Argentina, Chile and Brazil are struggling with increased demand for smuggled cigarettes, as these provide major revenue for criminal groups and result in massive tax losses for national governments.
Contraband cigarettes now represent more than half the cigarettes for sale in Brazil, 24 percent in Chile and 12 percent in Argentina, according to the Anti-Contraband Association of Latin America (Asociación Latinoamericana Anticontrabando – ALAC).
In Argentina, the number of illegal cigarettes seized by authorities jumped to some 1.2 million packs in 2018, up from about 250,000 in 2017, an increase of 245 percent, Clarín reported. Contraband cigarettes cost the Argentine government 8.5 billion pesos (about $200 million) in lost taxes in 2017. The majority of cigarette seizures occurred in major smuggling hotspots such as Formosa, a city on the Paraguay-Argentina border, and the Triple Border Area where Paraguay, Argentina and Brazil meet.
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Between 2015 to 2018, the illicit cigarette market in the state of Rio has more than doubled and 90 different brands are now illegally imported into the country. The loss of tax revenue for 2018 is estimated to have reached 11.5 billion reais (about $3 billion), surpassing the amount of taxes collected from the legal sale of cigarettes.
InSight Crime Analysis
The expansion of the black market for cigarettes poses a greater threat to the Southern Cone and neighboring Brazil than tax losses alone, as powerful criminal groups tap into the trade as a source of revenue.
Paraguay cigarette production spurs much of the black-market trade. The country produces some 65 billion cigarettes a year, but only consumes only some 2.5 billion, according to a 2013 study by the International Tax and Investment Center. The majority are smuggled to countries with much higher taxes on cigarettes, undercutting legal competitors. Nearly three-quarters of illicit cigarettes in 16 Latin American countries originated in Paraguay, Foreign Affairs reported.
Former Paraguay President Horacio Cartes has been at the center of the illegal cigarette trade in Latin America and beyond. His family’s company, Tabacalera Del Este, is one of the main sources of smuggled tobacco, representing half of all illegal cigarettes sold in Brazil.
The two most popular cigarette brands in Brazil are brands smuggled from Paraguay.
Besides, the smuggling routes in the Tri-Border Area are controlled by groups that include powerful Brazil prison gangs. Federal police say both the First Capital Command (Primeiro Comando da Capital – PCC) and the Red Command (Comando Vermelho – CV) have used proceeds from illegal cigarette sales to buy weapons and ammunition, O Globo reported.
Last year, Brazilian police dismantled a smuggling ring that imported cigarettes among other contraband on the Paraguayan border. This successful operation only created a vacuum in the market that the PCC stepped in to fill. The PCC now controls the Southern Cone’s main cigarette smuggling route, which originates in Ponta Porã in the Brazilian state of Mato Grosso do Sul that borders Paraguay. From January to September last year, some $71 million worth of illegal cigarettes were seized in this region, according to O Globo.
As long as Paraguay is able to supply cheap cigarettes and consumers in the region are willing to buy them, criminal groups will seize the opportunity to increase their profits, while national governments continue to lose taxes.