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Parliamentary Joint Committee on Law Enforcement
Illicit tobacco

DICKSON, Mr Gary, Regulatory and Legal Compliance Manager, Imperial Tobacco Australia

FETT, Mr Joshua Rene, Government Affairs Manager, British American Tobacco Australia

GREGSON, Mr Andrew, Head of Corporate and Legal Affairs, Australasia, Imperial Tobacco Australia

KEULEMANS, Mr James Gerrard, Head of Government and Corporate Affairs, British American Tobacco Australasia

POWELL, Mr Mark, Manager, Public Policy, Philip Morris Limited

Committee met at 18:06

CHAIR ( Mr Craig Kelly ): I declare open this public hearing of the parliamentary Joint Committee on Law Enforcement for its inquiry into illicit tobacco. The inquiry's terms of reference are available from the secretariat. The committee's proceedings today will follow the program as circulated. These are public proceedings, being broadcast live via the web and in Parliament House. The committee may also agree to a request to have evidence heard in private session, described as being in camera, or may determine that certain evidence should be heard in camera.

I remind all witnesses that, in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to the committee. The committee prefers evidence to be given in public but, under the Senate's resolutions, witnesses have the right to request to be heard in camera. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera. If you are a witness today and intend to request to give evidence in camera, please bring this to the attention of the secretariat as soon as possible. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken, and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may of course also be made at any other time.

I remind committee members and officers that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions to superior officers or to a minister. This resolution prohibits only asking questions for opinions on matters of policy and does not preclude questions asking for explanations of policy or factual questions about when and how policies were adopted.

I welcome everyone here today. I welcome representatives from British American Tobacco, Philip Morris Limited and Imperial Tobacco. The committee has received submissions from each company, and we thank you. Thank you for talking to us today. How is our time schedule going? We did have through to 6.30 pm, but we might extend that a little bit since we started a little be late. We will see how we go.

Senator ABETZ: In fairness to the Department of Health, it could be relevant and available to us on another occasion.

CHAIR: Correct. We are happy to look at it over time. Who would like to start with a brief opening statement?

Mr Gregson : Good evening, all of you. Thank you for the opportunity to speak with you again. It is the aim of all three companies here as witnesses this evening to maximise the time available for you to seek information from us; hence this introduction will be brief. To assist in pursuing brevity, please consider all statements that we have previously made to the committee in the last parliament to be reaffirmed. We can update you, though, on the size of the problem. The KPMG LLP report Illicit tobacco in Australia that will shortly be released will show approximately 14 per cent of tobacco consumed in Australia is illicit. That is approximately one in every seven cigarettes, and it comes at a cost to the taxpayer of $1.5 billion in forgone excise.

All three manufacturers expressed their support for the move in last year's budget to direct additional funding to combating illicit tobacco, $7.7 million was allocated and the tobacco strike force has managed to achieve from that some significant results—$160 million cigarettes and 100 tonnes of loose tobacco has been seized as a direct result of their work. On current excise rates that is $175 million in evaded excise that has been defeated and, even in strict financial terms, that is a return on the $7.5 million investment of over 2,000 per cent. While $7½ million is not an inconsiderable amount of money, it needs to be viewed in context. The 12½ per cent excise increase that the budget imposed on adult consumers of legal tobacco product will see an additional $4.7 billion collected over the same period. That is not $4.7 billion in total excise; that is just additional revenue.

With that sort of money on the table it is not hard to see why an assistant commissioner of the AFP elevated the threat posed by illicit tobacco in an interview with the ABC to one of 'national security' and linked it to organised crime groups and overseas extremist organisations. In that context we asked the committee to seriously consider whether the commitment of $7½ million was, to be generous, realistic. Moreover, resources were only committed for a period of two years. We submit that both the size of the problem and the results that have been achieved in the last year clearly demonstrate that a longer and greater commitment is warranted immediately. Since we last spoke, all three companies here this evening have continued to do all that they possibly can to combat illicit tobacco both individually and possibly as a collective. It is to that context that I now turn.

As I said, we applaud the increased efforts of authorities to crack down on importers of illicit tobacco but, as we discussed last time, the retail end of the equation has not seen significant, or sufficient, attention. Late last year British American Tobacco Australia, Imperial Tobacco Australia and Philip Morris submitted an anti-illicit tobacco cooperation deed to the Australian Competition and Consumer Commission. This deed, if authorised, would see these three companies take unprecedented action against the retail trade in illicit tobacco. The action is based on the simple premise that trade in illicit tobacco has become, in many instances, embedded within the legal retail trade. The deed, if it were authorised, would see the signatories cease selling legal product to retailers who were engaged in illegal activity—that is, we would simply stop supplying product to retailers who were doing the wrong thing.

This industry was, and is, prepared to curtail its own sales of legal product to assist the Australian and state governments to combat the scourge of illicit trade. That surely is the greatest disincentive to a retailer who thinks that they can get away with it. There is no doubt in our minds that it would put a serious dent in the retail end of the illicit trade of tobacco. The ACCC, as it is required to do, conducted a consultation process to seek the views of those impacted. Retailers and their representative groups overwhelmingly supported the proposal. Anti-tobacco activist non-government organisations did not support the proposal—not because it impacted them in any way, but because they are driven by an ideology that requires them to protest anything that we do. That is okay; that is their right, and we were not surprised by it. What we were surprised by, though, was the position of the Department of Health. The department that is charged with reducing tobacco consumption, that wants excise increased on legal tobacco, that is charged with enforcing plain-packaging laws, chose to frustrate a measure to reduce the supply of illicit tobacco.

Rather than implement their own measures against illicit tobacco by even something so simple as enforcing plain-packaging laws against retailers selling branded illicit packs, or even supporting the measures of others to combat illicit tobacco, the health department has directed resources to opposing this industry-led and retailer-supported measure. Anti-tobacco activist, non-government organisations can be driven by ideology. Surely we ought to expect departments tasked with enforcement to act with at least a measure of practical reality in the interests of taxpayers. There was no sound reason for the health department to have opposed this measure.

To our great disappointment, the ACCC has published a draft determination to reject the application. At a public meeting prior to the final determination held recently, retailers and their representative groups attended in person to plead with the commission to alter its decision and to approve the application. The Department of Health attended. Its sole contribution was to again question the validity of the application. We are doing our best to assist you to combat illicit tobacco, but we are being hampered at every turn for no good reason. If we are not able to assist, the entirety of the problem falls upon the government and the cost upon the taxpayer.

We are not here tonight though to complain. We are here to find ways to combat illicit tobacco, so we respectfully submit these measures that the government could undertake: (1) commit to longer term and greater funding for the tobacco strike team; (2) assist the industry to boycott supply to retailers engaged in illicit supply and (3) develop a national illicit tobacco strategy to ensure coordination and a consistent approach to combating the problem, including uniform laws and penalties. Thanks once again for the opportunity to appear. We are happy to take your questions.

CHAIR: Would Philip Morris or British American Tobacco like to make a statement?

Mr Powell : It was a joint statement.

CHAIR: I will go straight to the ACCC. I understand it is their draft decision?

Mr Gregson : Correct.

CHAIR: My reading of it was that there was some concern that you would be able to use it for some other anticompetitive means to block out a supplier, which, to me, did not make a lot of sense. Would you like to comment on that?

Mr Gregson : I think it is worth noting, in the submissions received by the ACCC, that, yes, there was one submission that alluded to that as a potential issue. There were, however, countless other submissions, not only from retailers individually but from their representative organisations representing thousands of retailers, who did not see that as a problem. So, it would be our view, and our submission to the ACCC, that the weight of numbers is such that that problem was not sufficient to determine against the proposed boycott.

CHAIR: What possible reason could they have that you would misuse such a power or such an exemption if you were given it? What is it you could do? Could you possibly try to enforce some type of retail price maintenance? I am not asking what you could possibly do wrong. I know it is a difficult question, but I am still struggling to get my head around this.

Mr Gregson : I understand—and, of course, you are asking me to explain the position of the ACCC.

CHAIR: I understand the difficulty of the question, but maybe you could turn it around?

Mr Gregson : Understood. So from their public documentation and from discussions that we have jointly held with them in public, the concern that they raised was that manufacturers who are party to the proposed agreement could target a retailer who was dealing with another manufacturer. In that respect it is worth noting that the three manufacturers who appeared this evening are the vast majority of the industry in Australia.

CHAIR: What is your combined market share?

Mr Gregson : It depends on which measure you use. Let's call it between 90 and 95 per cent.

CHAIR: So the reality is, if I am a retailer and I am not dealing with you guys, I really do not have a retail business unless I am going down the illegal track. Is that fair enough?

Mr Gregson : That would be a fair assumption.

Mr Powell : We also agreed to open up the arrangement to any other manufacturer who wanted to join. So, if this was even theoretically an issue, they could simply participate as a legal manufacturer and they would be part of the group that was—

Senator ABETZ: And could not the ACCC require, as part of this deal, that if one of you sought to enforce this you notify everybody else, including any other manufacturer, in a very transparent and open manner—you could even put it up on a website—that you had said this to a particular retailer? Would there be any problem with that? Then every legal manufacturer that might exist, apart from you, that represents 90-plus per cent of the market would be given notice. Then, if you had pinged a certain retailer and that retailer refused to get product from somebody else, it would be pretty obvious, one assumes, as to what happened. It would be out in the open, and one assumes you would not have a problem with that.

Mr Gregson : No problem at all whatsoever. It is worth noting that, with the problems that the ACCC raised and our response submission to them, we offered to, and in fact have, modified the draft deed to take into account all of those. As Mr Powell points out, one of those modifications was to throw the draft arrangement open to any manufacturer or importer of product to sell to retailers in Australia. So your suggestion is a very worthy one indeed. We are prepared to do what it takes to have the ACCC understand and agree that what we are trying to do is legitimate.

Senator ABETZ: If it is completely open, one assumes you can then use it for nefarious purposes.

Mr Gregson : Yes; agreed. The other thing that we added on top of it, of course, was an appeals mechanism for any retailer that becomes the target of a boycott.

CHAIR: I just go to that appeals mechanism. This is in your second round to the ACCC? Your first application to the ACCC did not include that appeals mechanism; is that correct?

Mr Gregson : That is correct.

CHAIR: Could you explain to us how that appeals mechanism would possibly work?

Mr Powell : In short, it is a mediation process with one of the—and I cannot remember the name of the organisation—Australian standard mediation bodies, where we enter into binding mediation if they were to raise any issue with the decision under the mechanism.

CHAIR: Let's just walk through it: I am a small tobacco retailer, and one of your salesmen has come in and given me a warning for selling illegal product. He says, 'I understand it is the second time you've done it.' And you would say, 'Look, mate, we've caught you the second time. That's it; we're cutting off supply to you.'

Mr Fett : Exactly.

CHAIR: And then he would say, 'Hang on, I want to appeal against this decision.'

Mr Fett : The first step would be a mediation process through a third-party provider. If that mediation did not come to a successful outcome, then there would be an option for arbitration to follow that.

Senator ABETZ: And you could not cut off supply until after the mediation.

Mr Fett : Until the entire process is completed.

Senator ABETZ: So you potentially could not bleed them dry by keeping the mediation process dragging on whilst you refused to supply. You would have to continue to supply until the mediation was over.

Mr Fett : Not at all. It is probably important to point out that the evidentiary basis is: there is a product and they have either sold it or they have not. It is probably quite clear cut.

Dr ALY: Could you talk us through the logic of your boycott of retailers who are found to sell illicit tobacco? What makes you so sure that if you stop supply to a retailer that is selling illicit tobacco that it is not going to push them into selling more illicit tobacco and push them more into the black market? That is the first part of it. The second part of it is: how do you propose to oversee or police whether a particular retailer is selling illicit tobacco? Who takes the responsibility for that? Do you take the responsibility for that or do you propose that responsibility be given to law enforcement or a department? How does that work?

Mr Gregson : The answer to the second part of your question is straightforward. Enforcement of the law is not our responsibility; it is the responsibility of a multitude of law enforcement agencies, depending on which of the multitude of laws or regulations have been breached in the act of selling an illicit packet of tobacco, be that fine-cut tobacco, loose tobacco or cigarettes, all of which are sold. To answer the first part of your question is a little more complicated. Our concern is that the sale and supply of illicit tobacco has, to a significant degree, become embedded within the legitimate retail supply chain. That is the end of the problem that we are attempting to address through this proposed boycott. It is not a singular method that will defeat illicit tobacco. It is part of the mix that needs to be undertaken.

Dr ALY: Have you seen this in operation in other parts of the world or in other jurisdictions where it has worked?

Mr Gregson : Not that I am aware of. The Australian retail environment is significantly different to other retail environments elsewhere. The first part of your question intimates that a supplier of legitimate product, who is currently running a sideline in illicit tobacco, will be the subject of target under this boycott and as a result will move solely to illicit supply. It is in that instance, if a retailer does that, that all of a sudden they enter into a much greater category of illegal activity. As a result, we would expect that enforcement authorities would look at them more closely. It is interestingly one of the questions that the ACCC raised with us, and that was exactly our response to them as well.

Mr Powell : If I could add to that: Australia is the only country I am aware of where the department of health refuses to deal with the problem of illicit trade in any way. In every other country I am aware of, it is actually seen as part of the tobacco control process, and indeed the World Health Organization has promoted a treaty for that purpose as well. Australia is the only place where the department of health takes that attitude.

I would also say that it is not really an enforcement action. Individually, as individual companies, we have a trading agreement of some kind which at the moment we are perfectly entitled to terminate if people breach those terms. Illicit trade would be a breach of those terms, and Philip Morris has terminated retailers for breaching and engaging in illicit trade.

Dr ALY: But currently they are not in the terms. Are they in the trading terms at the moment?

Mr Dickson : No, they are.

Mr Powell : It is. We currently have trading terms, and we can and have terminated people or retailers or businesses who have engaged in illicit trade. The only real difference here is that we are seeking to coordinate together to make those measures effective. It is not really law enforcement; it is a contractual operation, but we would be doing it jointly.

CHAIR: Not for joy and merriment, I would think.

Mr Gregson : It is pretty rare that an FMCG company chooses not to sell to a retailer.

Mr Keulemans : Just to add to that, I think it comes back to the point that we have made about the department of health's position. If you look at their submission to the ACCC, they say, 'Noncompliance with tobacco plain packaging does not necessarily mean that a product is illicit.' To some extent that is a perplexing statement because surely if a product does not comply with the plain packaging act it is illicit. It should not matter whether duty or excess has been evaded.

For example, here is a Korean Dunhill pack, with a Korean health warning that unless you can read Korean you would not understand. That clearly is illegal under the plain packaging act. So I feel that that statement by the ACCC belies one of the key objects of the plain packaging act, which is to reduce the appeal of tobacco products. We think there needs to be clarity there. In the absence of the ACCC authorisation, we would say that the enforcement of the plain packaging act should be shifted from the National Measurement Institute, which we do not believe is necessarily well tasked to deal with the level of criminality that is involved in the illicit trade. The enforcement should be shifted across to a law enforcement agency or agencies. That would certainly be an effective measure if it were to be considered.

CHAIR: How many retail outlets of tobacco are there in the nation?

Mr Dickson : Around 30,000.

CHAIR: And do you have any rough estimate of how many of those would be dealing in illicit tobacco?

Mr Dickson : Not really, no.

Senator ABETZ: Of the 30,000 retailers, are they stand-alone tobacconists or local newsagents—

Mr Fett : Those are all retail outlets. That is, your supermarkets and convenience stores.

Senator ABETZ: One assumes that, sadly—and I usually champion these—it is the small business, the mum and dad business, that might give in to the temptation of selling the illicit tobacco, as opposed to your major retail stores.

Mr Dickson : That is correct. It is not grocery organised or grocery independent.

Senator ABETZ: So is it unlikely at the local IGA et cetera?

Mr Keulemans : It is unlikely.

Mr Powell : There are certainly some wide networks of fairly dedicated organised crime syndicates with dedicated illicit retail outlets. They might control 30 to 50 outlets selling chop chop or potentially other illicit products as well. They may be family businesses in an organised crime sense, but they are not of the kind you are talking about.

CHAIR: Of those 30,000 retailers, are there many that do not stock your products at all, amongst all three of you?

Mr Dickson : There are some, yes. I could not tell you how many, but there are some.

CHAIR: What would their business model look like?

Senator ABETZ: What do they officially sell?

Mr Dickson : We have come across some, typically through police activity that we have been to. You find a whole range, particularly Chinese or Asian brands—

CHAIR: So a tobacconist is selling completely 100 per cent illicit product, is it?

Mr Dickson : These are not tobacconists. These are typically Asian grocery stores that you find quite predominantly in Sydney's western suburbs.

CHAIR: Right.

Senator ABETZ: But you are allowed to import cigarettes, one assumes, made in other countries if you pay the tax?

Mr Gregson : You are, but they must comply with the plain packaging act in Australia as well.

Mr Dickson : And pay excise.

Mr Keulemans : To that point, as was raised in Senate estimates in early March, the reality is that under the plain packaging act, there has only been one fine issued by the Department of Health for infringement notices. British American Tobacco, last financial year, had over 590 individual notifications to the Department of Health of noncompliance with plain packaging. This comes back to this point: it would be a very strong deterrent at the retail level if you shifted the compliance element of the plain packaging act, or the enforcement of it, to an agency better equipped and tasked to do so.

CHAIR: In your application, was there anything where, if you did, say, cut off a retailer, you would advise some law enforcement agency as well?

Mr Keulemans : In terms of the ACCC application that we have made?

CHAIR: For example: you are granted exemptions under the ACCC?

Mr Keulemans : Yes.

CHAIR: You go down to Bill Bloggs's tobacconist and you find that he has got a couple of the named brands up as a front and he is selling illegal stuff. You cut him off. You inform all three groups under your authorisation with the ACCC. You cease supply. Is there a step where you would then inform a law enforcement authority?

Mr Fett : We are already doing that today without the piece about the ACCC application. When we find information regarding people that we think are breaking the law, we are already providing information to law enforcement agencies.

CHAIR: Are you finding that follow-up is actually happening from the authorities that you are reporting that to?

Mr Fett : To the extent that they are able to, they are. I think that is also one of the important things that we are here today to say. In our minds, there needs to be a national approach to this, a national illicit tobacco strategy, to bring everything together. You do have a range of law enforcement agencies across Australia that have responsibility, whether it be state and territory police, federal police, Border Force, the ATO and, in some instances—in Victoria—you have got local councils that are responsible for investigating these sorts of things. One of the key things, from our perspective, that needs to happen is that there is a way in which this is all brought together under one strategy, preferably where there is one law enforcement agency responsible and appropriately resourced to deal with this problem. Because although we do provide that information to law enforcement agencies, it is not always something that they are properly resourced for—

Senator ABETZ: Or consider core business?

Mr Fett : or consider a core problem. I think part of the problem is that this illicit tobacco issue has not been considered quite the sophisticated criminal problem that it realistically is in Australia. So without a real acknowledgement of how serious this problem is in the one agency looking after it, it is very hard—although we do provide that information—to get that action always acted upon, although I have to say that they do a great job.

Senator ABETZ: For want of a better name, would we be best served by having a national illicit tobacco strategy, for example? I assume you gentlemen are aware of what the UK have done.

Mr Keulemans : Yes.

Senator ABETZ: Would you favour that sort of approach?

Mr Keulemans : Indeed. Senator Abetz, I think, as you pointed out at the last hearing, that when you have shared responsibility—and I am paraphrasing—sometimes that means there is no responsibility.

Senator ABETZ: I think I might have described it like a greasy pig—

Mr Keulemans : I think you may have done.

Senator ABETZ: that you can never catch.

Mr Keulemans : I think that is the critical point: having an agency—whether it is Border Force—with a mandate. Yes, we agree that the UK strategy has been successful. Since 2011 there has been a 50 per cent increase in prosecutions under that strategy, and it enables them to, in a methodical way, identify roles and responsibilities and have, dare I say, key performance metrics tasked—and, indeed, for example, the patchwork quilt of different penalties enforcement regimes in different states and territories is something that this strategy could address.

CHAIR: Finally, where are things up to with the ACCC at the moment? They have done the draft, which was a rejection. You have gone back, re-presented it and said, 'Okay, how about we do this, this, this and this?' Have they given you a date when they will make their final decision by? Are they looking at other evidence?

Mr Gregson : The ACCC's process requires them, after a draft determination, to offer a public hearing to the applicants. The applicants, in this instance, took that up. We held the public hearing in Melbourne. Attendance was also available. That was in March. We have provided them with some proposed amendments to the proposed agreement, and they have recently asked for an extension—

Mr Dickson : Of up to three months.

Mr Gregson : of up to three months, which we have been happy to grant them, because we need this.

Senator ABETZ: Yes. Also, hopefully they are giving your suggestions serious consideration and have not summarily dismissed your further arguments.

Mr Gregson : We have no reason to doubt their sincerity and we look forward to a final determination.

CHAIR: When would you expect that final determination to be handed down?

Mr Dickson : I think it is in the vicinity of late June, early July, so that is about three months.

Mr Keulemans : And just to add—every concern that has been raised, we believe that we have fulsomely responded to with an appropriate solution.

CHAIR: I want to ask a question on the customs bond procedure, when you are importing cigarettes—obviously there is a very large amount of duty that is payable on the importation of your product from overseas. Are you putting any of those goods into customs bonds, at the moment, to defer the duty payments?

Mr Powell : I think that is general practice across excisable goods in companies involved in their importation, yes. I can speak for Philip Morris—we certainly do, and then there is quite a detailed reporting process that we engage in to ensure that everything matches up and tallies.

CHAIR: That obviously helps the company's cash flow as well, not having to fork out the import duty when it arrives. You are doing it later, down the track.

Mr Powell : That is correct.

CHAIR: Do you have any idea of the value of goods held in customs bonds that you have at the moment?

Mr Gregson : We do, but, on security concerns, I do not think we would be too happy to disclose that publicly.

CHAIR: Okay. This committee has had some other evidence that the security in those customs bonds is perhaps not as good as it should be. Would any of you like to make any comments on that?

Mr Gregson : I certainly cannot speak on behalf of our competitors, but, on behalf of Imperial, I can tell you that we are very pleased with our security arrangements.

CHAIR: So you think you would have every single cigarette fully accounted for?

Mr Gregson : Cigarette sales in Australia are counted in billions.

Mr Powell : If I could just say, speaking from a Philip Morris point of view, we do daily stocktakes on those goods. There are dual registers kept between our logistics provider and us. There is an incredible amount of process to ensure that everything tallies, and tallies on a daily basis. I should say though that that is something that we voluntarily do to ensure that we are scrupulous. I am not suggesting the companies of my colleagues here do not do that, but I think that that is probably found wanting in some of the others. And I think previously the Australian National Audit Office gave some evidence before this committee—and I have taken a look at a report that they did—and I think, not only from their report but also, more broadly, from seizures, raids and other enforcement action against people who are misusing bonded warehouses, that it is a real revenue risk, and I think it has been proven to be a real revenue gap.

CHAIR: Mr Gregson, in your initial comments you said that about 14 per cent of the market for cigarettes is avoiding the duty, and you had that at about $1.5 billion under current duty rates. Did you include in that the loose-leaf imported tobacco, or was that separate?

Mr Dickson : That is included in the estimate, yes.

CHAIR: And do you think that the loose-leaf is a similar quantity to cigarettes?

Mr Dickson : It is about 55 per cent, so it is a bigger part of the market, and packets are about 45 percent.

CHAIR: So 55 per cent is what is described as the pouch—that people roll their own cigarettes?

Mr Dickson : Sorry—of illicit tobacco?

CHAIR: No, I am talking about what you call where you buy the loose-leaf tobacco as compared to a cigarette that is already fully manufactured.

Mr Dickson : Legal or illegal?

CHAIR: Legal.

Mr Dickson : I am not sure.

Mr Fett : Of the 14 per cent, about 55 per cent is chop-chop.

Mr Dickson : That is not the legal market though; that is the illicit.

Mr Fett : In the illicit market—is that the breakdown?

CHAIR: Both.

Mr Fett : That illicit market is 14 per cent of tobacco.

CHAIR: That is across all—

Mr Fett : Total tobacco.

CHAIR: That is across cigarettes you buy as a manufactured cigarette and basic chop-chop or loose leaf. Is it part of molasses as well?

Mr Fett : We do not count molasses.

Mr Dickson : Molasses is not included in that number. We do not include that. That sits outside.

Mr Fett : That 14 per cent is your counterfeit cigarettes, your contraband, your chop-chop and illicit whites. Just over half of that 14 per cent is in chop-chop, whether that be in manufactured tubes or in bags of loose tobacco, whereas 45 per cent is in those packets of factory-manufactured cigarettes.

CHAIR: So that is roughly fifty-fifty or 45-55. What about across the market itself?

Mr Fett : In the legal market?

CHAIR: Yes. Is the split similar in the legal market?

Mr Fett : There is a much lower share for roll-your-own tobacco in the legal market. It certainly is not fifty-fifty.

CHAIR: Is it 70-30 or 80-20?

Mr Fett : You would be closer to 80-20, I think.

Mr Powell : That sounds closer.

CHAIR: Therefore, there is greater illegal activity, or avoidance of duty, in what is effectively chop-chop?

Dr ALY: Relatively.

Mr Fett : That is correct at the moment—relative to the legal market, yes. The interesting thing is that it does shift. It is not a constant where you would say it is always 55 per cent chop-chop. I think it has been less than half in recent years as well.

Mr Powell : It is a market like any other. Not only does it shift but it is driven by factors. For example, in 2012, the penalties for importation of illicit tobacco were increased to a maximum 10-year jail penalty, but the excise offence for domestic growing was unchanged. Roughly since that time, we have seen increasing seizures by the ATO of domestically grown tobacco. Our observation of the market, and our observation of what is in field and from investigators, is that chop-chop has increased in that time. Things like that obviously drive—as people manage their risk, you see an increase in local growing, which had disappeared for a long time.

Senator ABETZ: But also, if you were caught with a lot of chop-chop and the police were to say, 'Where's this from?' you would not say that it was imported if you had been caught red handed. You would say: 'Well, we grew it wherever, but I'm not going to tell you where. But it was grown locally.' As a result, you would be charged, one assumes, because they could not prove otherwise as to where you got it from, and therefore you would get a lower tariff from the courts—or not?

Mr Powell : Optimistically, someone would be charged in that scenario. In practice, what we have found in many cases is that, if you cannot prove the point of origin as to whether it was imported or domestically grown, they are not charged at all.

Senator ABETZ: Oh, gee!

Mr Powell : One is a Customs Act offence and one is an excise offence, and, unfortunately, never the twain shall meet in practice, although I understand that that is currently being worked on. I believe it has been worked on for a number of years.

Dr ALY: Forgive my innocence, but is chop-chop also used for marijuana?

Mr Gregson : I do not think we would have any knowledge of that; I am sorry.

Mr Dickson : It is possible.

Dr ALY: It is possible that it is used to mix with other illicit drugs?

Mr Dickson : It is possible.

Mr Powell : There have been reports. I do not know whether this is general practice, but I have heard anecdotally of people who have tested positive for ice while driving—pensioners and people who do not look to the police like they are the kinds of people who necessarily consume ice, not that anyone should stereotype. They have put it down to consuming chop-chop tobacco that has been mixed with ice. We have definitely had reports of that from law enforcement and from people in the community.

Dr ALY: I was just trying to get at whether there is a market where chop-chop is used in other forms of illicit drug taking and drug use.

CHAIR: If the ACCC rejects this, do you have a plan B?

Mr Gregson : With respect, as I said in my opening statement, we are doing everything we can. Unfortunately, if we are thwarted at every turn, regretfully, the problem falls back on the government and the cost on the taxpayer. In terms of an industry boycott: without the approval of the ACCC, that cannot proceed.

Senator ABETZ: There is that saying that often applies in politics and in war: that the enemy of my enemy is my friend. Whilst the health department might see you guys as an enemy because of the product you promote within the marketplace, it would be helpful if they were able to cooperate with you to fight a bigger enemy, which is the illicit trade. That might be a good outcome.

Mr Gregson : We recognise the role of the health department. What we would like them to do is to treat illicit tobacco at least with the same degree of animosity as they do the tobacco companies.

Mr Keulemans : In that sense, as my colleague has mentioned, our interests are actually aligned. We are trying to limit the supply or reduce the supply of illicit tobacco. Outside of our application to the ACCC, as mentioned earlier, I do not think there is any silver bullet. That is why we are calling for a national anti-illicit tobacco strategy, which requires additional funding for the TST and better enforcement at all elements of the supply chain. At a retail level if we do not get the authorisation then, yes, we would like to see the department of health being more proactive in terms of enforcement. If, as we believe, the NMI is not necessarily the best agency to handle this issue then it should be transferred.

CHAIR: Or it could also be if government were inclined to make a special exemption to the competition act to give you some authorisation—it would have to go through the ACCC as well.

Mr Gregson : It certainly would have the effect that we are seeking with the proposed agreement.

Mr Powell : I think it is a case of a multipronged approach. We are looking at what we can do directly to assist and facilitate addressing this problem. However, as private companies there is no power or ability for us to address the serious organised crime that the Australian Criminal Intelligence Commission, the Federal Police, Border Force and everyone seem to acknowledge are involved. That will require a higher level and government-led investigative and coordinated enforcement approach. It probably needs policy backing that enables them to do their job. We are seeing some incredible efforts, particularly by the Australian Border Force. Even today the Australian Taxation Office announced a rather large seizure of illicit tobacco being domestically grown. But the laws they work with do not assist them in their task. You have to understand that law enforcement is going to put their best efforts behind what they can achieve with the resources they have got. So while this is so difficult for them to do, I am frustrated but I completely understand that they are doing their very best with what they have.

Mr Gregson : As long as this building continues to increase excise rates this problem not only does not go away but gets worse.

Senator ABETZ: And one assumes the only reason we have an illicit market is that they are able to undercut the legal product in price.

Mr Dickson : I will just put that into context. You can buy illicit tobacco of 20 cigarettes for about $13. The excise alone should be $12.35. The cheapest legal alternative at the very bottom end of the market is $21. There is a significant gap for the consumer.

CHAIR: There would be counterfeiting as well. Are you still seeing a prevalence of counterfeiting of your brand?

Mr Dickson : It is a relatively small problem. It is about one per cent or two per cent of the overall illicit market, so it is quite small in Australia.

Mr Fett : Fundamentally while there is such low risk and such high reward we are going to continue to see this problem. The reward obviously comes in the shape of excise in the price of cigarettes in Australia. What we can control and are calling upon the government to do is to increase the risk for these operators.

CHAIR: Thank you, gentlemen. We appreciate your time. As I said, you know this committee made a recommendation to the ACCC to accept that authorisation. Thank you, gentlemen, for your time.