Smuggling is a real Brazilian state problem that affects not only the domestic industry and, consequently, the economy, but also society as a whole.
The biggest competitor of BAT Brasil is not a company, but rather smuggling. It is estimated that about 48% of Brazil's cigarette market is occupied by products entered the country illegally - damage that goes beyond financial matters.
According to a survey of the National Anti-Piracy Forum (FNCP), Brazil had a loss of R $ 115 billion in 2015 because of smuggling crimes and embezzlement, which represents an increase of 15% over the previous year. The tobacco market was the most affected: 67.44% of the products that entered the country illegally in 2015 were cigarettes.
The main cause of the problem is inadequate supervision of borders, especially with Paraguay. Most of contraband cigarettes entering Brazil is produced in the neighbor country. There, the tax on manufacturers is 16%, far from the more than 80% that shall be charged in Brazil from December 2016.The tax gap ensures to illegal products prices significantly lower than those of legal goods and hence high attractiveness.
The illegal market is already consolidated in Brazil. Research conducted by Ibope in 2015 found that 46% of cigarettes sold are smuggled in Paraná. In Rio Grande do Sul, illegal products account for 32%; São Paulo, 34% and 3% in Minas Gerais.
The big volume of sales ensures high profitability to the illegal market. It is not aimlessly that, smuggling is only one of several activities carried out by organized criminal networks, such as drugs and arms trafficking and money laundering. The risk is relatively low: beyond the border gaps and failure monitoring at points of sale, the penalties are more lenient than those imposed for other crimes committed by these organizations.
Thus, the illegal cigarette market also contributes to the increase in violence and crime, not only in the entry regions of smuggled loads as in all supply points.
By opting for contraband cigarettes, consumers purchase products that do not pass the stringent requirements of the National Health Surveillance Agency (Anvisa). The formal products are subjected to regulatory analysis to ensure mainly the control substance content - BAT Brasil, for example, produces 28,000 samples per year.
Without the same control, illegal products pose new health risks. According to research conducted in 2013 by the State University of Ponta Grossa (UEPG), it was found insects, sand, hair, plastic and fungi in five cigarette brands often smuggled into Brazil. Moreover, in 65% of the brands, high concentrations of chemicals were observed, such as nickel, cadmium, chromium and lead, and twice the average concentration of arsenic found in legal cigarettes.
BAT Brasil supports the creation of governmental and private initiatives to combat smuggling. In 2015, the company supported the creation of the Joint Parliamentary Front Against Smuggling and Counterfeiting, aimed not only at illegal cigarette market, but also to all the affected industries, such as toys, electronics, pharmaceuticals, clothing and drinks.
Despite their efforts in terms of engagement with external stakeholders, structuring of communication strategy and positioning of brands, BAT Brasil believes that public authorities need significant advance in the crackdown on smuggling. The company advocates a series of measures to be implemented by the Government, such as:
R $ 115 billion were the country's losses from smuggling in 2015, according to the National Forum on Combating Piracy (FNCP).
R $ 4.9 billion left to be raised in taxes, according to a study from the Economic Development Institute and Social Border (IDESF).
91% of smuggled cigarettes are sold in formal shops. The inspection at point of sale is flawed.
600 billion illegal cigarettes are sold annually worldwide, representing 12% of overall consumption.
£ 40 million is invested annually by BAT in measures such as research and survey information, which help government authorities in the global fight against illegal cigarette market.