RICHMOND, Va. — Tobacco companies face several challenges, from keeping up with changing consumer demand, to declining cigarette volume, to negative publicity surrounding who they are and what they do.
They also face a growing problem as states continue to increase their excise taxes on cigarettes: a rise in counterfeit cigarettes and illicit trade.
"The number of tax increases has created an environment of expensive cigarettes at retail," Michael Thorne-Begland, director of brand and trade channel integrity and assistant general counsel at Altria Client Services, told CSNews Online. Richmond-based Altria is just one tobacco company waging war to not only protect its brands, but all legitimate tobacco retailers.
As part of its efforts, Altria regularly hits the streets of New York City and picks up cigarettes off the ground to find out where they were sold as part of its discarded pack program. New York State's $4.35-per-pack excise tax coupled with the city's $1.60-per-pack levy pushes the cost of a pack of cigarettes to the $12-$13 mark, creating an environment ripe for illegal activity.
Altria goes after cigarette counterfeits on the legal front as well, suing to keep fake products off the street and out of the hands of adult smokers.
"As a result of our work and law enforcement [efforts], we have seen counterfeit cigarettes move outside legitimate channels," Thorne-Begland explained.
The tobacco giant also runs an investigative program where private investigators actively look for illicit trade and bring the information to law enforcement. The good news is that these investigations often do not lead to legitimate channels. The bad news is they often lead to organized crime.
"This undermines businesses that are legitimate," added Thorne-Begland.
In the past two years, law enforcement has arrested nearly 225 people who have engaged in the illicit trade of cigarettes and were identified through Altria's investigative program.
Part of the problem is the difference in state taxes. Oftentimes, cigarettes are being bought in low tax states and sold in high tax states — with Virginia to New York being a popular route.
According to Thorne-Begland, Altria has been active on every piece of contraband legislation at the local, state and federal levels over the past 15 years. He noted that Virginia is more active in this fight than any other state. For example, the Virginia Crime Commission targets "cigarette smugglers" before they leave the state.
Altria even employs a canine unit to sniff out contraband. The company currently has two dogs — Max and Filmore — and is looking to add a third to the unit, Thorne-Begland told CSNews Online. The dogs are trained to know the difference between concealed tobacco and other tobacco. For example, they will not hit on a pack of cigarettes sitting on a table, but will find them hidden in a suitcase.
The company loans the dogs out to law enforcement to use in their fight against the illicit trade.
Other company efforts include:
- Auditing trade partners to make sure they are in alignment with the laws, and identify any situation where they are not.
- Training law enforcement agencies — more than 2,000 officers around the country a year — on this issue.
- Selling legitimate cigarettes at "a steep discount" to law enforcement agencies to use in operations aimed at "catching the bad guys."
"Law enforcement is on the front line of this," Thorne-Begland said.
Altria's efforts are not only at the corporate level. The company also trains its field sales force on the issues surrounding counterfeit cigarettes and illicit trade, according to Emily Garcia, manager of government and regulatory issues, brand and trade channel integrity at Altria Client Services.
"This goes beyond working with law enforcement. We also work internally," she told CSNews Online.
Altria has begun publishing a magazine with articles highlighting the problem.The lion's share of the focus is on cigarettes because of taxation, and the illicit trade covers a broad spectrum from counterfeit to international to genuine cigarettes moving from one state to another. However, other tobacco products suffer the same challenges, just to a lesser degree.
The next focus of illicit trade could be vapor products, Thorne-Begland said. Altria will use the same approach to protect all of its products.
"The reality is if there is money to be made by bad guys," the problem will continue, said Thorne-Begland.