Government at 'high risk' of losing $10 million annually if tobacco black market surges

Reporter Blair Ensor buying black market tobacco from a woman advertising on Facebook.
JOHN KIRK-ANDERSON/FAIRFAX NZ

Reporter Blair Ensor buying black market tobacco from a woman advertising on Facebook.

There is a high risk New Zealand's tobacco black market could grow significantly, costing the Government over $10 million a year, a declassified document says.

A Stuff investigation last year, which included a reporter purchasing 80 grams of the illicit product, highlighted how easy it is to buy illegal tobacco online.

Police have also raised concerns the black market is fuelling armed robberies and burglaries in Christchurch.

Nicky Wagner: "New Zealand's market is small, but it might grow and that's the threat that we're looking out for."
GETTY IMAGES

Nicky Wagner: "New Zealand's market is small, but it might grow and that's the threat that we're looking out for."

Customs appeared unconcerned, saying the illicit trade is "not a significant problem".

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But a 2016 Customs report, obtained under the Official Information Act, paints a different picture, stating the tobacco black market might grow significantly, costing millions of dollars.

This tobacco, purchased by a Stuff reporter last year, was about two-thirds the price of legal tobacco.
JOHN KIRK-ANDERSON/FAIRFAX NZ

This tobacco, purchased by a Stuff reporter last year, was about two-thirds the price of legal tobacco.

Customs initially refused to release the document, which is marked as confidential.

It stated there were signs New Zealand's illicit market was growing, with "notable growth" occurring recently, and acknowledged media reports that heavily discounted tobacco was being sold on social media.

Minister responsible Nicky Wagner on Sunday said Customs was keeping a close eye on the risky market.

The document outlined a possible scenario in which the market could reach a "tipping point" – where illegal tobacco is so much cheaper than legal tobacco that the market begins to boom.

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It goes like this: increasing tobacco thefts, illegally imported tobacco, and sales of home-grown tobacco lead to an increased illicit supply.

The increased supply causes the price of illegal tobacco to drop.

The black market increases as cash-strapped smokers turn to illicit sources, therefore making New Zealand an attractive destination for illicit tobacco imports.

The scenario was theoretical, and there is mixed data on whether the black market is on the rise.

However, the future risk of the scenario occurring was deemed "high".

"If the scenario in the flow chart occurs, then New Zealand's illicit tobacco market will expand significantly and much larger quantities of tobacco will be illicitly imported than at present.

"This will lead to an annual loss of Crown revenue in excess of $10 million," the reported stated.

Wagner ordered the report be done to gain an understanding of what sort of threat the illicit market presented.

"They concluded that New Zealand's market is small, but it might grow and that's the threat that we're looking out for.

"We're very small in comparison to Australia . . . They've always had a real problem with illicit tobacco," she said.

Media coverage suggested the black market tobacco trade is booming across the ditch, with reports it is worth more than $1 billion.

Organised criminals are attracted by the huge money at stake and the softer penalties compared to those for importing and dealing drugs.

Customs estimated that black market tobacco made up 2 to 3 per cent of the New Zealand tobacco market, compared with Australia where it was over 14 per cent.

Assessing future growth of the illicit market as "high" risk "must always be the case", Wagner said.

Customs was constantly looking at ways to curtail risk.

"As a border agency we're always looking out for what's happening now, what could come at us and what can we do in the meantime.

"We're monitoring it very closely, we're intercepting at the border, you may be aware that the Customs and Excise Act is changing in the New Year.

"That cuts the amount of growth for personal use from 15 kilograms down to 5kg . . . We're attacking it on several different levels," Wagner said.

She acknowledged the price of tobacco going up increased the risk of an illicit tobacco market.

The tax on tobacco products increased 10 per cent on January 1 as part of the Government's plan to make New Zealand smokefree by 2025.

A packet of cigarettes would rise to about $30 in the next four years after the Budget delivered a 10 per cent a year tax rise in May.

The 80g of black market tobacco purchased during Stuff's 2016 investigation cost $80. Legal tobacco would cost roughly 1.5 times that amount.

"The fact that the price of tobacco is going up increases the risk, because in the past we've hardly had any problems with the illicit tobacco.

"We don't think it's a significant problem at the moment, and none of the indicators show that, but we'll be watching," Wagner said.

The Crown lost at least $3.7 million in tax revenue from tobacco seized by Customs in 2015.

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