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What Drives Contraband?

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Despite being an activity so deeply entwined in the history of trade, it is possible to mitigate the effects of contraband once we have understood its causes. Contraband activities are driven by demand and profit. Whenever there is sufficient demand for contraband products - whether they are untaxed cigarettes, counterfeit designer clothes or pirated music - and it is sufficiently lucrative to supply those products, organized crime will step in to meet that demand.

The key incentive for criminal organizations is the potential for large profits but the key driver is the consumers' desire for the goods.

KEY FACTORS FACILITATING CIGARETTE CONTRABAND

• High taxation
  The root cause of contraband is high taxation. The potential profit for the smuggler is the difference between the cost of the product with all taxes paid and the untaxed product. Increasing taxation increases the incentive for criminals to begin participating in the contraband tobacco market. In the EU, taxes on cigarettes represent between 70% and 80% of the retail sales price.
  According to a recent survey from the Oxford Economic Forecasting and the International Tax and Investment Center: "The incentive for smuggling has its origins in consumers' desire to avoid high taxes and their willingness to switch from legitimate to illegal supplies in order to do so. Such behavior creates difficulties not only for governments but also for the cigarette manufacturers, who then lose control over their product distribution and pricing, which diminishes the value of their brands."
• Inadequate law enforcement
  Law enforcement agencies are often unable to deal with the contraband problem or they do not view it as a priority. Large borders, the sheer size and volume of both the legal and illegal global trade in all products, the sophistication of organized crime, inadequately funded and trained officers and a lack of knowledge and intelligence often conspire to make anti-contraband initiatives unsuccessful. Furthermore, criminal organizations are often attracted to cigarette smuggling as it is considered to be a high profit, low risk illicit activity which incurs lighter penalties than criminal activities like drug trafficking, human trafficking and arms smuggling. Despite best efforts, law enforcement authorities generally estimate that seizures of contraband represent barely 11 percent of the total volume of product actually being smuggled.
• Trade & regulatory controls
  The unforeseen consequences of stringent trade and regulatory controls can also affect the availability and supply of product to the market, thus stimulating contraband. The most celebrated case of this was the USA's experience with alcohol prohibition. Although there are no complete bans on cigarette consumption, excessive restrictions, for example, on pricing, retail availability, can be factors which promote illegal supply.