Title Parliamentary Joint Committee on Law Enforcement
Illicit tobacco
Database Joint Committees
Date 04-03-2016
Source Joint
Parl No. 44
Committee Name Parliamentary Joint Committee on Law Enforcement
Page 36
Questioner CHAIR
Leyonhjelm, Sen David
Responder Sir Ronnie Flanagan
System Id committees/commjnt/d417df51-4c78-494e-95f6-d7c8baaf9f02/0005

Parliamentary Joint Committee on Law Enforcement - 04/03/2016 - Illicit tobacco

FLANAGAN, Sir Ronnie GBE QPM MA, Private capacity


Evidence was taken via teleconference—

CHAIR: I now welcome Sir Ronnie Flanagan, who is the former Chief Inspector of Constabulary for the United Kingdom and is joining us via teleconference today from Abu Dhabi. Do you have any additional comment about the capacity in which you appear here today?

Sir Ronnie Flanagan : As you say, I was formerly Her Majesty's Chief Inspector of Constabulary for England, Wales and Northern Ireland. That role entails inspection of all law enforcement and investigative bodies in the United Kingdom, except Scotland, which has a different regime. Prior to that, I was Chief Constable of the Police Service of Northern Ireland, the organisation formerly known as the Royal Ulster Constabulary. In that capacity, I had quite a lot of experience in dealing with criminal and terrorist organisations who used tobacco-smuggling and the illicit tobacco trade as a means of funding their nefarious terrorist activities. In that capacity, I simply want to give the committee the benefit, if it is a benefit, of my experience in that regard. I currently offer some advice to British American Tobacco, but—I would like to stress—only in dealing with illicit trade. I am stressing that because I am no sense an advocate for the tobacco industry. I am not a supporter of smoking as an activity. My passion is doing my best to attempt to deny criminal and terrorist organisations profits from illegal trade. I hope that gives some sense of my background.

CHAIR: Are you doing any particular work in Abu Dhabi and the Emirates at the moment?

Sir Ronnie Flanagan : Yes. My day job in Abu Dhabi is as policing and security adviser to the Minister of Interior and Deputy Prime Minister. That is one and the same person, His Highness Sheikh Saif bin Zayed Al Nahyan, who holds those two positions—Deputy Prime Minister and Minister of Interior of the United Arab Emirates.

CHAIR: I will start there with a question. There was a recent large shipment of illicitly imported cigarettes coming into Australia which were alleged to have been manufactured in the Emirates. Are you aware of whether manufacturing of illegal cigarettes is a significant issue in the Emirates?

Sir Ronnie Flanagan : Absolutely. I am aware of that individual policing and enforcement success and had some contact with the Australian Federal Police representatives who are based here in the United Arab Emirates. I think that policing success—that seizure in Australia—was an excellent example of cooperation between the investigative authorities in Australia, the task force that operates around the Sydney area and the customs authorities—in Dubai, in this case—within the United Arab Emirates. Those cigarettes were manufactured in the Free Zone areas of Dubai within the UAE.

CHAIR: Would they also manufacture products for the legal market?

Sir Ronnie Flanagan : Yes. There is quite tight regulation in that regard. Ultimately, the intention of the UAE is that there is not to be production of tobacco products other than within the Free Zones. Within the Free Zones, where there is the production of legitimate product, there is quite tight regulation and quite tight enforcement. This seizure gives people like me the opportunity to reinforce the need for even more enhanced enforcement activity in relation to illicit smuggling of tobacco products that are made within the UAE.

CHAIR: I understand this case is still before the courts and you may have some difficulty giving some specific detail.

Sir Ronnie Flanagan : Absolutely. It is difficult to speak about detail of an ongoing case, as you say.

CHAIR: If we talk in general terms, can you say that there are factories set up in the UAE operating in contravention of Emirati law, producing cigarettes?

Sir Ronnie Flanagan : I have to say that that is still a matter of investigation. To say baldly that they are operating in contravention of law would be a step too far at this stage. That is a matter under investigation. The seizure to which we have referred has certainly given impetus to enhancing that investigative activity, to determine exactly what is going on, what laws, if any, are being contravened, and, if they are being contravened, what activity, operationally and legislatively, needs to take place to tighten up around that whole area.

CHAIR: My understanding is that, in the Emirates, there is a fairly significant excise, duty or tax on cigarettes as well.

Sir Ronnie Flanagan : There are some examples, believe it or not, of product being sold even below the excise rate. In local currency, which are UAE dirhams, let's say the going rate of excise on a pack of 20 cigarettes would be in the order of three dirhams; we have some examples of product actually being sold in shops for two or 2½ dirhams. So, immediately you see that (a) the proper excise revenue is not being derived and (b) either these things are being made at a loss, which I would suggest is most unlikely, or it demonstrates illegal activity.

CHAIR: Can you tell us what the approximate average retail price is in the Emirates for a packet of cigarettes?

Sir Ronnie Flanagan : I am not certain at the moment. But, just as you see globally where you have increased excise, there is a trend within the legitimate market that people downsize, if you like, as a first step. People who want to save money graduate downwards in the chain within the legitimate market and then they migrate to the illegitimate market. If they find that even that purchase at the lower end of the legitimate market is too expensive for them, they then migrate into that illegitimate market. I can get you the exact average price, but I would not want to mislead you by just giving you a figure off the top of my head. After this interview, if I may, I will ring the secretariat back to tell them exactly what the average price is within the UAE.

CHAIR: When I was working over there, I had a friend who was a chain-smoking Yugoslav, and he always used to complain about the price of cigarettes in the Emirates and always used to bring back a suitcase full of duty-free cigarettes whenever he travelled.

Sir Ronnie Flanagan : Absolutely.

CHAIR: The other comment you made is very interesting. It was similar to some of the evidence we have had earlier today from some of the retailers. They said that, having put cigarettes in plain packaging, after we increase the rate of excise in Australia, the consumer reaction they see is to trade down to a cheaper brand of cigarette.

Sir Ronnie Flanagan : Absolutely. I sent across to the committee a report produced by a joint British and Irish parliamentary committee looking into the effects of smuggling across the Irish border. One of the things that they stressed, which I think is very worthy of stressing, is the importance of consumer education, if you like, because in this whole area that we are considering I think a real risk is that consumers see illicit trading in tobacco as a victimless crime, and there is no stigma, or not sufficient stigma, attached to people in company or socially smoking illicit product. I think it is very important that governments engage in educating the consumer that this is certainly not a victimless crime—that, at the end of the day, serious organised criminal gangs and indeed terrorist gangs are profiting from this trade and using those profits then to fund other criminal activity, including human trafficking, narcotics importation, terrorism et cetera. Also, in terms of small traders, it is my experience that globally, where illegally traded product is available, it has a dreadful impact on legitimate small businesses, and we have seen that in Canada. I am certain that applies in Australia and it certainly applies in Ireland, on both sides of the border.

CHAIR: You mentioned the black market in cigarettes funding terrorism. How serious a concern is that?

Sir Ronnie Flanagan : If I talk about my experience in Ireland first of all, it was a really serious concern because, when the troubles, as we call them in Ireland, were at their height, we at one stage broke up a criminal gang who were providing for people in Belfast illicit tobacco, illicit alcohol and pirated DVD versions of the latest blockbusters that were available, and they were actually operating a telephone order system so that people, for their Friday or Saturday nights, could order their tobacco, their alcohol and a copy of the latest Hollywood movie, all illegally provided. Of course, the terrorist organisations were using that funding to further their terrorist activity, and that still goes on. One of the reasons I sent a copy of the report of the joint British and Irish parliamentary group is that that is still going on today in Ireland to fund the activities of those tourist groups who are outside the peace process and do not want the peace process in Ireland to take permanent hold. It is a matter of really serious concern. People will know colloquially of Captain Marlboro, the terrorist who in Mali funded his entire campaign by smuggling cigarettes. Of course, there is good evidence from Interpol and Homeland Security in the United States that even the terrorist grouping who call themselves IS—or Daesh, as they would be known in this part of the world—while on the face of it they ban cigarettes, undoubtedly they also benefit from profits in smuggling cigarettes, just as they do with historic artefacts. On the one level publicly they destroy these things, but on the other level, where they are small enough to be smuggled and sold, they benefit from the profits. The risk of funding through illicit tobacco trade going to terrorism and other forms of organised criminality is a very real risk and should be a matter of concern to us all.

Senator LEYONHJELM: Sir Ronnie, thank you for participating in our inquiry.

Sir Ronnie Flanagan : Senator, an absolute pleasure. Thank you very much indeed.

Senator LEYONHJELM: Regarding the source of illegal cigarettes that were seized in Australia recently, the Manchester brand—you mentioned it in your submission to us—do you think that the UAE, or Dubai, is a significant source of illicit tobacco products?

Sir Ronnie Flanagan : It depends on how you would define 'significant'. There is a source of that illegal product, undoubtedly, and I can assure the committee that the authorities here in this part of the world take it very seriously. They also take their nation's international reputation very seriously. In the particular operation to which we have referred, I think you will find that the Australian Federal Police would say that there was total cooperation from the authorities, both policing and customs, here in this part of the world. It is a source of illegal product. How you would determine or define the word 'significant' is another matter, but it is certainly seen as significant by the authorities here and they are determined to take action to stamp it out.

Senator LEYONHJELM: We heard from people earlier in this inquiry that the primary sources of smuggled products into Australia are South Korea and China. Do you encounter those two countries as sources in your activities?

Sir Ronnie Flanagan : I am certainly aware that those two countries are sources. I would not profess to be an expert in terms of the detail or the level or the extent or scope of the problem, but certainly those two countries do feature prominently in any research in the area that we are considering.

Senator LEYONHJELM: Insofar as you know what is going on in the UAE, particularly into Dubai, do you have a view of their business model? Is it entirely imported? Why is Dubai or why is the UAE a source? Is it because there is cheap labour?

Sir Ronnie Flanagan : No, I think the risk in free zones is that certain people will try to abuse the freedom, if you like, provided in free zones. There is a business model which encourages legitimate trade within the free zones, and of course people of criminal intent attempt to take advantage of, to circumvent, the regulations that apply within those free zones. Sometimes they corrupt people in terms of falsifying the documentation if they are going to import illicit goods to Australia. They can often seek to falsify the documentation and portray in the manifest that what is actually in the containers or packages is quite a different form of goods.

Senator LEYONHJELM: If the authorities in Dubai manage to close down the country or the city as a source of illicit tobacco, are there other free zones that you anticipate could pop up to replace it?

Sir Ronnie Flanagan : It is not that they would 'pop up'. Certainly the concept of a free zone in order to facilitate legitimate trade is a very real and worthy concept, and I am certain that the intention going forward would be to facilitate free trade. Globally, the UAE, I think, is very well situated to be a focus for world trade, so I think there will certainly continue to be free zones. What is imperative—and what is fully realised by the authorities here—is that there be very tight regulation to make sure that it is only legitimate trade which is being carried out within the scope of those free zones.

Senator LEYONHJELM: What I meant was this. I know that free trade zones, free zones, are a much bigger issue than illicit tobacco and that they do not 'pop up'. What I meant was to ask whether illicit manufacture and export to circumvent tax laws and so forth are likely to pop up in other existing free zones.

Sir Ronnie Flanagan : I have no doubt that there will be criminal organisations who will continue to do their best to take advantage of the freedoms afforded within the free zones, and I have equally no doubt that the authorities here within the UAE are very alive to that, to make sure that, even if free zones develop and expand as a concept, the regulations and the enforcement and investigative activity will be such as to ensure that those criminals and criminal gangs who would seek to abuse those freedoms will be thwarted in their intentions.

Senator LEYONHJELM: Is there anything you can tell us about those criminal gangs in the free zone of Dubai? Do you know anything about them?

Sir Ronnie Flanagan : I do not think there is really much more to add to what we have already discussed. I certainly do not want to give any impression that these are flourishing nests of criminal activity. I think it is rather more that these are excellent centres of legitimate trade being afforded freedoms to trade properly but being abused in some instances by people with criminal intent.

Senator LEYONHJELM: Yes, I understand. The other way to look at it, of course, is that, from a South Korean perspective, manufacturing cigarettes in South Korea—or even China, for that matter—is a legal activity and employs local people, gives people jobs. If the Australians are silly enough to restrict the market so much that it makes it attractive for them to sell their products in Australia then that is Australia's problem, not their problem. You could look at it from that point of view. The complaint that I think that you would share and we would be concerned about is that, when it is illegal, it attracts criminals rather than legitimate businesspeople. Is that right?

Sir Ronnie Flanagan : Yes, I have no doubt about that. We in Ireland certainly had concrete examples of people whom we arrested, people whom we brought to justice. The expression you often hear of organised criminal gangs, terrorist gangs, moving into illicit tobacco because they perceive it to be high profit and low risk—that phrase is very real. I have personal experience of arrested criminals admitting that that is the case, that they think that they can make just as much profit at much lower risk from dealing in illicit tobacco products and other products such as fuel and other contraband than, for example, from dealing in narcotics.

And therefore, on the point that you alluded to about countries such as Australia where this product ends up, I am no economist, but I think it is an absolute fact that, when we talk about excise and taxation, there has to be an optimal level above which unintended effects kick in. Above that optimal level of taxation, the risk, I think, is that people—even people who want to be legitimate—are driven first of all downwards in the quality and price of product within the legitimate market, and then they are driven into the illegitimate market.

Senator LEYONHJELM: Sir Ronnie, you could be an economist. There is a thing called the Laffer curve which basically supports exactly what you are saying.

Sir Ronnie Flanagan : I am familiar with the Laffer curve. I remember. I think Laffer was an economist who advised President Ronald Reagan.

Senator LEYONHJELM: Indeed he was.

Sir Ronnie Flanagan : I remember reading a story that at lunch one day in Washington he was sitting and demonstrating to people on a paper napkin. He was talking rather more about income tax, but I think his suggestion was that if a government imposes 100 per cent taxation then nobody will work. Why would anybody work to give the government 100 per cent of what they earn? So there would be zero revenue income to the government. Equally, if the government imposes zero per cent taxation, then per se that government gets no revenue. Out of that lunchtime conversation where he drew this little curve on a paper napkin came this idea that there has to be an optimal level somewhere between 100 per cent and zero per cent. That is my basic knowledge of Laffer and how the so-called Laffer curve came into being.

CHAIR: We actually had Arthur out here last year, and I understand he is currently working with Donald Trump in the USA, but that is another story.

Sir Ronnie Flanagan : I honestly was not aware of that. I did not know that.

CHAIR: Sir Ronnie, I just want to talk about where the illegality point occurs. You talked about cigarettes being manufactured in the free zone in the UAE, so they are lawfully manufactured. I would imagine anyone could go to that factory and say, 'I want to buy a 40-foot container of cigarettes,' pay them the money and transfer them. The factory then has not actually done anything illegal, has it, at that stage?

Sir Ronnie Flanagan : No. That is why I said earlier, when your colleague raised this question of illegality and laws being broken within the UAE, that it is not absolutely a given fact that laws have been broken; that is a matter for current investigation. But I have to say that I did not approach this session concentrating on the exact position within the UAE. Rather more I came to this based on my experience in Ireland with organised criminal groups and terrorist groups. If it is of help, I can later submit more detail about the actual position within the UAE.

CHAIR: The point that I was making or trying to get to was that the criminality actually occurs in Australia rather than in the foreign jurisdiction where the cigarettes are manufactured.

Sir Ronnie Flanagan : I think that is a fair point.

CHAIR: It is fair to say that the cigarettes are manufactured lawfully. They are then sold to a third party lawfully. Where the illegality then comes in may be in forgery of documents or incorrect documents, incorrect customs declarations, in the country of export, but then the real criminality arrives in Australia, where they are illegally imported without the excess being paid.

Sir Ronnie Flanagan : I think that is a very fair point.

CHAIR: So the profits from the criminal activity are all derived or will end up on shore here in Australia rather than in the country where the goods or the illegal products are manufactured.

Sir Ronnie Flanagan : That is very largely the case, absolutely.

CHAIR: In summary of what you have been saying, on the concern that we have that, if we have another significant increase in tobacco excise here in Australia, that will significantly increase the potential for more black-market activity, would you concur with that?

Sir Ronnie Flanagan : I do concur with that. I again stress that I am concurring with that not as any advocate of the tobacco industry or the smoking business but just looking at the impact on criminality that that risks bringing about. I think everyone accepts that there should be properly calibrated annual increases in revenue, but the shock ad hoc increases over and above the calibrated increases I think do have the real risk of bringing about the effect of driving people into the illegal tobacco market.

CHAIR: The greater the gap between the regular retail price with all the excise and taxes and duty put in there and the cost of manufacture, obviously the greater the opportunity there is for criminal activity and, as you said, terrorist activity to become involved in this trade?

Sir Ronnie Flanagan : I think that is self-evident. That is my view, absolutely.

CHAIR: Thank you, Sir Ronnie. We greatly appreciate your assistance in our inquiry here today. I understand that you were going to try to make it down here to Australia, but we appreciate your appearing by telephone conference. We greatly appreciate your submission as well. I would like to thank you. Thank you so much.

Sir Ronnie Flanagan : It is a great pleasure, and can I commend the work of the committee and wish the committee all success in their endeavours.

CHAIR: Thank you. All the best to you, sir.

Sir Ronnie Flanagan : Thank you very much indeed.