In addition to the smuggling of genuine UK manufactured cigarettes, which remains a serious problem, there has been a significant rise in the smuggling of counterfeit cigarettes in recent years. In 2001/02 15% of large seizures of cigarettes made by Customs officers were counterfeit. By 2003/04 this had risen more than three-fold to 54%.

In 2005-06, 51% of illegal cigarettes seized by Customs were counterfeit. Most counterfeit cigarettes, which may be almost indistinguishable from the genuine article, are manufactured in the Far East and Eastern Europe and are smuggled into the UK in large quantities, predominantly as maritime freight. As the supply chain is entirely illicit, there are no legitimate manufacturers with whom the government can work to restrict supply. However, as counterfeit products undermine brand integrity and directly affect tobacco industry profits, the manufacturers have an interest in trying to curb this market.

Smuggling is based on tax avoidance but it is driven by the commercial activities of tobacco companies and organised crime and the extent to which law enforcement creates costs and risks as a disincentive to smuggling.

Tobacco companies have used smuggling as a distribution channel to launch new brands, to enter new markets and fight price wars with their competitors. Once one company is involved, the others risk losing market share if they do not effectively ‘compete’ to have their brands represented in illegal markets. The major companies seek to maximise their performance in the whole system – legal and illegal and they exploit the lack of law enforcement to do so. As the deputy chairman of BAT, Kenneth Clarke MP, said: “Where any government is unwilling to act or their efforts are unsuccessful, we act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as the legitimate market.”