Tobacco Facts.

Fisherman Lino Bocalan became legend in the 1950s to 1960s after he chanced upon an alternative and more lucrative profession: cigarette smuggling.

Beneath the seawaters of his sleepy hometown of Tanza in Cavite, Bocalan discovered gun powder among the remnants of Japanese or American ships from World War II. The finds proved especially useful for fishermen who engaged in dynamite fishing back then.

Illiterate but supposedly gifted with numbers, Bocalan eventually linked up with traders in Mindanao who were drawn to his supply of gun powder. In exchange, they offered him “blue-seal” or imported cigarettes, which were illegally, and easily, transported from areas like Borneo because of the South’s un-policed shorelines.

Before long, Bocalan built a fortune and a name in an industry that grew in Tanza, aided in part by the presence of Sangley Point, a former American base where blue-seal cigarettes were sold and taken out from its commissary. He eventually traded directly with Borneo, cut the southern connection, and became a millionaire.

Decades later, the Tanza cottage industry has evolved into a lucrative national, and even a global, industry. The southern backdoor, where traders of smuggled cigarettes used to taunt law enforcers, has become an outmoded entry point. Smugglers have become more brazen, preferring direct payoffs to willing takers.

Big Business

The Philippines has become a favorite transshipment point for the smuggling of tobacco to countries where governments are charging exorbitant taxes to curb domestic production and consumption.

Among Southeast Asian countries, the Philippines imposed the heaviest tax on cigarettes from 1989 to 1995, according to latest available figures from the World Bank. The tax accounted for 63 percent of the retail price, almost double the rate imposed in China, another huge cigarette market. China, which constitutes 35 percent of global cigarette sales, imposed taxes equivalent to 38 percent of the retail price.

Taxes collected from tobacco sales in the Philippines constitute 20 percent of all government revenues, and industry insiders complain that they are government’s favorite whipping boy. Yet the business remains highly profitable.

Industry insiders say the country ranks among the Top 10 or 12 in the world in terms of per capita consumption of cigarettes, with 80 billion sticks sold annually. It has also earned the distinction of being a predominantly “stick sales” market, with sticks (as opposed to packs) accounting for about 70 percent of cigarette sales.

Highly-Protected

There are only five major players in this highly protected industry. Lucio Tan’s Fortune Tobacco and Philip Morris Philippines Manufacturing Inc. corner over 90 percent of the local market. The smaller players include Mighty Corp., La Suerte Cigar & Cigarette Factory, and Associated Anglo-American Tobacco Corp.

Common interests, such as taxes and other laws that affect the entire industry, compel them to close ranks and move as one, according to an insider. This has resulted in a virtual monopoly that keeps other big players, like British American Tobacco or Japan Tobacco International, out.

This is crucial for an industry that requires heavy capitalization. Philip Morris invested US$300 million in its state-of-the-art factory in Tanauan, Batangas, which opened in 2003. Billions of pesos, too, are required to maintain inventories of tobacco, which need to be aged for 12 to 18 months after harvest.

With taxes and other production costs eating into revenues, the lure of smuggling for those who profit from the tobacco trade has become stronger.

Summary of Apprehended Cigarette Shipments
1998 to March 2009

Source: Bereau of Customs
- Newsbreak Research

Cheapest in RP

Worldwide, according to a 2000 report commissioned by the World Bank, from 6 to 8.5 percent of cigarettes were being smuggled, purportedly driven by high taxes.

In 2006, the non-profit Framework Convention Alliance for Tobacco Control pegged the percentage of contraband at 11 percent of worldwide cigarette sales—roughly 600 billion sticks a year.

In the same year, governments all over the world lost from $40 billion to $50 billion in tax revenues, with the Philippines losing P29 billion. According to a September 2008 study on foregone revenues and tax leakage from cigarettes, that amount could have been collected from smuggled cigarettes.

Cigarette prices here are among the cheapest. For instance, a pack of Marlboro sells for about $.50 or P20-plus, whereas in other countries, this could sell ten-fold for as much as $5 to $6. The cost of production in the Philippines is relatively lower compared to other countries so that today, smuggling, according to some experts, is actually more outward bound.

Types of Smuggling

International organizations and groups working to stop the tobacco black market and curb cigarette smoking are sounding alarm bells because the illegal trade is believed to finance criminal syndicates that engage in drugs, trafficking, terrorism, and money laundering.

Intelligence officials here say they do not have solid proof that those in the cigarette business are also involved in drugs, but willingly concede that there are isolated “indicators” of a possible interrelationship.

They can only speculate that illegal income from cigarettes is “maybe” used for money laundering and even terroristic activities, or that the cigarette trade is being used as a front for drug smuggling.

One such indicator, according to officials, is the attempted smuggling of high-grade shabu or methamphetamine hydrochloride worth P4.6 billion into the Subic Bay Freeport in May 2008. Said to be the country’s biggest drug haul ever, over 700 kilograms of the contraband were shipped through a Vietnamese registered vessel and traced to Hualong International Inc., a cigarette-importing company operating in the Freeport since 2004.

Taiwanese Anthony Ang, a co-owner of Hualong, has reportedly slipped out of the country with his family. No less than President Arroyo has created a panel to directly investigate the drug smuggling incident.

More Sophisticated

In the 1960s, during the time of Bocalan, smugglers resorted to crude “bombing” operations that involved wrapping “master cartons” or “master cases” of cigarettes in plastic bags that were dropped at pre-arranged points at sea. One master case contains about 500 packs of cigarettes.

Fishermen picked up these cases and delivered them to land-based smugglers who directed and managed them. Such operations were “high-risk” for smugglers because there were no guarantees that fishermen would retrieve and deliver all master cartons. The practice, save perhaps in some areas of the South, has become passé.

Because of the huge profits involved, smuggling has taken on different forms: illegal manufacturing or counterfeits; bootlegging or the purchase of cigarettes in low tax areas for resale to high tax areas; and large-scale organized smuggling that involves the participation of manufacturers and organized crime syndicates.

From 1998 to the first quarter of this year, the Bureau of Customs (BOC) has apprehended 26 cigarette shipments with a total value of P163.4 million (click here to see table). The highest number of seizures recorded was in 1999 at 12, with shipments worth P84.7 million.

1999 marked the height of the smuggling of counterfeit cigarettes, Customs officials say. Back then, the landed cost of a pack of counterfeit cigarettes was only P9 and could be sold for double, making it extremely profitable for smugglers. Before long, smugglers resorted to inserting cigarettes among goods that they imported in container vans.

Politicians Involved

When they got away with it, they started filling up container vans but misdeclared cigarettes as general merchandise, stuffed toys, stearic acid, or even slippers to evade so-called “sin taxes.” The counterfeit cigarettes came mostly from China and got past Customs inspectors.

There was a sharp drop in apprehensions in 2000 supposedly because of controls that the BOC put in place. These pushed smugglers to import raw materials like tobacco leaves, packaging materials, and filters, says Customs Intelligence and Investigation Service (CIIS) director Jairus Paguntalan.

Before they knew it, they were seeing cigarette-making machines that led BOC officials to conclude that there were clandestine counterfeit cigarette-making factories that were already operational here. While some of these factories were raided, it is widely believed that counterfeits continue to be manufactured here—specifically in La Trinidad, Benguet; in Ilocos in Northern Luzon; and in Malabon and Valenzuela in Metro Manila.

Some of the operations are being linked to political personalities. Their identities and activities are known in tobacco manufacturing circles, but are tolerated as a form of political accommodation.

Roundabout

Certainly, smuggling operations continue to be brisk business, if small boats near the Subic Bay Freeport are any indication. A former ranking Customs official says these small boats have a military look but are actually used for smuggling cigarettes.

Cigarettes manufactured in China are “exported” and brought to the Philippines on big ships. These shipments are then broken up and placed in the smaller boats. “Those are the fast boats, which are able to reenter China and go to Vietnam. Cigarettes are smuggled back to their country.”

Smugglers of counterfeit cigarettes take their container vans in circumlocutory routes. For instance, Chinese-made cigarettes head for Hong Kong then to Manila as a transshipment point. From Manila, they make their way to Vietnam via small fishing vessels and then from there proceed to other countries of final destination.

It works for the Chinese because whenever they export cigarettes, they get tax rebates; when these cigarettes re-enter China illegally, they make a profit. The cost of bringing out their goods is minimal compared to the profits they make. According to estimates, smugglers end up spending only at least $700 per container van if they go the Mainland-Hong Kong-Manila route.

There have been instances, too, when cigarettes from China entered Subic for transshipment but were replaced by locally made Marlboro cigarettes. The switches were made while the ships were docked for about a week at the Freeport—the counterfeit cigarettes from China were unloaded for the domestic market and replaced with genuine Marlboros, which were “consolidated” and shipped out.

“Consolidators” buy locally produced cigarettes in small quantities from small outlets until they accumulate volumes large enough for illegal shipment or “diversion” outside, industry insiders explain. This is illegal because cigarettes that are exported require certification from the National Tobacco Authority.

Like Drugs

Only last January, 1,000 master cases of locally produced Marlboro cigarettes supposedly for shipment to Vietnam and The Netherlands were intercepted. The cigarettes were valued at P15 million, and if sold in Europe or Northern America, could easily generate returns of P150 million. CIIS agents reported that the cigarettes were mis-declared as 490 pieces of furniture and decoration, and 450 cases of assorted grocery items. The shipment was found inside two 20-footer container vans at the Manila International Container Port.

Even Fortune Tobacco’s Hope cigarettes, which are popular among overseas Filipino workers, are being smuggled to the Middle East.

Customs officials say the price difference of cigarettes among neighboring countries explains the bootlegging phenomenon. Consolidators try to smuggle out genuine cigarettes but mis-declare them and illegally export them to countries that include the United States.

This makes economic sense because export container vans headed for the US cost only about $500. A 20-footer container van can hold 500 master cases of cigarettes or 250,000 packs. Factoring in cost and the sale value of cigarettes in the US, one official asks, “Tell me of a product other than drugs that brings in that kind of a profit—200 percent or 300 percent.”

The so-called gray market is already being regarded by cigarette manufacturers as their third or fourth biggest competitor, with China’s underground manufacturers and its trillion-stick-a-year market seen as both threat and opportunity.

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