of continuing to exert pressure on criminal
organizations. Step up efforts to improve the quality of information networks of
law enforcers in the four countries; place greater emphasis on the efficiency of
controls; and establish a target for the numbers of seizures in a given year.
•
Authorities should impose stricter controls and stiffer penalties on
smugglers who extensively exploit common instruments for trade promotion and
development (such as free trade zones, ports and merchandise transit rules,
etc.) in the region.
•
Evaluate the feasibility of a MERCOSUR satellite monitoring system for
tracking containers as a way of preventing merchandise from being diverted.
70
•
Promote the creation within MERCOSUR of an organisation along the
lines of OLAF, the European Union’s body for fighting fraud, corruption and
irregular activity. This would deliver benefits extending far beyond control of the
illicit tobacco trade. Were governments in the region to decide in favour of
creating such an agency it would send clear signals to the international
community, and to smugglers, about the priority assigned to combating illicit
trade of all kinds.
71
ANNEX A
JURISPRUDENCE: EXAMPLES OF LEGISLATION APPLIED TO CONTRABAND GOODS AND CIGARETTES IN MERCOSUR COUNTRIES Argentina •
Judicial issues: a consultant’s report highlights two main reasons why it is
not possible to obtaining this information: a) cases concerning contraband do
not identify the merchandise in question; b) all the cases concerning contraband
occurred in the north of the country. However, the National Chamber for
Economic Crimes computer database identified three cases relating to
contraband cigarettes (in 1993, 2002 and 2004) that were not specified or
considered in the consultant’s report. We have identified 50 cases occurring in
2006 and 2007 that related to falsification of trademarks and fiscal stamps
which were submitted Federal courts in the north of the country. A more
detailed study of this issue is required.
Brazil •
General comments related to jurisprudence
o
Cases sometimes distinguish between types of offense and in the case
of cigarettes refer exclusively to contraband. However, in a particular case
concerning contraband cigarettes the court did not consider the nature of the
goods to be significant as it did not believe there was evidence to demonstrate
that cigarettes produced in one country and illegally imported into another were
more dangerous to public health than those manufactured locally. Nor did it
regard guilty conduct as a basis for prosecution.
o
To date, we have not turned up any cases considered by any Regional
Federal Tribunal, Superior Court of Justice or the Federal Supreme Court that
mae reference to the Criminal Code when it came to falsification of cigarettes.
o
The principle of the insignificance of an offense has been applied by
various tribunals where small quantities of cigarettes have been intercepted.
This is on the grounds that the people concerned are excluded from the labour
market. Courts have ruled that this principle would not apply in the event of
exacerbating offenses. However, this does exclude there being other reasons
by which individuals may be absolved.
•
Jurisprudence in cases identified and analyzed
72
o
Analysis of legal cases at various stages in the legal system revealed
that, with the exception of one prominent case, legal proceedings do not focus
on those bearing overall responsibility for operations. In comparison, legal
action against drivers, truckers, small retailers and poor people who commit
offenses are extremely frequent.
o
In general, the cases relate to: illicit transport, contraband or re-routing,
theft of freight or receipt of stolen goods, products used in falsifying cigarettes,
the removal and disposal of materials used in committing offenses, fiscal
actions, conflicts of competence between tribunals, tax issues, bribery,
corruption, falsification of stamps, or the lack thereof. We found convictions for
contraband offenses but not for tax evasion. There were no criminal convictions.
Other legal actions are pending or cases are subject to appeal.
o
As with other criminal and civil procedures, appeals based on habeas
corpus apply in cases of contraband and crimes relating to money-laundering,
tax evasion and unconstitutional acts concerning the cancellation of the special
register for cigarette companies.
Paraguay •
Jurisprudence: the consultant refers to personal enquiries made in cases
that led to criminal proceedings and some which involved fines. The majority of
these concluded with the “special suspension of judicial proceedings”, which is
what occurred when the previous Customs Code was in force. The majority of
those few cases involving merchandise that were investigated by relevant
authorities resulted in administrative rather than criminal penalties being
imposed. In cases where taxes had not been paid, this led to the sale of goods.
But this was rarely applied in situations concerning cigarettes. In addition, there
have been situations in which a vehicle used in committing an offense was
returned to the owner at the conclusion of the case. Minor penalties against the
driver – who is commonly not the owner of the vehicle – were not imposed.
Uruguay •
Jurisprudence: a) in four judgements by Federal Customs and Criminal
Courts, cases involving contraband cigarettes were considered as Customs
infringements. Goods and manufacturing materials were seized and offenders
were ordered to pay taxes, costs and fines on imports; b) in addition, several
separate cases involving contraband cigarettes have led to criminal
prosecutions and prison sentences being handed down for bribery of public
officials.
73