Contraband Chinese cigarettes are pouring into Latin America, infiltrating old smuggling routes and threatening longstanding criminal empires.
Seizures in the last two years have been frequent, with authorities finding large quantities of Chinese cigarettes in Nicaragua, Panama, Colombia and even Texas.
A recent exposé by the Organized Crime and Corruption Reporting Project (OCCRP) found that Latin America is awash with CNTC brands such as Golden Deer and Silver Elephant – despite there being no legal market for them in any country other than Chile.
The Americas are home to around 121 million smokers, according to World Health Organization figures, and tobacco giant Philip Morris International (PMI) estimates 22 percent of cigarettes smoked in the continent to be illegal. While Paraguay is still responsible for the majority of the supply, China is rapidly becoming a major player, already outstripping Paraguay in countries such as Colombia and Ecuador.
Experts believe CNTC is replicating a strategy used by Big Tobacco in the 1990s, when global brands allowed massive smuggling of their products into Latin America as a means of expanding the market, before lobbying for legalization.
Below, InSight Crime considers three key takeaways from the investigation into this booming market.
1. Infiltrating Old Smuggling Routes
There is one major gateway for Chinese cigarettes into Latin America: Panama.
OCCRP’s investigation revealed a network of Chinese tobacco subsidiaries or shell companies that have exploited loose regulation within Panama’s Colón Free Trade Zone to import Chinese cigarettes tax-free, or even manufacture the brands within Panama. They then collaborate with a network of regional bootleggers to move them into other Latin American countries, obscuring their source through complex paperwork.
From Panama, the cigarettes take convoluted routes to their markets, sometimes passing through multiple jurisdictions to cover their trail. In one case, Chinese cigarettes were sold via Panama to a Texan customs broker, who was convicted in May 2020 of attempting to smuggle millions of cigarettes over the US border into Mexico.
In another case, a shipment of 96 million cigarettes was smuggled from China to Colombia via Panama, Jamaica, and Aruba.
These Chinese smokes followed long-established contraband routes. Aruba’s free trade zone is a historic smuggling hotspot, having served as a staging post for cigarettes trafficked into Colombia from British American Tobacco in the 1990s, and later from Paraguay and Uruguay.
Cigarettes are also smuggled directly from China in container ships to the Colombian port of Buenaventura, paying off customs officials to secure their passage, according to a report by Colombia’s Institute of Political Science. Huge shipments have also been seized at major regional ports such as El Callao in Peru and San Antonio in Chile.
Once on the continent, large price discrepancies between Latin American countries generate their own regional contraband flows. For instance, high tobacco prices in Ecuador allow smugglers to make profits of up to 150 percent moving cases of Chinese cigarettes through Colombia to the Ecuadorean border, according to a smuggler who spoke to Caracol News.
“We buy them from companies in Panama, we ship them on boats to Maicao [a Special Customs Regime Zone in northeast Colombia, served by the port of Puerto Nuevo] and from Maicao we move them on lorries,” he said. “It’s an incredibly lucrative business.”
2. Distorting Local Markets
The big attraction of Chinese cigarettes is their price. OCCRP’s investigation found contraband Chinese cigarettes sold at around a fifth of the price of their legal competitors in countries including Colombia and Mexico. In Ecuador, the difference can be as much as tenfold.
Much of this difference is a result of the high taxes many Latin governments have placed on cigarettes. According to OECD figures, taxes on tobacco average 48 percent across the region, but can be as high as 80 percent in countries such as Chile and Argentina.
While higher prices resulting from these taxes have been highly effective in reducing tobacco consumption, tax-dodging contraband threatens to undercut progress – and costs regional governments an estimated $6 billion per year in lost tax revenue.
Furthermore, the products are often of dubious quality. Researchers in Ecuador found Chinese cigarettes being sold past their sell-by date, and US investigations into the smuggling network that moved millions of cigarettes into Mexico found that many of the seized brands were “banned in Mexico for health reasons.”
Meanwhile, legal cigarette producers – both international and local – are struggling to compete.
In 2019, PMI closed its two factories in Colombia, blaming an upsurge in contraband. And in 2020, Mexico’s National Council for the Tobacco Industry (Consejo Nacional de la Industria Tabacalera – Conainta) warned that the influx of contraband cigarettes from countries such as China risked wiping out the national tobacco industry altogether.
That said, statements from traditional manufacturers should be treated with caution. The tobacco industry has a history of denouncing competing contraband as a means to lobby for lower taxes on cigarettes – and to distract from profitable smuggling of its own products.
Researchers in Ecuador, for instance, found that while China is now the primary place of origin for illicit cigarettes in the country, the single biggest smuggled brand is PMI’s Marlboro.
3. Challenging Traditional Mafias
Governments and legal producers aren’t the only ones who could stand to lose from this onslaught. Latin America is home to its own tobacco mafias that have long dominated the contraband cigarette trade – most notably Tabacalera del Este, owned by former Paraguayan president Horacio Cartes.
Paraguay has the lowest tobacco prices and taxes in Latin America, making it a key export hub for contraband cigarettes. Aided by corruption reaching into the heart of government and the collaboration of regional gangs, including Brazil’s First Capital Command, Paraguay still accounted for 66 percent of cigarette contraband in Latin America in 2020, according to a PMI-commissioned study in América Economía, compared to 9 percent from China.
Figures from the Center for Analysis and Dissemination of the Paraguayan Economy (Centro de Análisis y Difusión de la Economía Paraguaya – CADEP) show that Paraguay’s tobacco production has grown steadily from 2008 to 2019, even as domestic consumption and registered exports have decreased – suggesting that contraband is still booming.
However, regional data suggest that trouble could be on the horizon for the Paraguayan tobacco mafias.
“There is a transition in the origin of the tobacco smuggled in Colombia and Ecuador,” a report by Colombia’s Institute of Political Science found in 2018. “Production originating in China has displaced the brands from Paraguay and Uruguay that formerly dominated the black market for cigarettes in Colombia.”
The report found that 66 percent of illegal cigarettes in Colombia now come from Asia, compared to 33 percent from Paraguay and Uruguay. This may reflect Colombia’s proximity to the distribution hub of Panama – while Paraguay’s neighbors are more likely to be supplied by simple cross-border smuggling. Eighty-six percent of Paraguayan cigarette contraband found in 2016 was in neighboring Brazil.
In this context, Paraguayan smugglers may be more concerned by data analyzed by OCCRP showing that Brazil saw a 165 percent increase in seizures of Chinese cigarettes during 2020.