Approximately one third of internationally traded cigarettes (355 billion per year) are eventually sold illegally with the avoidance of duty. This reduces the price, increases demand, undermines national tobacco tax policies and, as a result, harms health by increasing tobacco use. By the late 1990s, cigarette smuggling in the UK had reached epidemic proportions: according to tobacco industry estimates, 25%-30% of the total market was made up of illegally imported cigarettes although Customs & Excise estimated the figure to be no more than 21%. Tobacco smuggling was costing the Government more than £3 billion a year in lost revenue. Action by HM Revenue & Customs (formerly Customs & Excise) since 2000 has helped reduce the proportion of smuggled cigarettes to approx 16% of the UK market. Despite this success, 1 in 6 cigarettes and about half of hand-rolling tobacco smoked in Britain are still illicit resulting in a net loss to the Government of more than £2 billion a year.

Organised crime and petty criminals clearly benefit. The tobacco companies benefit because average tobacco prices are reduced and hence demand increased and cheap smuggled cigarettes may keep people smoking who otherwise would quit. High levels of smuggling can also result in governments reducing tobacco taxes in an effort to deal with the problem. This keeps prices lower and demand higher in the legal market – again the tobacco companies benefit. The World Bank has identified price as a key health and economic policy in tobacco control, and smuggling undermines the effectiveness of this policy.

The trade in contraband cigarettes is dominated by large-scale container fraud: as many as 10 million cigarettes can be hidden in containers which are disguised to give the appearance of carrying legitimate products such as food or furniture. This is very different from the popular perception of cigarette smuggling, namely the “white van trade” in which small scale operators exploit cross-Channel tax differentials but pay duty in, say, Belgium or France. Cigarettes obtained legally in lower-taxed countries and consumed in the UK account for about 9% of the total cigarette market. However, hand-rolling tobacco makes up a significant proportion of tobacco imported illegally into the UK from mainland Europe: in 2004-05 illicit market share was estimated to be 53%-64% of the total market.