UK Relevant Legal and Enforcement Frameworks

Abstract

Among dual markets (i.e. those where a licit and an illicit market for the same commodity exist), the tobacco market is one of the most tightly regulated. Tobacco consumption poses health problems that generate great costs to society and the economy.

Among dual markets (i.e. those where a licit and an illicit market for the same commodity exist), the tobacco market is one of the most tightly regulated. Tobacco consumption poses health problems that generate great costs to society and the economy. As set out in the 2017 document ‘Towards a Smokefree Generation—A Tobacco Control Plan for England’ prepared by the UK Department of Health, the overall goal of tobacco control in the UK is to reduce smoking prevalence and the stated vision is to create a smoke-free generation.¹

The first comprehensive UK tobacco policy document was released in 1998 under the title ‘Smoking Kills’,² whereas the first coordinated national response to illicit tobacco trade was introduced only a few years later in 2000.³ Actions to tackle illicit tobacco trade are an essential part of the UK’s tobacco control policy. Over the years, commitment to controlling the use of tobacco products as well as to fight illicit trade has not diminished, regardless of the political leadership. This may suggest that tackling illicit tobacco trade will remain a priority in the UK, irrespective of the outcome of Brexit.

The 2000 anti-smuggling strategy prioritised enforcement. Significant investments were made to tackle the problem at the source with interventions targeting the supply side to prevent illicit tobacco from entering into the UK.⁴ For instance, one thousand frontline and investigative staff were added along with additional x-ray scanners to detect high-scale cigarette smuggling in freight. The introduction of fiscal marks on UK duty-paid products, and increased use of criminal and civil sanctions to deter smuggling and reduce its profitability were also among the measures adopted under the first strategy.

The UK approach to illicit tobacco trade proved successful over the years. As discussed above, since 2000 there has been a significant reduction in illicit product market share and lost revenue. However, the footprint of the UK illicit market is not immutable. The nature of the threat from tobacco smuggling has evolved since HMRC’s first strategy in 2000. Over the years, the strategy has been reviewed and reinforced to more effectively meet the evolving challenges.⁵ The current strategy ‘Tackling illicit tobacco: From leaf to light’ was presented jointly by HMRC and UK Border Force in 2015. It aims at holding the illicit cigarette market share at or below 10%, and at containing the illicit market share for hand-rolling tobacco and reversing the recent upward trend.⁶

The possible impact of Brexit on illicit trade in tobacco products in both the UK and EU more widely can be analysed on the basis of the key features of the current ‘pre-Brexit’ approach to tobacco control. This approach includes an articulate legal framework, an institutional framework, and enforcement mechanisms. Particular consideration is given to those elements of the current approach that are directly linked to EU membership, to identify the additional regulatory flexibility and the risks that may result from Brexit.

4.1 Relevant Legal Framework

In order to assess the possible impact of Brexit on the control of illicit tobacco trade, it is necessary to consider tobacco-specific measures in the UK but also non-specific measures that may have a bearing on the availability of tobacco products.

4.1.1 Fiscal Measures

Taxation is a preeminent element of tobacco control and one of the most effective ways to reduce the prevalence of smoking, mitigate its consequential health harms, and progress towards a tobacco-free society. Some commentators have highlighted how high taxation indirectly supports the persistence of an illicit market, as high prices can push some smokers to switch to illicit or other tax-non-paid cigarettes.⁷ Instead of lower tobacco consumption and higher government revenue, the higher taxes would thus mainly benefit those who circumvent them.

Tobacco products in the UK are expensive. At 219% of the EU average, the UK price level index (PLI) of tobacco is the highest among EU Member States.⁸ According to the UK Office for National Statistics, in August 2019 the average price for a pack of 20 king size filter cigarettes in the UK was £10.77.⁹ The ‘affordability of tobacco’ index has fallen over the past three decades.¹⁰ On the basis of smokers’ purchasing power, with very few exceptions, tobacco products are today more expensive in the UK than virtually anywhere else in the world.

Tobacco Products Duty

The high prices for tobacco products in the UK are the result of a combination of different taxes. The most important component of the total price is the Tobacco Products Duty, which alone represents 90% of all tobacco duty receipts.¹¹ Based on the Tobacco Products Duty Act 1979 the duty is a form of excise duty, payable on tobacco products manufactured in the UK or imported into the UK.¹² The Tobacco Products Duty is payable on cigarettes, cigars, HRT, and other smoking tobacco—for example pipe tobacco, chewing tobacco, cigarette rag or expanded tobacco—if it can be smoked without further processing.¹³ Notably, the Tobacco Products Duty does not apply to tobacco leafs (raw tobacco). Products become liable to the Tobacco Products Duty when they enter the UK from overseas or reach a smokable condition during manufacture (events known as ‘duty points’). Products may be stored duty-suspended in approved excise warehouses. When goods are released from an excise warehouse for consumption, the excise duty must have been paid or accounted for before they leave the warehouse.

The rate of the Tobacco Products Duty (in force since 29 October 2018) varies depending on the tobacco product, as illustrated in Table 4.1. For HRT, cigars, and other smoking and chewing tobacco, the duty takes the form of a specific tax (specific amount per quantity). Cigarettes, since May 2017, are subject to a combination of specific and ad valorem tax (percentage of the product value) or to a Minimum Excise Tax (MET), whichever is higher.¹⁴ The MET sets a minimum level of excise duty for any packet of cigarettes, i.e. a floor below which the tax on cigarettes cannot fall. MET was introduced with a view of reducing the availability of cheap cigarettes, which in turn encourages quitting, and to increasing tax revenues.

Table 4.1 Tobacco products duty rates

The EU does not have a direct role in collecting taxes or setting tax rates. The amount of tax each citizen pays is decided by EU Members’ national governments, along with how the collected taxes are spent. To facilitate intra-EU business and avoid competitive distortions, Member States have nevertheless agreed to align their rules for taxing goods and services, for instance in case of excise taxes, including on tobacco products and to some extent, for VAT.

In the area of excise duties, EU law provides for horizontal rules to cover, for example, the categories of products that Member States must apply excise duties to, the principles on where excise duty revenue accrues, and the rules on the production, storage and movement of excise products. Such common provisions, which apply to all products subject to excise duties under EU law, are set out in Council Directive 2008/118/EC of 16 December 2008 concerning the general arrangements for excise duty and repealing Directive 92/12/EEC.

Beside these common provisions for excisable goods, specific EU legislation on excise duties for manufactured tobacco is contained in EU Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco (Tobacco Tax Directive). The Tobacco Tax Directive sets out the details of how tobacco products shall be taxed within the EU, mainly by providing the categories of manufactured tobacco products (cigarettes and ‘other tobacco products’), the principles of taxation, as well as the minimum rates and structures to be applied. In the case of cigarettes, the Tobacco Tax Directive establishes a minimum rate which must consist of a specific component of between 7.5% and 76.5% of the total tax burden (TTB)—expressed as a fixed amount per 1000 cigarettes, and an ad valorem component—expressed as a percentage of the maximum retail selling price. In addition, the overall excise rate must be at least €90 per 1000 cigarettes and at least 60% of the weighted average retail selling price (Member States that apply excise duty of €115 or more, however, do not need to comply with this 60% criterion).

For other tobacco products, the Tobacco Tax Directive introduces a slightly different taxing structure. Member States can choose between applying a specific component or an ad valorem component, or if they wish, they may apply a mixture of the two. Minimum rates are set out for three distinct categories of ‘other tobacco products’: (i) for ‘fine-cut smoking tobacco’, 48% of the weighted average retail selling price or €60/kg; (ii) for ‘cigars and cigarillos’, 5% of the retail selling price or €12 per 1000 pieces or per kg; and (iii) for ‘other smoking tobaccos’, 20% of the retail selling price or €22/kg.

EU legislation sets and regularly updates the harmonised minimum rates.¹⁵ Member States are free to apply excise duty rates above the minima foreseen in the Tobacco Tax Directive. Excise duties in the UK are significantly higher than the minimum limits requested by the EU and there is a commitment to increase them annually by 2% above inflation for the duration of the current Parliament.¹⁶

Under all four Brexit scenarios analysed, post-Brexit UK would no longer be bound to excise minima foreseen in the EU legislation. In theory, the UK could therefore choose to apply lower excise duty rates. Since the Tobacco Products Duty represents the most important component of the total retail price of tobacco in the UK, a high diferential compared to neighbour countries could create an incentive for illicit activities. This may be the case with respect to the neighbouring Ireland, where retail prices are now by and large aligned with those in the UK.

Excise Movement and Control System (EMCS)

Closely linked to excise duties is the EU-wide Excise Movement and Control System (EMCS). Within the EU, excise taxes are paid in the country of final consumption. Established by EU Directive 2008/118,¹⁷ the EMCS is a computerized, paperless system that is used by businesses when moving duty-suspended excise goods (alcohol, tobacco, and certain mineral oils) between EU Member States as part of their commercial activities. The system records in real time the movement of tobacco and other excise products for which excise duties still have to be paid, and helps to ensure that the appropriate duties are paid at the final destination. The authorised warehouse-keeper in the Member State of departure must provide a guarantee for the excise goods they dispatch, under duty-suspension, to another Member State, until the excise duty has been secured (‘Report of Receipt’ has been received) in the Member State of destination. As a standardized, electronic system for the whole EU, the EMCS also simplifies procedures and reduces administrative costs for businesses and tax authorities.

The purpose of the EMCS is to combat fiscal fraud by providing tax authorities and the involved traders with real-time information and checks on individual consignments of excise goods along the supply chain.¹⁸ EMCS thus also helps to prevent illicit trade by monitoring the movement of excise goods within the EU until the duties are paid or the goods are exported. The EU Commission’s ‘2nd Action Plan to fight illicit tobacco trade 2018–2022’ makes several references to this system.¹⁹

In principle, following Brexit implementation (regardless of its form), the EMCS would no longer be used to control suspended movements between the EU and the UK. The 2019 Withdrawal Agreement only clarifies how to treat the movement of excise goods under duty suspension which started before the end of the transition period (which at the date of writing will end on 31 December 2020 unless extended).²⁰

Both the UK and the EU prepared guidance notes for the movement of excise goods in the event of a ‘Hard Brexit’. Previous versions have in the meantime been withdrawn. The current guidance note explains how imports of excise goods from the EU to the UK will be treated from 1 January 2021.²¹ After Brexit day, imports of excise duty-suspended goods to the UK from EU Member States will be treated in the same way as imports from the rest of the world. Businesses will no longer be able to use the EMCS to move excise duty-suspended goods to the UK from the EU. However, the EMCS would continue to be used to control the movement of duty suspended excise goods within the UK, including movements to and from UK ports, airports and the Channel tunnel.

Personal Allowance

Each EU country can decide on a maximum amount of tobacco products and alcoholic beverages that travellers are entitled to bring into the country as a personal allowance, i.e. products purchased are for personal use (own consumption or to be given away as gifts) and not for resale. Taxes (VAT and excise) are included in the price of the product in the country where they are purchased, so no further payments are due in any other EU country. Pursuant to EU Directive 2008/118 concerning the general arrangements for excise duty, the EU only establishes minimum guide levels or ‘Minimum Indicative Limits (MILs)’, for imports from EU countries (‘EU allowance’).²² The MILs are as follows: 800 cigarettes, 200 cigars, 400 cigarillos, and 1 kg of tobacco.

As discussed in Sect. 3.2 above, today different limits apply for travellers to the UK from an EU country and travellers from third countries. Travellers from third countries can benefit from the ‘international duty free allowance’ based on Council Directive 2007/74/EC of 20 December 2007 on the exemption from value added tax and excise duty of goods imported by persons travelling from third countries.²³ Although less generous in terms of allowed quantity, in terms of prices, products under the international duty-free allowance are cheaper than those within the current EU allowance as they are ‘duty-free’ in the countries where they are purchased. The international duty-free allowance is as follows: 200 cigarettes, 50 cigars, 100 cigarillos, and 250 grams of tobacco.

Some have suggested that after Brexit, duty-free status for imports from EU Member States could be introduced, in lieu of the current EU allowances.²⁴ Under all four Brexit scenarios analysed, the UK would be free to depart from EU legislation regarding EU allowances or the international duty-free allowances, discussed above. Under a ‘Hard Brexit’ scenario, this could happen immediately, without waiting until the end of the transition period. Because of its popularity among parts of the population, the issue of the reintroduction of duty free allowances on tobacco and alcoholic beverages for travellers from EU countries has been widely publicised and used by the Government to counter some of the negative stories surrounding a ‘Hard Brexit’ with examples of how consumers will see some tangible and immediate benefits.²⁵ The adoption of more restrictive amendments could create incentives for consumers to consider cheaper products in the illicit market.

Value-Added Tax

A value-added tax (VAT) applies to all tobacco products. Since 2011, the standard VAT rate in the UK has been 20%.²⁶ VAT is administered and collected by HMRC. In the area of VAT, EU law requires Member States to have a single value-added tax rate of at least 15%. In addition to this rate, Member States can foresee no more than two reduced value-added tax rates set of no lower than 5%.²⁷

After Brexit, the UK will no longer be bound  by the minimum rates set by the EU. Under the different post-Brexit scenarios, such as a participation in the Customs Union, for instance following the precedent of Turkey,²⁸ or by remaining in the single market as in the EEA,²⁹ the UK would not be bound by EU legislation in the area of VAT. The same applies in case future UK-EU relations would be governed by a free trade agreement.

The 2019 Withdrawal Agreement contains limited references to VAT. However, Art. 51 (Value added tax (VAT)) clarifies the regime applicable to goods travelling across borders during the transition period as well as the extent to which the EU VAT Directive shall continue to apply after the end of the transition period (set to last until 31 December 2020). Although there have been no discussions so far on amending VAT rates following Brexit, changes could occur. A different rate than what applies today would have an impact on the final price of tobacco products and thus on the attractiveness of illicit products. While changes could be sweeping or minimal, it seems highly unlikely that the Government will do away with VAT altogether as it represents a valuable source of revenue.

According to HMRC’s Notice—VAT for businesses,³⁰ in the event that the UK leaves the EU without an agreement, the VAT rules relating to UK domestic transactions will continue to apply to businesses as they do now. The UK Government intends to keep VAT procedures as close as possible to what they are now.³¹ Pursuant to Art. 8 of the revised Protocol, Northern Ireland will be allowed to have different VAT rates to the rest of the UK. In practice, this means that Northern Ireland may apply the same VAT rates on certain goods as the Republic of Ireland in order to stop an unfair advantage on either side of the border that could be exploited also by illicit activities.

4.1.2 Import Duties

Before excise duties and VAT, imported tobacco products may be subject to import tariffs. Today, the UK (and obiously so) does not levy any import duties on tobacco originating from EU Member States. The same applies to products from countries with whom the EU has concluded a preferential trade agreement (or that benefit from the Generalized System of Preferences) although in some cases, rather than a zero tariff, such agreements foresee lower (preferential) import tariffs than what applies to imports from third countries.³²

As a result of the UK’s participation in the EU Customs Union, the tariff rates currently applied by the UK on tobacco products as well as on any other products, are based on the EU Common Customs Tariff. The tariff rate depends on the origin of the imported product. Ad valorem customs duties are levied on importer’s CIF (cost, insurance and freight) value. The UK currently applies import tariffs on tobacco products from third countries³³ as illustrated in Table 4.2.

Table 4.2 Import tariffs on tobacco products from third countries

Brexit could have an impact on import tariffs for tobacco products. As discussed above, most licit imports of tobacco product come from EU Member States. If, after Brexit implementation, the UK remains part of the EU Customs Union (i.e. the second scenario) building on the arrangement negotiated by former PM Theresa May, imports from the EU would continue to be duty free and imports from non-EU countries would be subject to the EU Common Customs Tariff. In case of relations based on a free trade agreement, one can expect tobacco products to be among the tariff lines for which import duties are equal to zero or at any other preferential level. In case of ‘Hard Brexit’, however, the UK would in principle have to apply to imports from the EU, the same tariffs it applies to third countries—the so called ‘WTO rate’ or ‘MFN rate’—which for cigarettes currently amounts to 57.60%. In preparation for Brexit, the UK Government has published a list of tariffs that would apply for imports in case the UK leaves the EU without an agreement for an initial period of up to 12 months.³⁴

The World Trade Organization’s Most Favoured Nation (MFN) obligation prevents WTO Members from applying to imports from one country, treatment more favourable than that provided for like product imports from other WTO Members.³⁵ Only the conclusion of a preferential trade agreement with the EU would allow the UK to apply preferential (even ‘zero’) tariffs to tobacco products from the EU, as it was the case previously under several preferential agreements that applied to the UK as part of its EU membership.³⁶ In the past few months, the UK has negotiated the ‘rolling over’ of a number of preferential trade agreements concluded by the EU with third countries. As of October 2019, the list of such agreements included Israel, Switzerland, Chile, the Faroe Island, the Eastern and Southern Africa States (the Union of Comoros, the Republic of Madagascar, the Republic of Mauritius, the Republic of Seychelles, the Republic of Zambia and the Republic of Zimbabwe), the Palestinian Authority, Fiji and Papua New Guinea, CARIFORUM (Antigua and Barbuda, Barbados, Belize, The Commonwealth of Dominica, The Dominican Republic, Grenada, The Republic of Guyana, Jamaica, Saint Christopher and Nevis, Saint Lucia, Saint Vincent and the Grenadines, The Republic of Trinidad and Tobago), Iceland and Norway, the Andean countries (Colombia, Peru, Ecuador), South Korea, as well as Central America (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama).³⁷ For imports from these countries, a preferential duty rate already applies to products that satisfy the rules of origin set out in the respective agreements.³⁸

In a 2017 position paper, the Tobacco Manufacturers Association (TMA) suggested that the introduction of tariffs on imports of tobacco from the EU following Brexit would push up tobacco prices, thus exacerbating illicit trade.³⁹ In its statements, the TMA also stressed the fact that the UK has no tangible domestic tobacco manufacturing to protect from foreign competitors, and that the already significant tax burden weighs on the sector.⁴⁰

To put things in perspective, in the 2017–2018 period HMRC collected a total of £3.4 billion in import tariffs on goods brought into the UK.⁴¹ Contrary to excise taxes, import tariffs are not aimed at influencing consumers’ behaviour. Their purpose is to increase the cost of imported goods in order to benefit domestically produced goods which do not bear the tariff and often to raise budgetary revenue. In the specific case of the UK, there is no domestic tobacco manufacturing company (and related jobs) to protect. In light of the current state of the UK tobacco manufacturing industry and the overall tobacco tax structure, it indeed seems unnecessary to resort to tariffs unless the UK Government decides to use import tariffs to raise additional revenues or as bargaining chip in future negotiations with the EU. The indirect impact of tariffs on illicit tobacco trade could mainly result from higher retail prices pushing consumers of licit products toward the illicit market.

All in all however, import tariffs are not expected to play a significant role under most Brexit scenarios. Indeed, if the UK remains in the single market or in the customs union (first and second scenarios, respectively) it would continue to grant duty free access to products that originate from the EU Member States. The same can be assumed in case the EU and the UK negotiate a trade agreement (third scenario) based on the precedents set by existing FTAs. ‘Hard Brexit’ is the only scenario where one could envisage tariffs being effectively levied on imports of licit tobacco products from the EU entering into the UK market. Conversely, one could argue that import tariffs could be lowered for all imports (EU and non-EU countries) in case of a ‘Hard Brexit’ where the UK would enjoy full freedom in the realm of trade regulation. This could contribute to lowering the retail price of tobacco products (even if only marginally given that excise is usually a more impactful pricing instrument), thus encouraging illicit consumers to move to licit sources.

4.1.3 Tobacco Regulations

Beside taxation (including the EMCS) and trade discussed above, the legal framework related to illicit trade in tobacco products includes the regulation of tobacco manufacturers, the licensing of wholesale and retail sellers, the regulation of raw tobacco, tobacco machinery licensing, as well as a number of requirements resulting from the EU Tobacco Products Directive. The latter are analysed in a separate section. The purpose of these instruments is to support tobacco control policies and protect the national budget by preventing tax evasion through illicit trade.

Regulation of Tobacco Manufacturers

Although tobacco manufacturing has ceased in the UK, tobacco manufacturers who supply the UK market must comply with the full range of relevant legislation, including tobacco product regulations, as set out in the Standardised Packaging of Tobacco Products Regulations 2015 and the Tobacco and Related Products Regulations 2016. Both pieces of legislation implement EU Directive 2014/40.⁴²

Regulation of Raw Tobacco

Controlling raw tobacco supplies limits the risk of illegal manufacture of tobacco products and consequent duty evasion either through processing into smoking products in unregistered premises, or selling in small quantities to consumers for home processing. Tobacco is not grown in the UK. Also, contrary to tobacco products, raw tobacco is not subject to excise duty. In 2018, the EU Commission concluded that including raw tobacco in the scope of excisable goods is not justified and the administrative costs of such a measure would be disproportionate to its foreseeable benefits.⁴³

Pursuant to the Raw Tobacco (Approval Scheme) Regulations 2016, businesses and individuals are prohibited from carrying on any activity involving raw tobacco unless they have obtained approval from HMRC. The scheme has been introduced to prevent the illegal manufacture of tobacco products, reduce the risk of excise duty evasion, and control the movement of raw tobacco in the UK.⁴⁴

Tobacco Machinery Licensing

Since April 2018, a registration scheme has been in operation to license manufacturing machinery used to make tobacco products in the UK, as set out in the Tobacco Products Manufacturing Machinery (Licensing Scheme) Regulations 2018.⁴⁵ Under the licensing scheme, anybody manufacturing, purchasing, acquiring, owning, or in possession of tobacco-manufacturing machinery must hold a license issued by HMRC. HMRC assesses the ‘fit and proper’ status of the applicants and their proposed use of the machine prior to issue of a licence.

Although HMRC expects the scheme to have very few users, it gives HMRC additional powers to tackle the evasion of excise duty on tobacco products through the control of tobacco product manufacturing machinery and thus to tackle the illegal manufacturing of tobacco products.⁴⁶ The introduction of penalties and forfeitures of manufacturing machinery in case of non-compliance, as foreseen under Part 5 of the Regulations, offers a stronger disincentive than the simple payment of a fine. The measure can help prevent the diversion of tobacco-producing machinery into the illicit market, or at least make such diversion more difficult, thus facilitating law enforcement. Notably, the licensing scheme introduced in 2018 implements Article 6 of the WHO FCTC Protocol to eliminate illicit trade in tobacco products (ITP) on ‘Licence, equivalent approval or control system’.⁴⁷ ITP Article 6 para. 1 states:

[…] each Party shall prohibit the conduct of any of the following activities by any natural or legal person except pursuant to a licence or equivalent approval (hereafter “licence”) granted, or control system implemented, by a competent authority in accordance with national law: (a) manufacture of tobacco products and manufacturing equipment; and (b) import or export of tobacco products and manufacturing equipment.⁴⁸

Internet and Overseas (Distance) Sales

In the UK, buying tobacco products over the internet from another EU country for personal use is permitted. TPD-2 gives Member States two options in relation to cross-border distance sales to consumers—either to prohibit such sales or to require sellers to register with the competent authorities in Member States where actual or potential customers are located.⁴⁹ So far, a minority of EU Member States (e.g. France and Finland) have chosen to ban these sale, thus preventing consumers from ordering tobacco products from abroad.⁵⁰

TPD-2, adopted in 2014, introduces common rules on the registration of retail outlets engaging in such sales. The UK implemented this requirement through Article 47 of the UK Tobacco and Related Products Regulations of 2016 prescribing that all retail outlets intending to engage in cross-border distance sales shall submit a comprehensive set of information to the Secretary of State, including name or corporate name and permanent address of the place of activity from where the tobacco products will be supplied, the starting date of the activity of offering tobacco products for cross-border distance sales to consumers, and the address of the website or websites used for that purpose and all relevant information necessary to identify the website. In the UK, sellers are required to register by completing a form which is submitted to HMRC, charge customers the relevant amount of tax, and make arrangements for these taxes to be paid.⁵¹ The list of registered tobacco products retailers is published by Public Health England.⁵²

There have been calls for the introduction of a ban on cross-border distance sales to consumers in the UK.⁵³ Considering the flexibility already provided by EU law on this matter, Brexit is unlikely to have any direct effect on the approach chosen by the UK, regardless of the final form of Brexit.

The impact of Brexit on these regulatory measures can be summarized as follows. ‘Soft Brexit’, where the UK remains in the single market, is the scenario that would provide the highest possible regulatory stability. The EU legislation on which some of the regulations above is based, i.e. EU Directive 2014/40, represent legal norms applicable to EEA. The situation would change if the UK remains in the customs union leaving however the single market. In both instances, changes to the current regulatory regime would not be automatic and are more theoretical in the absense of continous efforts and enormous resource. This topic may also not feature highly on the regulatory agenda of the regulator in the complicated post-Brexit scenario. The same need for legislative efforts and resource applies in case of a freetrade agreement or the ‘Hard Brexit’ scenarios. Finally, Brexit would have no impact on obligations resulting from the ITP, such as the licensing scheme introduced in 2018. As a party to the ITP in its own right, the UK will continue to be bound  by this international instrument after Brexit.

4.2 The Enforcement Framework

Beside an effective legal framework, robust investigation and enforcement mechanisms are indispensable to counter illicit trade in tobacco products. In the UK, this task is left to a number of different actors that operate at the local, national, and international levels. The UK being a target market for illicit tobacco products, international cooperation plays an important role in detecting and disrupting international networks and tackling the problem in source and transit countries alike. The UK’s approach to disrupting the illicit supply chain can be described as ‘end-to-end’, requiring action both inland and overseas. Illicit tobacco products sold on the UK market are mainly imported from other EU Member States and often the latter are transit countries, with the products originating outside of the EU. Close collaboration with EU and Member States’ agencies is therefore of paramount importance under all Brexit scenarios.

4.2.1 UK Institutions

At the national level, the two principal actors in the fight against illicit tobacco trade are HMRC⁵⁴ and UK Border Force⁵⁵ (previously Border Agency). Since 2008, they share responsibility for tackling illicit tobacco trade in the UK, for developing intelligence, and reducing revenue losses (budget protection). Despite the many synergies, they have fundamentally distinct roles. HMRC has responsibility for collecting and enforcing tobacco duties, investigating and disrupting criminal offences, and detecting and disrupting the supply of illicit tobacco inland.⁵⁶ The UK Border Force, a law enforcement command within the Home Office, undertakes enforcement work at the border for HMRC. It is in charge of detecting and seizing smuggled tobacco at the border, arresting those suspected of smuggling and referring them to HMRC for investigation.⁵⁷

Various institutions play different investigative and enforcement roles, including the National Crime Agency (NCA), UK’s lead agency against organised crime and the UK point of contact for foreign agencies such as Interpol, Europol and other international law enforcement agencies, and the British Police. At the local level, the Trading Standards promote and enforce fair, safe, and legal trading practices. Covering a wide range of consumer protection activites, they are responsible for developing local intelligence and detecting and seizing illicit tobacco products.⁵⁸ Trading Standards play an important role in tackling illicit tobacco trade, including through social media and online platforms—see for instance their involvement in Operation Jasper.⁵⁹ Other important national actors include the Market Surveillance Authorities and the Intellectual Property Office of the United Kingdom (UKIPO), particularly with regard to counterfeit tobacco products.⁶⁰

International investigative functions are mainly carried out through the HMRC’s network of Fiscal Crime Liaison Officers (FCLOs). FCLOs are responsible for liaising with international fiscal and law-enforcement agencies and developing intelligence to intercept illicit tobacco destined for the UK market. The FCLO network consists of officers located in countries stretching across Europe to the Far East.

Brexit could encourage increased coordination among the various actors in the UK. Such efforts could go beyond tobacco and be structured across sectors, involving other counterfeit goods such as electronic equipment, clothing and footwear, toys and games, and leather goods. For instance, in 2018, the Illicit Trade All Party Parliamentary Group (APPG) proposed the creation of a UK Anti-Illicit Trade Group (AITG). Partners of the AITG could include regional policing units, HMRC, Treasury, Border Force, National Trading Standards, consumer advisory groups, trade associations, and businesses. Among AITG’s main tasks would be to function as a forum for partnership, coordination through dialogue, information, intelligence sharing and strengthening cross-organizational relationships, as well as to facilitate the development of a comprehensive UK national anti-illicit trade strategy.⁶¹

4.2.2 Current Collaboration with EU Agencies and Bodies

As an EU Member State, the UK was an active participant in the work of the different European agencies which tackle illicit tobacco trade and, more generally, participated in EU police and judicial cooperation in criminal matters, including in the context of information exchange databases and systems.

The fight against illicit tobacco trade in the EU is conducted with a combination of strong legislative responses, robust law enforcement and enhanced cooperation at national, European, and international levels. In particular, OLAF, Europol, Frontex, and Eurojust contribute to strengthening enforcement, detection, and sanctions, and to enhancing cooperation and coordination in analysis and intelligence.

Deriving its jurisdiction from the budget offence element of illicit tobacco trade, OLAF plays a central role in tackling illicit tobacco trade and has an explicit mandate to fight cigarette smuggling as part of the EU efforts to curb this phenomenon.⁶² In 2017, OLAF seized a total of approximately 470 million cigarettes, equal to an estimated loss to public budgets of €94 million.⁶³ OLAF works in close cooperation with national law enforcement agencies and customs services both inside and outside of the EU to prevent, detect, and investigate tobacco smuggling, so that evaded duties can be recovered and perpetrators prosecuted.

HMRC works closely with OLAF, collaborating at strategic level by sharing information and analysing risks, and has initiated and delivered joint operations with other Member States funded by OLAF. For instance, ‘Joint Customs Operation (JCO) Magnum II’ targeted the smuggling of tobacco products transported by road into the EU territory from third countries such as Belarus, Ukraine, and Russia. The operation, which was coordinated by the Estonian Customs Administration and OLAF with the involvement of fourteen Member States—including the UK—as well as Europol and Frontex, led to the seizure of roughly 20 million cigarettes.⁶⁴ OLAF is also tracking the movements of suspicious containers, in cooperation with the competent services of the Member States and third countries, as well as with international organisations, to avoid the diversion of cigarettes onto the EU contraband market. Combating tobacco smuggling is among the main activities of Hercule III, an anti-fraud program implemented by OLAF with a total budget of €104.9 million.⁶⁵

The European Union Agency for Law Enforcement Cooperation, or Europol, is the law enforcement agency of the EU formed in 1998 to handle criminal intelligence and combat serious international organised crime and terrorism through cooperation between the competent authorities of EU Member States. Excise fraud remains among the priorities for the fight against organised and serious international crime.⁶⁶ Since 2010, Europol has promoted EMPACT (European Multidisciplinary Platform against Criminal Threats) projects, several of which specifically relate to illicit trade in tobacco products, for instance aiming at disrupting smuggling in shipping containers. With a permanently seconded officer at Europol, HMRC engages with pan-European intelligence and analysis on tobacco fraud, and support projects driven by Europol.

The unlawful manufacturing and smuggling of excise goods, including tobacco and cigarettes, is also among Europol’s Analysis Projects, under which specialists support EU law enforcement authorities and other partner organisations to tackle organised crime.⁶⁷ For instance, operation ‘TSAR’, coordinated by Europol in collaboration with Eurojust, resulted in the break up a large network of counterfeit cigarette smugglers operating from Ukraine to the United Kingdom.⁶⁸

Frontex, the European Border and Coast Guard Agency, carries out operational activities focusing on cigarette smuggling across the EU-Eastern land border, a major source of illicit tobacco products. Frontex efforts have led to important seizures of illicit tobacco products and to the breaking up of organised cross-border crime at the EU’s borders with Western Balkan countries, Southeast Europe, and select border crossing points at the Eastern land border.⁶⁹ As a target market for illicit tobacco products, the UK benefits from this type of operations.

Judicial cooperation in criminal matters is another important field in the fight against illicit trade in tobacco products. Eurojust was set up in 2002 to “support and strengthen coordination and cooperation between national investigating and prosecuting authorities in relation to serious crime […]”, as outlined in Article 85 of the TFEU (Treaty on the Functioning of the European Union).⁷⁰ One of the key instruments by which Eurojust supports and strengthens coordination and cooperation is through the facilitation and funding of joint investigation teams, which play a crucial role in combating cross-border serious and organised crime. Crime groups are often active in illicit tobacco trade, among other activities.⁷¹

As EU Member State, the UK also participated in the Customs Cooperation Working Party (CCWP) of the European Council.⁷² The CCWP handles work regarding operational cooperation among national customs administrations with a view to increasing their enforcement capabilities. It also defines strategic and tactical objectives for Joint Customs Operations. The CCWP focuses on seeking results in terms of seizures, identification of new threats, and disruption of criminal gangs by cooperating closely with Europol, Eurojust, and OLAF. Illicit tobacco trade is a recurrent topic on the CCWP agenda.

Continued participation in the work of EU agencies and bodies fighting illicit tobacco trade is important considering the UK’s geographic location, the fact that it is a target market, and that EU Member States are either origin or transit countries for illicit products sold on the UK market. The many successes achieved so far corroborate this view.

It should be noted that third-country participation in EU agencies and bodies is not new. For instance, the EFTA states (Iceland, Liechtenstein, Norway, and Switzerland) participate extensively in the work of EU agencies. Generally, they do not have voting rights in the agencies’ decision-making fora and may have to contribute to agency budgets. Participation in EU agencies is also part of the EU’s Enlargement Strategy, according to which agencies are encouraged to offer participation possibilities, including observer status, to candidate countries in Management Board and expert group meetings.⁷³ Collaboration is in the interest of both sides. After all, the UK will be leaving the EU but not Europe. The examples provided above suggest that the EU can accommodate different scenarios. As much in the same way as other aspects analysed in this project, the future cooperation among EU and UK agencies is likely to be commensurate with the scope and depth of the future relationship.

4.2.3 Possible Forms of Post-Brexit Cooperation with EU Agencies

In order to efficiently control illicit trade in tobacco, close post-Brexit collaboration seems to be in the interest of both the UK and the EU. The 2019 Withdrawal Agreement only regulates the question of the transition period, for instance by stating at Art. 131 that:

During the transition period, the institutions, bodies, offices and agencies of the Union shall have the powers conferred upon them by Union law in relation to the United Kingdom and to natural and legal persons residing or established in the United Kingdom. In particular, the Court of Justice of the European Union (ECJ) shall have jurisdiction as provided for in the Treaties.

The 2019 Political Declaration contains references to cooperation, including in “law enforcement and judicial cooperation in criminal matters, foreign policy, security and defence, as well as thematic cooperation in areas of common interest”.⁷⁴ The 2018 Withdrawal Act does not provide more guidance and only states at para. 19 (‘Future interaction with […] agencies of the EU’) that “nothing in this Act shall prevent the United Kingdom from […] (b) continuing to participate in, or have a formal relationship with, the agencies of the EU after exit day”.

Some guidance can be found in the founding acts of the EU agencies described above, as they set out the modalities of participation, budgetary contribution, and staffing arrangements which can be made by third states. For instance, the Decision of the EU Council establishing Europol provides at Article 23 para. 1 (‘Relations with third States and organisations’) that “[…] Europol may [] establish and maintain cooperative relations with: (a) third States”.⁷⁵ Today, Europol has such arrangements with administrations in several third countries.⁷⁶

There are two types of cooperation agreements that Europol can enter into with states and other entities outside of the EU—strategic agreements and operational agreements. While both types of agreements are aimed at enhancing cooperation between Europol and the country concerned, there is one major difference. Strategic agreements are limited to the exchange of general intelligence as well as strategic and technical information, whereas operational agreements allow for the exchange of information, including personal data.⁷⁷ The system of liaison officers at Europol ensures that the interests of law enforcement agencies in the EU Member States and non-EU partners are represented in Europol’s headquarters.

As a non-EU Member, the UK would foreseeably not be able to continue interacting with the Europol through its designated Europol National Unit (ENU).⁷⁸ Rather, upon conclusion of an arrangement, ideally an operational agreement, the UK, like other non-EU countries, would have a liaison officer. Today, liaison officers from non-EU countries include European non-EU countries (e.g. Iceland, Norway, Switzerland), and a handful of countries from different continents (e.g. Australia, Canada, Colombia). Liaison officers from several United States law enforcement agencies are also hosted at Europol.

Likewise, Frontex cooperates and collaborates with third countries at a technical and operational level on the basis of status agreements or other bilateral agreements. The terms of cooperation are set out in Article 54 (‘Cooperation with third countries’) of Regulation 2016/1624,⁷⁹ where para. 7 foresees that “The Agency may, with the agreement of the Member States concerned, invite observers from third countries to participate in its activities at the external borders.” Frontex has concluded working arrangements with the authorities of 18 countries: the Russian Federation, Ukraine, Moldova, Georgia, the former Yugoslav Republic of Macedonia, Serbia, Albania, Bosnia and Herzegovina, the United States, Montenegro, Belarus, Canada, Cape Verde, Nigeria, Armenia, Turkey, Azerbaijan and Kosovo, as well as with the CIS Border Troop Commanders Council and the MARRI Regional Centre in the Western Balkans.⁸⁰ Eurojust is also open to cooperation with third countries, as provided for in the Agency’s founding act, which devotes Section III to ‘International cooperation’ (Article 52).⁸¹

Regarding OLAF, Art. 93 of the 2019 Withdrawal Agreement establishes a transitional period (‘New State aid and European Anti-Fraud Office procedures’) during which it remains competent to initiate new investigations regarding facts that occurred before the end of the Brexit transition period (now set for 31 December 2020 pursuant to Art. 126 of the 2019 Withdrawal Agreement). In a scenario where the UK remains in the customs union, OLAF may also play a role in the future and if the two parties agree on ‘common procedures and processes’ for the collection of VAT on trade between the UK and the EU, to avoid the need for fiscal border controls on goods moving in either direction. Since customs duties and the VAT base are an EU ‘own resource’ affecting the revenue side of its budget, any such arrangement could require UK authorities to work with OLAF (since it investigates irregularities affecting the EU budget).⁸² The exact parameters of such cooperation would be a matter for negotiation.

Also relevant to the enforcement of anti-illicit tobacco actions, is the European Arrest Warrant system. Established in 2002, the system allows EU members to request the arrest and detention of criminals in other countries without extradition talks between them. According to the National Crime Agency, other EU Members requested the arrest of 14,279 UK-based suspects in 2015–16, up from 1865 in 2004. The UK made 241 such requests in 2015–16, leading to 150 arrests. Title V of the Withdrawal Agreement (‘Ongoing judicial cooperation proceedings in criminal matters’) provides for a transitional period including in respect of European arrest warrants where the requested person was arrested before the end of the transition period for the purposes of the execution of a European arrest warrant.⁸³ After Brexit however, it could prove difficult for the UK to remain part of the system as a result of the UK opting out from the free movement rules and largely ending the jurisdiction of the European Court of Justice. Instead, a streamlined extradition process could be considered.⁸⁴ The same difficulties are likely to emerge with regard to the European Criminal Records Information System (ECRIS), where there is no precedent of access to the system granted to a third country.

It remains to be seen whether the existing forms of collaboration with third countries are adequate to the UK’s unique situation. Some have expressed concerns about the diminished ability to influence work in key EU agencies.⁸⁵ The most adequate solution would also take into account the availability of alternative fora already providing a framework for cooperation between the EU and the UK beyond that of the EU, such as the Council of Europe or Lyon-based Interpol, the world’s largest international police organisation that takes part in the fight against illicit trade in tobacco products in Europe and on a global level by facilitating international police cooperation. However, a paper prepared by the EU Parliament in 2018 suggests that simply relying on existing alternative frameworks would result in a “substantial reduction in the level of cooperation when compared to the current situation, including a reduction in the level of intelligence available to the EU [and to the UK]”.⁸⁶

Finally, two international organizations of great importance in the fight against illicit trade in tobacco products are the Brussels-based World Customs Organization (WCO) and the World Health Organization (WHO) based in Geneva. The WCO has quasi-universal membership and represents 183 customs administrations across the globe that collectively process approximately 98% of world trade. The UK has been a member since 1952. While the WCO does not by itself actively fight illicit tobacco trade, it provides a valuable venue for discussions among customs authorities worldwide, for analysing and sharing best practices, and for collecting and disseminating data. For instance, since 2012 the WCO publishes the annual Illicit Trade Report which contributes to the study of the phenomenon of illicit trade through the analysis of seizure data and case studies—including on tobacco products—voluntarily submitted by Member Customs administrations from around the globe to the WCO through the Customs Enforcement Network (CEN) database.⁸⁷

The WHO, a quasi-universal specialized agency of the United Nations with 194 Members, including the UK, deals with illicit trade in tobacco products since such activity can undermine tobacco policies aimed at reducing the harmful effects of tobacco. In 2003, WHO Member States unanimously adopted the WHO Framework Convention on Tobacco Control (WHO FCTC), the only public health treaty under the auspices of WHO. More recently, Parties to the FCTC negotiated the Protocol to Eliminate Illicit Trade in Tobacco Products (ITP), an international treaty with the objective of eliminating all forms of illicit trade in tobacco products through a package of measures to be taken by countries acting in cooperation with each other. The ITP is discussed further in Sect. 6.2 below.

The UK’s standalone membership in relevant international organizations, such as the WCO and the WHO, and international treaty-based initiatives such as the FCTC and the ITP, will continue after Brexit without the need for re-negotiations with the rest of the membership, as it is for instance the case for the UK’s participation in the World Trade Organization (WTO).