INTRODUCTION

The smuggling and illegal distribution of cigarettes is a global phenomenon in a dual sense. It can be observed in some form or other on every continent, and there are some schemes that span the globe, connecting distant places such as a clandestine factory in China producing counterfeit cigarettes with a street corner in London where these cigarettes are eventually sold to consumers.

Cigarettes are essentially a legal good. What makes the trade in cigarettes illegal is the evasion of excise and customs duties. Excise duties are taxes levied on certain goods produced or sold within the country. Customs duties are charged on goods imported from another country. Cigarettes are among the highest taxed commodities and provide a significant source of revenue for governments. While the level of taxation varies across jurisdictions, in many countries taxes account for as much as 70 to 80 percent of the price smokers have to pay for a pack at a legal retail outlet store. Through a number of different schemes, suppliers and customers circumvent the taxation of cigarettes. As a result, cigarettes are being made available at a cost below legal retail prices, providing both lucrative profits for suppliers and significant savings for consumers, while causing substantial losses of revenue to governments, estimated at around forty billion USD globally in 2007, and at the same time undermining public health policies that aim to discourage smokers through high tobacco taxation (Joossens et al., 2009).