EU struggles to renew deal with Big Tobacco

Commission agreement with industry is called ’scandal of the century.’

The European Commission is scrambling to reach agreement on whether to renew a controversial, multi-billion-euro agreement with tobacco giant Philip Morris as part of its fight against illegal cigarette smuggling.

Officials had hoped to make a decision before the end of the year on whether to renew the deal, which locks the company into a range of distribution measures to stop genuine tobacco products from being traded on the black market. But internal divisions in Commission departments as well as among national governments have made reaching an agreement difficult.

Investigators working on the illicit production and trade of cigarettes insist that the EU agreement signed with Philip Morris in 2004 has given them real firepower in tackling a complex law enforcement issue that is estimated to cost EU countries €10 billion in lost tax revenue every year.

They say the deal slashed the illicit trade of genuine Philip Morris cigarettes, from 116 million cigarettes seized in 2004 to 13 million in 2014, and without it law enforcement agencies would not have the clout to force big tobacco to provide them with information they need to clamp down on cigarette smuggling.

A majority of EU national governments also support keeping the arrangement in place, according to documents seen by POLITICO.

But critics of the tobacco industry and health advocates strongly oppose cutting financial deals with tobacco companies.

“This is the scandal of the century,” said center-left French MEP Gilles Pargneaux, the deputy chair of European Parliament’s committee on the environment, public health and food safety. “It is high time for the European Union to end its complicity and duplicity with the tobacco industry.”

Pargneaux is not alone. Anti-tobacco campaigners say the EU has no business signing any kind of agreement with cigarette companies. They want the four deals now in place with the world’s largest tobacco firms to be reined in.

The decision is proving particularly divisive, with the Commission facing both internal and international pressure over the ethics and the practicality of the deal, which expires in July 2016.

Within the Commission, officials closer to the law-enforcement side of the problem want to keep such tobacco agreements, while those formulating health policy say they should be scrapped.

The EU also has to contend with its commitment to adhere to the World Health Organization’s framework convention on tobacco control, which urges public officials to remain at arm’s length from tobacco lobbyists while putting in place strict regulations to combat the illicit trade of cigarettes.

These deep divisions have left Kristalina Georgieva, the European commissioner for budget and human resources, playing for time as she tries to reconcile the opposing sides of the debate.

In May, Georgieva told a parliamentary committee that she had yet to make up her mind and had reached out to EU members to gauge their feelings on whether to re-sign the agreement. But she said she was confident she could “finalize and publish” her decision by the end of the year.

Georgieva repeated that claim in October, although Commission sources now say she may not be able to meet that deadline.

Philip Morris said the agreements have been successful, leading to an 85-percent reduction in the quantity of its products which are illegally in circulation. However, the company has not expressed a view on whether the deals should be renewed.

“We remain committed to helping eliminate this complex, costly and constantly evolving problem,” a company spokesperson said in a written statement.

Smoke signals

The EU’s agreement with Philip Morris was the result of a decade of allegations and investigations carried out by the EU’s anti-fraud investigator OLAF and European national customs agencies.

In the late 1990s, OLAF was convinced tobacco companies, among them Philip Morris, had intentionally made genuine tobacco products available to the black market — especially in Spain and Italy.

The contraband trade of genuine products can involve cigarettes smuggled into the EU from third countries, without taxes and duties paid to the EU, or cigarettes smuggled from a low-taxing EU country to a high-taxing EU country (a practice also known as bootlegging).

In 2000 the Commission and a number of EU countries launched legal action in a U.S. court against several cigarette manufacturers, suspecting the contraband had occurred with at least some knowledge of the tobacco companies. Philip Morris was among the tobacco companies singled out by the EU action.

Although most of the case was thrown out of court on a technicality, the prospect of facing more legal challenges forced the big four tobacco companies to the negotiating table.

The Commission later signed four, separate agreements with the world’s largest cigarette producers: Philip Morris (2004); Japan Tobacco International (2007); British American Tobacco (2010); Imperial Tobacco Limited (2010).

The deals are legally binding, enforceable anti-fraud agreements involving EU and national counterfeit investigators. They also involve annual payments to the EU by the big four tobacco companies. According to Luk Joossens, a researcher at the Association of European Cancer Leagues, payments totaled $1.9 billion (€1.7 billion) over 20 years.

Speaking last year, former EU taxation commissioner Algirdas Šemeta acknowledged the signing of agreements with tobacco companies was controversial, but said they had had a major impact on the sale and distribution of illicit, “branded” tobacco.

“The agreements are certainly not about encouraging people to smoke, and do not in any way affect EU determination to combat tobacco consumption and regulate the tobacco industry,” Šemeta said. “These agreements are aimed solely at combating the illicit trade in cigarettes.”

But critics of the agreements say they contain too many loopholes and there is little transparency in how the data are collected and collated. Academic research published in the British Medical Journal also suggests the fines imposed on the tobacco companies were not high enough to discourage them from placing their cigarettes on the black market.

“The fact that €10 billion in revenue goes missing because of illicit trade proves the agreements are not working,” Pargeaux said.

OLAF’s official line is that it is not taking sides in the Commission’s decision and will work with whatever Georgieva decides.

However, OLAF investigators told POLITICO the agreements have brought real results in the fight against the illicit trade of cigarettes. They disputed claims from critics that such deals allow big tobacco to hold sway over investigations.

“If you think [our] investigators are vetted by the industry because of these agreements, you’re being naïve,” an investigator said, adding that OLAF uses the legally binding agreements to compel the companies to take steps to prevent the illegal sale and distribution of their products.

Documents seen by POLITICO confirm a majority of EU national governments are on the side of the OLAF investigators who would like to see the tobacco agreements extended.

But Pargneaux rejects the suggestion that OLAF investigators are in favor of the deals. “When I contacted [OLAF] and customs officials, they told me an end to the agreement would not impact their investigations,” he said.

Under pressure

The Commission now has to weigh these competing claims and map out the way forward — all before the holidays, according to Georgieva’s schedule.

Officials in the Commission’s health directorate are pushing for the WHO’s framework convention to be front and center of any decision, according to sources in the department — suggesting that they consider the existing tobacco agreement to be in breach of the international convention.

The Protocol to Eliminate Illicit Trade in Tobacco Products, negotiated in 2012 under the convention, is not yet legally binding. The only EU countries to have ratified it fully are Austria, Portugal, Spain and France, along with other eight countries worldwide. For the framework convention to become binding, 40 countries need to sign up.

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“Our mandate comes from the member states, so our hands are tied,” one Commission official said.

This article has been updated to correct the attribution of figures relating to fines paid by tobacco companies.