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Parliamentary Joint Committee on Law Enforcement
Illicit tobacco

BUCCHORN, Mr Wayne, Assistant Commissioner, Department of Immigration and Border Protection

DALE, Ms Erin, Acting Assistant Commissioner, Department of Immigration and Border Protection

FORD, Mr John, Assistant Commissioner, Private Groups and High Wealth Individuals, Australian Taxation Office

GEDDES, Ms Linda, First Assistant Secretary, Traveller, Customs and Industry Policy Division, Department of Immigration and Border Protection

McCARTNEY, Mr Ian, Assistant Commissioner, Organised Crime and Cyber, Australian Federal Police

O'ROURKE, Mr Michael, Senior Director, Indirect Tax, Australian Taxation Office

WALSH, Dr Simon, National Manager Specialist Operations, Australian Federal Police


CHAIR: I now welcome the representatives from the Australian Taxation Office, the Department of Immigration and Border Protection and the Australian Federal Police. Welcome, ladies and gentlemen. The committee has received submissions from the ATO—submission 16 and submission 163; the Department of Immigration and Border Protection—submission 77; and the Australian Federal Police—submission 161. Thank you for talking to us today. We might start off with the Department of Immigration and Border Protection. Would you like to make a brief opening statement?

Ms Geddes : I do have an opening statement, thank you.

CHAIR: Fire away.

Ms Geddes : Thank you for inviting the Department of Immigration and Border Protection to appear at the hearing for the inquiry into illicit tobacco. Stopping illicit tobacco remains a priority for the department and the Australian Border Force. We detect, deter and disrupt the illicit trade of tobacco before the border, at the border and in the post-border environment. We are also responsible for managing the flow of legitimate trade across the border and collecting Customs duties and taxes on legitimately imported tobacco products.

In the seven months since we last appeared before this committee we have made significant progress in tackling illicit tobacco. As you may be aware, the government announced an additional $7.7 million in funding for the Tobacco Strike Team, as well as measures to strengthen illicit tobacco offences. This funding has allowed us to enhance the Tobacco Strike Team model and structure. The strike team has also built stronger ties with key international law enforcement partners involved in combating tobacco smuggling at various points along the supply chain. At the same time we have been progressing legislative change to strengthen offences which will allow our officers to better address the full range of offenders in the illicit tobacco trade. These measures will deliver more investigations, more prosecutions, more disruption activities and greater deterrence against the illicit tobacco trade.

We have also been working with partner agencies to explore ways in which the ABF can leverage their tools and powers to more successfully target and prosecute the most serious and organised of these criminals. The ABF has increased the number of operational activities that it is able to conduct, which has resulted in a number of important seizures being made and briefs of evidence being submitted. My colleague Assistant Commissioner Wayne Buchhorn will be very happy to speak about operational activity in more detail. We are also working more closely with the ATO, particularly in the warehouse environment. My colleague Assistant Commissioner Erin Dale will be able to speak in more detail of this.

It is a crime for anyone to bring tobacco across the border without paying revenue, but illicit tobacco is not just a risk to Commonwealth revenue. The illicit tobacco trade has serious criminal implications, with proven links to serious organised crime groups. The trade in illicit tobacco also undermines the tobacco prevention and control initiatives of the Australian government. The department and the ABF are committed to tackling the trade in illicit tobacco, to implementing comprehensive policy regulatory compliance and to enforcement initiatives to tackle this problem. Thank you.

CHAIR: We might go through all three groups first and then come to questions. The ATO?

Mr Ford : If I can, I just want to make a correction to the ATO's submission. At paragraph 13—it is page 5 of our submission—we refer to tobacco seizures through the 2016 calendar year. At paragraph 14, we say:

There have been no prosecutions, investigations or briefs to CDPP—

It is incorrect to say there have been no investigations. Obviously, to have seized the tobacco and destroyed it, we would have had to undertake an investigation and some of those investigations are ongoing. I just wanted to correct that.

CHAIR: There have been no prosecutions?

Mr Ford : There have been no prosecutions for those matters listed at paragraph 13—

Senator ABETZ: Or briefs?

Mr Ford : And there have not been any briefs. That does not mean that the investigations are not continuing.

Senator ABETZ: So we just delete the word 'investigations'?

Mr Ford : Just delete the word 'investigations'.

CHAIR: Any other opening comments, Mr Ford?

Mr Ford : No.


Mr McCartney : No, Chair.

CHAIR: There seems to be, anecdotally, a significant amount of illegal tobacco on the market in Australia. I know that in my electorate I could go around to dozens of small tobacconists' shops, and just from simple inquiries I have seen that they are selling illegal product. It seems quite surprising that, despite the prevalence of it, there has not been—as you are saying—a single prosecution.

Mr Ford : There have been prosecutions.

CHAIR: Sorry, in 2016, you are saying.

Mr Ford : Yes. There are a number of agencies that can undertake the prosecution function. I can comment from an ATO perspective.

CHAIR: Yes, okay.

Mr Ford : From an ATO perspective, we only have carriage over illicit tobacco that is grown or manufactured in Australia, so the Excise Act allows us to respond to those matters. As we previously gave evidence of, there is an issue of proving the origin of the tobacco. To get a successful criminal prosecution, we need to prove that the tobacco was either grown in Australia or manufactured in Australia. When you get it to a shop level, which is where you were talking about, we do not have the tobacco in the ground, nor do we know how it has been manufactured. Government has announced that the Department of Immigration and Border Protection and the ATO are working on some new legislation which will address that.

Senator ABETZ: Can I interrupt and ask: are you able to bring alternate charges such that, if you find illegal tobacco, you charge somebody with either having grown it or, alternatively, having imported it?

Senator O'SULLIVAN: Or possession without a reasonable explanation—

Mr Ford : The decision on a charge, the decision on the way the matter is prosecuted, is a decision made by the CDPP. When we put our brief of evidence to them, they make the decision on whether that is open. My understanding is that it is not open to the CDPP to lay a charge of 'either this or that'; they need to go with the one.

CHAIR: Has your organisation done any modelling or forecasting of the potential for greater illegal activity as the rate of tobacco excise increases; therefore you would need to do more surveillance in that particular area?

Mr Ford : We are actively working with both law enforcement and industry in monitoring the current environment. We have a number of sources of information from industry where they provide us with intelligence in regard to the growing of tobacco in Australia. We also have ongoing liaison with both the state and the federal law enforcement agencies. We have a tax evasion referral hotline. So, through those data sources, we are actively looking at whether we are seeing a spike in domestic growing. We are just seeing a continuing trend of low-level numbers of domestic growing. That is not to say that we are not continuing to monitor, because the point you are making is well made that there is probably an increased opportunity or benefit for people to grow tobacco as the excise rate increases, but we are not seeing that in the operational results at the moment.

CHAIR: Could I put that same question to the Department of Immigration and Border Protection. With the projections or the legislation we have in place at the moment, where we are going to see increases in the rate of duty, have you done any modelling or forecasting and looked at whether you expect to see a greater rate of people trying to import illegal product, and, if so, what steps have you programmed down the track in years to come to counter this?

Ms Geddes : I think it is fair to say that, as you have greater taxes on tobacco, organised crime groups will seize on that to look at increasing the illicit market because it brings them greater revenue. But again, with the money that we have—and I might ask my colleague the assistant commissioner to talk—we have been given additional money to operationally focus on this market through the Tobacco Strike Team.

Senator ABETZ: But it is never enough!

Ms Geddes : It is never enough!

Senator O'SULLIVAN: Before we leave that subject area—

CHAIR: Fire away, Senator O'Sullivan.

Senator O'SULLIVAN: I want to pick up on your previous answer, Mr Ford, with respect to the scope of your ability to prosecute. Are you telling me that if you conduct an investigation and become satisfied that an individual has a product that is probably of illicit origins but you fail to be able to prove some of the elements of the charge, such as the source or whether it was grown domestically in Australia—which is to do with perhaps a jurisdictional question on whether you prosecute at all—that you have to walk away? There is no charge that reverses the onus in terms of possession of a suspected illicit product?

Mr Ford : We certainly don't walk away. We look at whether there is unexplained wealth attached to that, and we will use our administrative powers or work with—

Senator O'SULLIVAN: Which is a reverse onus in that prosecution.

Mr Ford : It is not a prosecution; it is administration power. In the administration of the tax law, we would tax the person on the unexplained wealth. Maybe I could talk about some of the complexities in this space.

Senator O'SULLIVAN: Just before you do that: they have $3 million that you think is illicit wealth. You tax them $1 million, and that is that?

Mr Ford : If they had $3 million that was illicit wealth, we would apply the marginal rates and apply a penalty starting at around 75 per cent, with an uplift to 90 per cent for the following year, plus interest. So, in my experience, if they incurred wealth of $3 million, normally, because of both the penalties and the interest, there is not much left over from the $3 million by the time we raise the assessment.

Senator O'SULLIVAN: Beyond that, unless you have these specific elements—and I understand about having to prove the elements of a charge and what is involved in a brief—and putting aside your ability to respond administratively, it seems to me that in other places there was always some other measure, a catch-all measure—when I was in the police, we used to call it the 'barbed wire and other entanglements act'—that sort of reversed the onus on them to prove up, I suppose, the provenance of the product.

Mr Ford : I have to administer the prosecutions under the Excise Act. It does not mean that we do not talk to other law enforcement agencies about what is available under their acts as well. Let's take a recent experience. We responded to tobacco being grown in a field. When we went and talked to the owner of that field, they told us the properly had been leased. When we went and had a look at who had leased it, we found that they had used a false identity to lease it. We have good intelligence that it is actually a share copping arrangement, so there are four or five organised criminals behind the crop. Without the ability to get behind the false identity of who leased that land, it is impossible to actually identify a suspect.

Senator O'SULLIVAN: Typically, in those circumstances, if it were a crop of substance, say, cannabis sativa, there is a prospect that law enforcement would conduct an exercise of surveillance and make quite exhaustive efforts. I suppose one of our tasks here is to find out whether there are recommendations to be made on how you might be able to have better powers or be better resourced. That is the burden of my line of questioning. It is not to find that you are not doing a good job.

Mr Ford : I understand that totally. Again, another example in our most recent illicit tobacco cases is one where we did respond with the Victorian police. There was cannabis growing on the premises. They undertook—what the police do—surveillance et cetera for a period of time. That is not beyond what we do, but we do that in partnership with other agencies. Often when this intelligence comes in, we will sit down with local police, the Federal Police, other agencies and the Australian criminal intelligence commissions and talk about what is the best way to respond to that matter. If it is cannabis, they take the cannabis and charge them. We will plough in the crop so it cannot be grown and then we will look at the unexplained wealth and tax those that have been there as well.

Senator O'SULLIVAN: Just coming back to the unexplained wealth: if it is good enough to take 90c, what is the thinking behind leaving them with 10c?

Mr Ford : Because that is what the law allows me to apply.

Senator O'SULLIVAN: So that is a limit within the law?

Mr Ford : The tax act makes all gains from illicit activity taxable. It denies any deductions in relation to that illicit activity, so they cannot claim deductions for fertiliser and things like that. Two, it then says that the onus of proof is on the individual to say how they sourced the income—

Senator O'SULLIVAN: I get that.

Mr Ford : And then it says there are a range of penalties we can apply, depending on the behaviour we see. Those penalties—

Senator O'SULLIVAN: So you could reach 100 per cent recovery there?

Mr Ford : The maximum penalty we can apply is 75 per cent in the first year with an uplift of 15 per cent for second, third and fourth year of non-compliance.

Senator O'SULLIVAN: I do not want to labour this but I am interested in why we just do not take the lot and then leave the onus on them to prove that some of it is—

Mr Ford : At times, through different acts, and, again, working with our partners rather than taking an ATO approach, we might talk to the Criminal Asset Confiscation Taskforce with the AFP and look at it as a proceeds-of-crime matter and have it restrained that way.

Senator O'SULLIVAN: I think everyone has picked up on the burden of the question. I would be interested if any of the other agencies have ways where they could compensate to take that 10 per cent. I have heard about the proceeds of crime and so on.

Ms Geddes : If I might add to my colleague Mr Ford. We are working, between the immigration and border protection department, the Treasury and the ATO, to make those legislative amendments. This will address the issue around proof of origin—about whether it be home-grown or brought into Australia—and the difference in penalties that exist between the Customs Act and the Excise Act, and also increasing the additional tobacco-smuggling offences that we require. This will also address the reverse of onus issue. That will go through government next year. We are still working through that, but that is the intent of the work we are doing now in order to resolve some of those issues.

Senator O'SULLIVAN: Just as a side interest: when you talk about the origin of growth, what are the botanical capabilities here with plant varieties, soil types or grain types that are picked up, as you do with forensic work?

Ms Geddes : You are asking a technical question beyond my knowledge and experience, but someone else may have that.

Mr Ford : I am happy to talk about the ATO's experience. We have engaged experts in the past to have a look at the DNA of the tobacco plant. The advice we get from those experts is that the intergrowth of the tobacco is now so prevalent that it is impossible to actually identify an Australian strain as compared to a strain grown in other regions. It was one of the first things we did when we had conversations with the DPP about proving the proof of origin; we engaged experts to see if we could actually say, 'Can you say beyond a reasonable doubt that that was grown in Australia?' and the experts were unable to do it.

Senator O'SULLIVAN: From my point of view, being a dirty old Nat, I have interests where any plant product comes into this nation that is endeavouring to try to avoid the traditional biosecurity pathways that we have, to see that we do not find ourselves with unintended consequence here—even on the part of the criminals—with some biosecurity issues. Is there any attention when you do this testing? My point was: are there any trace elements so you might be able to say that this has come from somewhere else; that has not been born here in Australia?

Mr Ford : First of all, I would just clarify that we do not do ongoing testing; we test it with experts at a point in time. Can you do this? The answer was no.

Senator O'SULLIVAN: But my considerations are greater than your elements of law enforcement. I am now spraying a bit into plant material coming into this nation that has an additional risk. So I am interested in the protocols. There may be none, they may be under review or they may be under construction. I am interested in the biosecurity aspects of a plant material that has come into the country, potentially illicitly, which could be detected through some forensic work that looks for trace elements that are not consistent with or are nasty to—for want of a better term—other industries in the country. You do not do that?

Mr Ford : We do not do that, from an ATO perspective.

Mr O'Rourke : You cannot import any tobacco seed, plant or leaf without a licence that is issued by the tax office.

Senator O'SULLIVAN: 'You should not', you mean.

Mr O'Rourke : The department of agriculture and AQIS—or whatever they are called now—certainly look out for that.

Senator O'SULLIVAN: But Mr O'Rourke, what you are saying is that you should not. There are laws to say what the pathway is, but that does not mean you cannot or do not come through with a pocket of seeds or a container full of tobacco grown in Indonesia or somewhere else. That is my interest. Crack me off when you are ready, Chair. Has this question been asked and answered—this broader biosecurity question?

Mr Buchhorn : In terms of the illicit tobacco that comes in or the legitimate tobacco, we generally work with the department of agriculture, but not in the terms you are talking about in the sense of identifying potential threats to the environment, because most of it is obviously in smokable form.

Senator O'SULLIVAN: Mr Buchhorn, again, we are in no position to set a course for you, but could you at least consider this: perhaps treating the department of agriculture as a concurrent agency to see whether they would like to take a sample of illicit tobacco when you are uncertain of its origins, particularly if there is a body of evidence to suggest it may have come from another country, to see if they are not interested to have a bo peep at it for 20 minutes to see that there is nothing nasty about it—no strain that will wipe out our wheat crops or all our cockatoos or something?

Mr Buchhorn : I think we do run it past the department of agriculture in that sense, Senator.

Senator O'SULLIVAN: What does that mean? Do they take a sample and physically do some sort of forensic testing?

Mr Buchhorn : They will give us the all clear, for want of a better term. I will confirm that categorically.

Senator O'SULLIVAN: Yes, if you could. On some other day I will be asking this question again, just to see how you have gotten on with it.

Senator ABETZ: I have a number of questions. This is being addressed to the ATO: first of all, in your opening statement you told us in paragraph 13 about the illicit tobacco seizures. In your submission it says that on 8 February, 45 acres of illicit tobacco crop were seized. This is, between then and now, enough time to have a child—over nine months—and we still do not have a brief going to the DPP.

Mr Ford : I would have go and look at the specifics of that matter, but in a general sense, as I have said in my previous evidence, I suspect that this will be run by an organised crime syndicate probably using false identities to lease the property. I am happy to have a look at that specific one. It may well be that it is still under investigation; I am just not sure.

Senator ABETZ: That brings me onto another bracket of questions. Basically, this is organised crime we are talking about in the vast majority of cases.

Mr Ford : We crosscheck our information in terms of the intelligence that is provided to us by law enforcement agencies, et cetera. The vast majority of cases we can reference back to things like the Australian Criminal Intelligence Commission's list of organised criminals. So yes, our experience is that it is organised crime.

Senator ABETZ: And AFP, similarly? It is not the average punter thinking, 'This might be a make-rich scheme for me personally,' and acting as a lone wolf; it is more organised crime in both importing and growing?

Mr McCartney : There is a mix of people involved. The reality is the perception of low risk, high profit. Again, it is attractive to some elements of organised crime. Through the work that we conduct with Taxation and ABF, it is part of the focus for us.

Senator ABETZ: Is there any suggestion or evidence that bikie gangs are involved?

Mr McCartney : There has been some crossover, but, in terms of OMCGs having a primary focus on the importation of tobacco, we have not seen that to date.

Senator ABETZ: Are you able to able to describe the organised crime groups in any way?

Mr McCartney : I think it has been detailed in a number of the submissions. There are significant links to Asia and Middle Eastern organised crime. It has been a consensus right through the submissions from each of the agencies appearing here.

Senator ABETZ: Is there any evidence of this activity being used for money laundering, AFP or ATO?

Mr McCartney : There are two aspects to it. In terms of our involvement, obviously ABF have a primary focus of detection and investigation of the importation of illicit tobacco. Our involvement is when we start to hit upon significant elements of organised crime. In our submission we have detailed a number of cases. In Operation Minium in 2015 we arrested, with New South Wales Police and with ABF, 15 people of a significant organised crime syndicate. That is the type of work that we do. Ultimately, it is all about the money and following the money. A priority focus of the AFP, and my colleague from Taxation has noted this, is through the AFP-led Criminal Assets Confiscation Taskforce. We work closely with each of the agencies here today. It is about attacking the profits from that sort of criminality. We have detailed in the submission that $8 million was linked to an organised crime syndicate. We have restrained assets. Currently we are working particularly with the new tobacco task force. We have four matters that have been referred to the Criminal Assets Confiscation Taskforce for restraint action, under proceeds of crime, to the value of potentially $10 million.

Senator ABETZ: Is there any evidence of money laundering? Is that a significant component?

Mr McCartney : In terms of money laundering, once they create a profit it is an illicit profit, and once they move those funds that is money laundering. I go back to the case in 2015. They were charged with a predicated offence related to illicit tobacco, but a number of them were also charged with money laundering offences because they disguised the profit and moved it through various methods and moved that money offshore.

Senator ABETZ: Is it possible, to your knowledge, to make a connection? There are Middle Eastern crime syndicates; there is money laundering, sending it offshore. Is there any suggestion it might be going to terrorism?

Mr McCartney : No, there has been no connection at this stage.

Senator ABETZ: Or no connection found.

Mr McCartney : No connection found. Obviously, it is an area that we take a strong interest in, but there was no strong connection found.

CHAIR: I would like to ask a couple of questions about the national mail system being potentially used for smuggling cigarettes now and in the future. Do you disclose how many actual seizures you make through the general mail system? Is that something that has been disclosed?

Mr Buchhorn : There are a number of figures that we are putting together in relation to the smuggling of illicit tobacco through the international mail system. It is only relatively recently that we have started to holistically keep those figures, but certainly since January this year we can identify the number of detections that are coming through the international mail stream. That is one of four major entry points: sea cargo, air cargo, independent or individual travellers, and obviously the international mail stream.

CHAIR: On the mail stream, is there a certain percentage of those small courier shipments—books from Amazon and things like those smaller parcels—that gets X-rayed? Is there a percentage that goes straight through? How do you actually tackle that? That might be more for the Department of Immigration and Border Protection.

Ms Dale : In the international mail, when the article comes through we apply a risk-based approach. Where we actually deem them to be high risk, we will actually put them through the X-ray and we use profiles and alerts, and those profiles and alerts are developed from past detections and intelligence holdings. Also, we share information and intelligence from other countries. Those profiles and alerts will cut across whatever the information is, but what we cannot risk-assess will actually go through an X-ray process.

CHAIR: With that extra $7 million of the funding you got, is any more of that funding going to the international mail detection?

Mr Buchhorn : The $7.7 million was focused towards the Tobacco Strike Team, and what we did with that money was to triple the size of the Tobacco Strike Team. We have gone from 10 to 30, which includes our ability to work more closely with our domestic partners and, importantly, our international partners. We have had, we would suggest, a number of successes on the back of that $7.7 million, but I cannot state whether any of that money specifically has gone into enhanced mail screening.

CHAIR: Have there been any technological improvements that make it easier to detect tobacco? Tobacco is something that has a fairly strong, pungent smell. Is that something where you have detection dogs at airports? Is there anything else you are doing in that particular space?

Ms Dale : Yes, we continue to improve our detection capability and we also have a major capability area within the departments looking at new and emerging technologies, and we also continue to train detector dogs to—

CHAIR: Are the current dogs specifically trained to detect tobacco?

Ms Dale : That is right, yes.

Mr Buchhorn : There was a trial in Melbourne in 2015 which identified a number of positive outcomes with the tobacco detector dogs, and we are using them on a much more regular basis. Four additional tobacco detector dogs are now in operation, and they have been trained for leaf tobacco, cigarettes and molasses tobacco, which is the tobacco used in water pipes.

CHAIR: Would you have the same dog that would do cannabis as well, or would they be separate?

Mr Buchhorn : I would have to confirm, but I think they are separate.

CHAIR: Is that something you would look at increasing the role of across airports as this rate of duty increases? In Singapore, a carton of cigarettes duty-free is $40. Back in Australia, it is going to be $800, so at two cartons of cigarettes I am paying for my airfare. I would imagine this would be something that we would need to look at in the next couple of years, even increasing the crackdown so Australians know that, if you try and put a packet of cigarettes in your luggage instead of bundling them up amongst your shirts, there will be a pretty strong chance you will get caught.

Mr Buchhorn : That is something that ABF are particularly focused on: to try and disrupt the importation of illicit tobacco through all modes, from the very small—as you say, the two cartons from Singapore—to the very large coming in through sea cargo containers. We are very focused to try and identify and attack all of those for the deterrent aspect, particularly as the duties rise over the next period.

CHAIR: I just have another line of questions to ask, on the jurisdictional divisions about who has responsibility. If there is a small tobacconist in the suburbs of Sydney, Brisbane or Hobart, who would actually have jurisdictional responsibility for policing that? Is it the AFP? Is it Border Protection, since it is likely to have been illegally imported? Is it the Taxation Office? Is it the local state police force? Where is the first port of call of that?

Mr Buchhorn : There are a number of jurisdictional responsibilities in that. Health and those sorts of agencies also have some jurisdiction in terms of the warnings on the cigarette packets. Obviously the ABF have some jurisdictional responsibility is smuggled, and we find ourselves in a similar position to our colleagues from the ATO in terms of needing to prove that the particular tobacco in the tobacconists was—

CHAIR: Let me give you an example. A law-abiding citizen goes to buy something from a tobacconist's shop and he is offered illegal product. He does not say anything to a shop. He thinks, 'I need to report this is unlawful activity.' Who should he be contacting and who would then have the responsibility to go inspect that shop or take action? Is it Border Protection? Is it the state police? Is it the AFP? Where should that citizen go first to report?

Mr Buchhorn : We would be very keen to report it to the ABF through our border watch or any of those sorts of available sources because it builds for us an intelligence picture. We could then take action if we could identify it as smuggled or illicit tobacco, but the difficulty is that some of the tobacco in the packets looks exactly the same as the stuff that is brought in legitimately. Obviously the pricing is a very good indicator. But state and territory policing jurisdictions could also take action if they were so inclined.

Senator ABETZ: There are state licensing requirements to be a tobacconist, aren't there? You need a state licence, a local government licence or something, don't you?

Mr Buchhorn : I am not sure, to be honest.

Senator ABETZ: Can anybody sell tobacco?

CHAIR: I think you need a tobacconist licence.

Mr O'Rourke : Only some states. That is outside our control, but only some states have them.

Senator ABETZ: Right. I was wondering how you can ping or penalise the actual retailer.

Mr Buchhorn : As I said, it is difficult with the smuggled tobacco because of the difficulty in proving that that particular tobacco, whether it is cigarettes or whatever, was brought in through the border illicitly.

Ms Geddes : But that is today. Through the legislative changes that we will seek into 2017, that it what we are trying to address. It makes it easier.

Senator ABETZ: Good.

Mr Buchhorn : That is the reverse onus that we are trying to get through.

CHAIR: If an average law-abiding citizen phoned the AFP and said, 'The tobacconist on Main Street is selling illegal tobacco,' do you follow through yourself or do you then pass it on to the state police agencies to go and inspect? Does it then go to Border Protection? Who actually would make the—

Mr McCartney : I think that, in terms of intelligence, there are very mature working relationships between each of the agencies that are here today. The first response would probably be ABF. If we received that information, that is something we would probably pass to ABF in the first instance in terms of building that intelligence picture. If we were looking at something much larger in terms of the involvement of organised crime, that is when the AFP would come into that. The tobacconist might pass the intelligence to the state police or they might pass it to the AFP, but, given the mature relationships we have with the state and territory police—

CHAIR: But who actually has the responsibility of doing a follow-up and going into that particular store? Do they need a search warrant issued from the courts? Can they walk in and check? I am asking this question because there seems to be a great prevalence of illegal product traded and sold openly in many outlets throughout the country.

Mr Buchhorn : Certainly from the ABF perspective we could take individual action if we could prove that the tobacco was smuggled, but the practical reality is we would be more focused on getting that information and trying to build the intelligence picture to move further up. Rather than targeting the retailers on an independent basis, we would much prefer to identify the syndicate that was bringing it in in much larger numbers, because they are the ones who are making the enormous profits and they are often the serious organised criminal groups that we want to have a particular impact on. So that would be our principal focus.

Senator ABETZ: So the reality is that none of you could charge a retailer?

Mr Buchhorn : We could if we could prove that the tobacco in the retailer had been smuggled into the country.

Mr Ford : And for the ATO, domestically-grown or manufactured.

Ms Geddes : But in the future we are trying to remove the requirement to have proof of origin to be able to prosecute. So if we can remove that it does not matter whether it has been home-grown or smuggled, it will make it easier for us to prosecute.

Senator ABETZ: Can I just quickly ask: between home-grown and imported, what is the division? Do you have a handle on how big the problem of illegal tobacco actually is? Are you able to put a quantity, dollar value on it? Anybody?

CHAIR: I will just add to that question: do you pay any attention to those KPMG reports?

Ms Geddes : Yes. We work very closely with the tobacco industry. We come together to discuss the outcomes of the KPMG report. It is something that the Department of Immigration and Border Protection and the ATO are working on, around understanding exactly what you have asked—the market, the size and the percentage.

It is very complex, and we are looking at different methodologies. Hopefully, we are confident that we will have our own estimate next year. But, certainly, we are very heavily engaged in that—

Senator ABETZ: But this has been a problem for many, many years—

Ms Geddes : Yes.

Senator ABETZ: and we still do not think we have a handle on the size of it. If I were in the blame game, who would I want to blame for not having a proper handle on this? None of you, of course!

Let's move on. It is concerning that we do not have a handle on the size of the problem, because if we do not have a handle on the size of the problem we do not have a handle on the size of forgone revenue and we then, realistically, do not have a handle on why my own government provided $7.7 million for a task force. One assumes that was a good educated guess, but based on nothing substantive.

Ms Geddes : Yes.

Mr Ford : Estimating the size of the problem is obviously difficult, because people are in the business of hiding it. It is not something that is an overt activity; these are criminals. What I can say is that if you have a look at the domestic seizures versus the seizures that come across the border, from our annual reports we believe it is predominantly an imported product rather than domestic growing. Then, when you ask how much the imported size is, as I said, people take steps to hide it, so it is hard to quantify. As my colleague and the Department of Immigration and Border Protection staff said, we are working to make an estimate but we are trying to estimate what is an unknown.

Senator ABETZ: Yes, but this has been going on for ages. I would have thought that you might be of the view that you intercept five per cent, 10 per cent or 20 per cent—whatever it might be—and then if you intercept so much then you can make the calculation as to how much actually comes into the country and how much is forgone. Or with that which is grown locally and domestically, we assume that which is discovered represents, let's say, 30 or 40 per cent of what is grown and therefore you can make that out. But that we do not actually even have a rubbery or a good guestimate as to the size of the problem of illegal tobacco I must say is concerning. So all strength to your arm in trying to come to a figure.

I was going to ask you a range of questions as to what percentage you think is grown domestically, as opposed to that which is imported, and then of that which is imported how much comes by mail, air, sea or individual passengers et cetera. Is anybody willing to proffer even rough guesses?

Mr Buchhorn : Not necessarily in terms of the size of the illicit market. But certainly, the ABF is working to be in a position to identify which particular streams the illicit tobacco is coming in on in terms of that which we have identified—so, sea cargo versus air cargo, or mail or on the traveller. Our figures are progressing on that, and that is very much a work in progress. As my colleague indicated, there is a lot of work going on in terms of trying to get that very educated guess, given that it is an illicit market, as to the size of that illicit market.

Senator ABETZ: And the Tobacco Strike Team—who is trying to put that together? Who is actually responsible for trying to get all this information together?

Mr Buchhorn : My understanding is that, certainly in the Department of Immigration and Border Protection, they are doing some work with other partner agencies to try and come up with an agreed figure. As best estimate—

Senator ABETZ: So you guys are the lead agency to try to determine that figure?

Ms Geddes : We are both working jointly—between the ATO and Immigration and Border Protection.

Senator ABETZ: This is the greasy pig-type answer—when you think you have somebody, then it slips through your hands. I want to know who is actually responsible. With whom does the buck stop?

Ms Geddes : There is a shared responsibility between us both. We look at that which—

Senator ABETZ: Shared responsibility? Sorry, but that usually means nobody takes actual responsibility.

Ms Geddes : We are responsible for imported and the ATO is responsible for that which is home-grown, so it is truly a shared responsibility.

Senator ABETZ: Do we have a tobacco strike team or an interdepartmental committee, or something?

Ms Geddes : We do. We have the tobacco—

Senator ABETZ: Who is the lead agency of that IDC?

Ms Geddes : I will give you the—

Senator ABETZ: And do not tell me it is shared. Surely, there is a lead agency?

Ms Geddes : No, it is not shared, but I can give you a little bit of history.

Senator ABETZ: Yes, please.

Ms Geddes : I chaired, for whole of government, the IDC up until, I think, around mid-this year, when we handed that over to the Department of Health. The Department of Health has expanded on illicit tobacco to tobacco, and we are heavily involved in participating in that IDC. We are all represented at the meeting, but the Department of Health chairs the tobacco IDC.

Senator ABETZ: So that is a hospital pass, is it, to the health department?

Ms Geddes : No. It is—

Senator ABETZ: I understand that that is how it operates, so we should, therefore, in due course be talking to—

Ms Geddes : The other thing, if I may, is that I chair within the department the industry advisory group on illicit tobacco. That brings our operational elements together within the department with the major tobacco companies, as well.

Senator ABETZ: Why has the health department taken it over from, in effect, yourself, I understand? Was that something you shunted off because you did not want it, or was it a government decision?

Ms Geddes : It was an agreement between the Department of Health and our commissioner, but it reflects the Department of Health's policy role in tobacco writ large, where we manage it at the border—that is our role—but the Department of Health has a much broader remit in tobacco.

Senator ABETZ: The Department of Health, clearly, has a very important role from a public policy health point of view, but there are law and order, criminal gangs and forgone revenue as well. And one wonders how excited they are about the rule of law, criminal gangs, forgone revenue et cetera as some other departments might be. What percentage of the tobacco that is smoked in Australia is from an illegal source? Do we have any idea on that?

CHAIR: Can I ask that another way: the KPMG report has it at about 14 per cent. Do you have any reason to believe that is not accurate?

Ms Geddes : I do not know. It is a guesstimate. We do not have any evidence to suggest that it is wrong. It could be higher, and it could be a little bit less. That is the work that we and the ATO are working on and, hopefully, through the work that we are doing we will have a credible estimate next year.

Mr Ford : Could I take the question on notice? The ATO has met with KPMG. We have been through that report, we have had a look at their methodology. I understand we have some concerns around the veracity of some of the assumptions they have had to make. You have to make assumptions when you are coming up with these issues. I am not across it in enough detail to provide you with the evidence today but, if I could take it on notice, I can give you some views.

Senator ABETZ: That would be good. But if I were the health department, my task is to try to stamp out smoking. As 85 per cent of my task relates to legal product, why would I be concentrating that much on the 15 per cent?

But from our point of view—law and order, criminal gangs, criminality, money laundering and forgone revenue—that might be something which ought to be exciting agencies a bit more than just the health department, which might be more focused on the health issue—not only that, but concentrating on the big percentage.

Ms Geddes : As I said, the IDC is for all of us to come together. It is a shared problem, and that is where we are able to exchange information. We are working on reform measures around the illicit tobacco market, and I can assure you that, with the Department of Health chairing, they are giving it as much airtime in that IDC as I had in the past.

Senator ABETZ: That is reassuring, and hopefully we will get some figures in due course. Around the world, I am told, a number of countries have implemented national illicit tobacco strategies. Is that correct, and do we have one in Australia?

Ms Geddes : Within our department, we have a departmental illicit tobacco strategy.

Senator ABETZ: First of all, do other countries have national illicit tobacco strategies, to anybody's knowledge? I do not want to mislead you, but it has been suggested to me that there are such things as national illicit tobacco strategies in other countries. Have any of the federal departments looked at how they work in other countries? Do we have a similar body here?

Mr Buchhorn : One of the things that I mentioned earlier about the additional funding for the Tobacco Strike Team was to work with our international partners, and one of the projects that we have in relation to that is to develop a regional illicit tobacco strategy so that we are working with our partners domestically and, more importantly, internationally, particularly for the source countries and the transit countries, so that we can attack it collectively for all those agencies that have an interest in attacking the illicit tobacco trade.

Senator ABETZ: Can I go across the ditch to New Zealand. Do they have a national illicit tobacco strategy?

Mr Buchhorn : I would have to take that on notice.

Senator ABETZ: How are they cooperating with other countries? I think you said South-East Asia and the Middle East were the two main sources.

Mr Buchhorn : Yes.

Senator ABETZ: Can we latch onto them and work with them?

Mr Ford : I understand that HMRC in the UK have an illicit tobacco strategy. I recall seeing that. We have certainly had discussions with them. Fundamentally, the environment is a little bit different. They have the English Channel; we are an island. So getting the tobacco across the states of Europe et cetera can happen through road transport and things of that nature, whereas in Australia, as I say, we are an island.

Senator ABETZ: I have heard reports that petrol tanks in trucks are made into secret compartments, and one truck got caught because they had to fill their petrol tank every half an hour of travel, and it was being followed, and somebody put two and two together as to why the truck, on its trip through Europe and then just getting across the English Channel, immediately filled up again, but not with much, and then kept on to the next destination. So they put two and two together and opened up the petrol tank and, sure enough, that is where—

CHAIR: Can I just follow up on that international perspective. I would imagine a lot of this product that is illegally imported into Australia is actually lawfully made in the country of origin. If you are talking about cannabis or other drugs, it is unlawfully made in the country of origin and then unlawfully exported. There is nothing in the provisions with the other countries. It is no offence for that person to load it in a container and ship it to Australia. Is that correct? So the crime does not occur until it arrives in Australia and they avoid the duty.

Mr Buchhorn : Not necessarily. It depends on the laws within the source country about the export of tobacco. If it is done legitimately through a tobacco company then, absolutely, it might be a legitimate export and unlawful when it is snuck into Australia, for example. But if is a criminal group here, with criminal contacts in the source country, then it would most likely be a crime in both countries.

CHAIR: Let's take China, for example: I would imagine there are countless factories which I could go around and buy tobacco from in any number of descriptions or any packaging. The manufacture in that country and the loading in a container and shipping it—would that actually be a crime in that country?

Mr Buchhorn : It could be. I cannot speak categorically in relation to the Chinese legislation, but if the person or the group who are putting it in the container to transport it to Australia are doing it unlawfully—that is, they are not a legitimate tobacco manufacturer or they do not have the appropriate licences to export—then they would also be committing an offence in their home jurisdiction as well as when it comes into Australia.

CHAIR: But it could also be that there were no laws preventing that?

Mr Buchhorn : It could be.

CHAIR: If I am a cigarette manufacturer in China and I am shipping a container to Taiwan and a container to the Philippines, it is up to the importer in those countries to make sure I comply with all the regulations. So then the law is, I imagine in many cases, not broken until the goods actually arrive in Australia and the duty is avoided?

Mr Buchhorn : That could be the case. If the exporter is acting legitimately, then we would expect a bill of lading, as an example, to reflect—

CHAIR: If it is to declare what is actually—

Mr Buchhorn : Yes. And if it comes in as 10,000 plastic buckets, then clearly there has been—

CHAIR: So it would be basically a forgery or a falsely declared export under the bill of lading, and that would therefore be a breach in that country?

Mr Buchhorn : I would imagine so. You would suggest there is some criminal intent and some knowledge on the part of the exporter in the source country, in that sense.

Following Senator Abetz's question about internationally: we held a working group in Singapore in May to get all the relevant countries from around our region, New Zealand, the UK and the World Customs Organization—a number of agencies and countries together—to have a look at the illicit tobacco activity around the world. Particularly, it was something that we, as the department, resourced, coordinated and put together. As a consequence of that we are now looking to develop a regional illicit tobacco strategy. So we are working collaboratively not only with our partners in South-East Asia and further afield but also with the New Zealanders and, in particular, with the United Kingdom.

To that end, we have a member from Her Majesty's Revenue & Customs who has a particular expertise in tobacco working with our Tobacco Strike Team. So in terms of looking at the problem internationally and being best placed to address it before it hits our shore, and to be able to take action offshore, we are certainly focused on that. A lot of that is on the back of the money that we got through the last budget process to enhance the Tobacco Strike Team. I know that the UK are very well advanced and that they do have a particular illicit tobacco strategy which they call 'leaf to light'.

Ms Geddes : And to assure you: Australia has a National Tobacco Strategy. Within our department we have a strategy around illicit tobacco and how we manage that at the border.

Senator ABETZ: Is that in the form of a written document? How many pages is it?

Ms Geddes : The strategy itself is quite slim, but what sits behind it is the implementation plan that we manage within our own department for the activities that we pursue.

Senator ABETZ: Are you at liberty to share that with the committee?

Ms Geddes : Let me just check—

Senator ABETZ: Look, take it on notice—

Ms Geddes : It is a classified document because of the operational nature of what we do.

Senator ABETZ: All right; understood.

Mr O'Rourke : The World Health Organization has an illicit tobacco strategy protocol, which Australia is not a signatory to. We have been getting stuff from the Department of Health; they might be the better department to ask about that.

Senator ABETZ: Thank you. Has anybody put together the actual quantity and value of seizures, let's say over the last five years, broken down by type, as in home-grown, what came in by sea cargo, air cargo, mail, passenger, warehouse smuggling or whatever other category there might be? Has anybody collated all that?

Mr Ford : We keep records of the amount of tobacco we seize from domestic growing. It is more complicated than it sounds, because if you find, as we did recently, some 123,000 seedlings, the question is: how tall they will grow and how fertile the ground they go into will be—

Senator ABETZ: That was on 15 November.

Mr Ford : It was—123,000 seedlings. In terms of the total quantity that that might have grown to, you have to make some assumptions about plant height et cetera. Most of the crops that we respond to are not at fully grown height. So we apply some consistent methodology that basically says that we believe it will get to about this height, that it will make about this weight, and the excise out of that would be X. But there are a number of variables that could change that.

Senator ABETZ: That is understood, but, irrespective of size, there would be the number of plants, for example, as one metric, to say that in Australia we destroyed X thousand plants of various sizes, which at least gives us a little bit of a handle.

Mr Ford : We normally work in acres, because if you have 45 acres I do not want my resources going counting each plant. So you are going to get variants—do they plant them one metre apart, two metres apart, 50 centimetres apart et cetera. So we normally work on acres and make some assumptions about the average distance they are planted, average height et cetera, and we do keep all of that.

Senator ABETZ: You do not have to count every single plant—I get that. But if it is an acre and you have a look to see if they are planted relatively equidistantly you do not have to count too many—just one row and then count the number of rows and a bit of high school mathematics might tell you how to multiply that out to give you the total number of plants. I get the distinct impression that nearly everything is too difficult, rather than, 'Yes, it is difficult but we are trying to develop a methodology to give us a good handle on the size of the problem.' We have just heard about the growing of plants and I accept that you would not count every one. I would be gobsmacked if what you told us in written form on 15 November—123,000 seedlings—and I trust that you did not have your officers count each one.

Mr Ford : No, that one was five years ago.

Senator ABETZ: So you engaged in the sort of mathematics—very basic mathematics. So if you can do it for that you can do it for acres and broadacre plantings as well I would have thought. You might be out by a couple of thousand or 10,000—so what—but at least we have some data to deal with.

Mr Ford : What I was saying was that we do that and we convert it into a tonnage amount. That is in our submission. So for each year we calculate what we think is the number of tonnes, based on those assumptions, of domestically grown tobacco that we seize.

Senator ABETZ: Do we have that for the past five years? Can you take that on notice?

Mr Ford : We have it from 2007-08 through to 2015-16, and it is in the submission.

Senator ABETZ: What about all the other categories of the imported?

Mr Buchhorn : In terms of the seizures, we do keep very accurate records over a number of years for that which has come through—

Senator ABETZ: Yours would be easier, because you are not counting plants.

Mr Buchhorn : Yes. It generally goes on the weight of leaf tobacco or the number of individual cigarette sticks. We keep that number and calculate it and turn it into revenue—revenue avoided or whatever. We keep quite detailed statistics on that in the sea cargo environment. As I stated earlier, we are now addressing it through the international mail environment, in terms of the accurate figures, and we are working on the other two streams, which are the individual travellers. We would not be able to give you five years for those streams.

Senator ABETZ: If you could take on notice to provide what information you have and provide it as up-to-date as you can. That would be good—if it is only two years. Is there a reason we have not been collating that data?

Mr Buchhorn : Not that I am aware of.

Ms Geddes : There is a reason, and we are working on that. It is legacy systems. Our office is doing a lot of things manually at the border, and we are working on that now. The statistics that we are gathering because of the systems and improving those systems are improving as well. We have got figures here if you would like, or we could take it on notice to provide to you.

Senator ABETZ: Take it on notice, because we are right up against the clock.

CHAIR: The Audit Office were here previously and they did make some criticism. They identified some weakness in the capacity, control and movement of excise-equivalent goods. They said in their submission to us, 'There is no calculation or reconciliation that provides assurance that the correct amount of customs duty is being collected and reported'. Would the ATO like to respond to the criticism from the Audit Office?

Mr O'Rourke : Certainly I listened to some of the comments from the ANAO and certainly, from my perspective, for every licence that we issue the person that we issue the licence to goes through very detailed scrutiny through their application. If we are not sure—and depending on how much tobacco they want to store under bond—we will take a cash security. If there are thefts at those warehouses, we will hold them to account. They know that, if there are thefts from that warehouse, they are going to get an assessment for that amount. It was about 12 months ago that we wrote to each one of those warehouses and reminded them of that condition on their licence.

CHAIR: So those could be very significant amounts of money.

Mr O'Rourke : Yes. We told them to go talk to their insurance company to make sure they had their insurance coverage to cover that potential loss. From that perspective, we think that we have got them pretty well covered in terms of that security. Obviously, some of those warehouses—

CHAIR: Have you ever had to call on that?

Mr O'Rourke : Yes, we have. Some of those have gone to court, and we are still in court on a couple of those because they cannot afford to pay and they did not have enough insurance to cover it.

CHAIR: I imagine that would set some precedents down the track as well.

Mr O'Rourke : It has. It was a reminder. That is one of the reasons why we wrote to those warehouses and the licensees of those warehouses and reminded them of the value of the excise-equivalent amount that they would be liable for if they could not account for it. We undertake audits and compliance activity on those warehouses each year. We check to make sure they are keeping the records, their bond register is up to date and they can account for every tobacco stick in those warehouses. It is difficult to go and count a large tobacco warehouse. It is quite significant. It can take quite a number of staff a number of days to do that. You can imagine how many cigarettes are in, say, 10 containers that come into a warehouse. So I just wanted to clarify that particular point. We do take cash securities if we have got some concerns. We do limit those. There are about 37 different conditions on the licence before we issue them. You talked about security. There are a lot of security requirements: have CCTVs in some of them, security, back-to-base alarms, all those types of things.

CHAIR: So the obligation is on the person that runs the bond storage to have the financial—

Mr O'Rourke : That is correct.

CHAIR: It is up to them to make sure their security is up to date.

Mr O'Rourke : Yes, and that is a requirement of the licence. That is part of the licence conditions, and they have to go through all of that before we will approve the licence. Now, a lot of those licences were already in place when they came across to the ATO in 2010. We review those licences every year. Customs licences get reviewed every year. The excise licences, which we were not talking about, are every three years. But those are some of the things that we do check.

CHAIR: We went to the counting. Is there a way of having an easier track-and-trace regime in place?

Mr O'Rourke : No, we do not have a track-and-trace system in place in Australia.

CHAIR: I have heard some of the overseas retailers saying they have scanners and electronic codes in the products. Is that something that could be looked at down the track as the rates of duty kick up?

Mr O'Rourke : That is a possibility, yes.

CHAIR: I would also like to give the department of border protection a chance to respond to the Audit Office's criticisms.

Ms Dale : I might also add to the comment. We undertake a number of joint compliance activities. For example, we use our intelligence sources to work with ATO to see which are the high-risk warehouses and use the information reported by brokers and importers. We go hand in hand to check that what has been reported is what is in the warehouse. That is in the form of physical checking, desktop audits and a number of other activities. So we have actually strengthened that in the last six to eight months to be able to address some of those audit recommendations.

CHAIR: Okay, thanks. I have one final question from Senator O'Sullivan, who had to leave. He asked: of the extra finance that has gone into the increase in duties, is any of that set aside for any undercover operations on the retail side?

Mr Buchhorn : We do not undertake any undercover operations in that sense. I would suggest it is no.

CHAIR: Okay. Some of the tobacco companies have had some criticism of government agencies. 'We report issues that this particular retailer is selling unlawful products, but it seems to be a reluctance for different government agencies to actually crack down and do something about that retailer.' You were mentioning the difficulty before. Could you maybe respond to that criticism? Maybe the AFP would like to respond as well.

Mr Buchhorn : In terms of the ABF, I cannot respond—

CHAIR: No. Sorry.

Mr Buchhorn : We are dealing with the same issue. Notwithstanding the fact that the tobacco industry might tell us that it is unlawful, we still need to prove the smuggled nature of those goods—the understanding of the retailer, as an example, that they were unlawfully imported into Australia or smuggled into the country. We need to prove that criminal intent or the criminal understanding of the retailer. That makes it particularly difficult until such time as such legislation may pass which would reverse the onus from us proving to the retailer proving.

CHAIR: Mr McCartney, would you like to quickly respond?

Mr McCartney : Sure. It is very similar. As per my previous response, the first response to this sort of information would be from ABF to assess the matter. If through that investigation there was involvement of organised crime, that is when we come to the table to have a look at the matter.

CHAIR: Okay. Thank you, ladies and gentlemen. We appreciate your time here. As you said, it is a lot of government revenue that we have on the line. We need to make sure every single cent of it is protected. Thank you for the work that you do and thank you for being here late this evening.

Mr Buchhorn : I think the Tobacco Strike Team would suggest that, in terms of the work that the strike team has done over the past year since it was created in October 2015, we have not necessarily recovered but stopped $100 million of revenue from going into the illicit market. On the back of a $7.7 million investment, I would suggest that is a worthwhile return on investment.

CHAIR: We need every cent. Thank you.

Senator ABETZ: Can I invest at that rate? That's pretty good going!