Up in smoke

Illicit tobacco trade in Vietnam and Cambodia, with brands owned by Cambodian tycoons at its heart, is costing producers millions.

Two cigarette brands distributed by two of Cambodia’s most prominent and connected tycoons are being smuggled from Cambodia to Vietnam at an estimated rate of more than 300 million packs a year. The practice is contributing to tobacco manufacturers’ losses of nearly US$200 million annually, according to trade documents and industry experts.

Hero cigarettes are distributed by a firm controlled by Ly Yong Phat, the “King of Koh Kong”, who made his fortune in sugar.

Hero and Jet, distributed respectively by Senator Ly Yong Phat’s Hero King Co Ltd and Theng Bunma’s Thai Boon Roong Co Ltd, comprise a significant portion of the billions of cigarettes illegally moved across the border each year, according to estimates from the Vietnam Tobacco Association.

A total of 11.4 billion cigarettes were smuggled into Vietnam from Cambodia in 2011, causing industry losses of $171 million, according to the VTA. With little being done at the border to prevent smuggling, that number was predicted to have jumped to 12.9 billion in 2012 for a grand total of $193.5 million in losses for cigarette producers, the trade group says.

Smuggled cigarettes make up from 18% to 22% of the 3.5 billion to 3.8 billion packs consumed in Vietnam each year, the VTA stated in an analysis of the market in 2011. Of those, the two brands distributed by Thai Boon Roong and Hero Kings have controlled roughly 40% of the market since 2007.

“If the [Vietnamese] state does not have effective measures to prevent radically illicit tobacco, the tobacco industry of Vietnam may face difficulties in maintaining its core position in the domestic market in a short time,” the VTA analysis states.

“With the evolution of the situation with respect to illicit tobacco ... our country’s foreign currency has been bleeding more than $200 million per year and in 2010 it was 3.6 billion dong [or $172.72 million] in tax losses for the state.”

In a bid to tackle rampant smuggling of cigarettes across the Cambodian-Vietnamese border, the VTA has lobbied for tougher anti-smuggling reforms with the Vietnamese government, while releasing information about it to the public through the Vietnamese media.

“In the course of working negotiations at a national level between Cambodia, Laos, and China, it is suggested that [Vietnam] should pay attention to the collaboration in fighting illicit and trading of illegal tobacco through borders, especially in Cambodia,” VTA secretary-general Pham Kien Nghiep said in an e-mail.

Hero packages proclaim they are “Made under authority of Hudson Tobacco, London”, a company that has done no actual business since it was established in 1985, according to UK records.

But the illegal trade is also affecting the local markets. British American Tobacco (BAT), which produces brands such as ARA and 555, estimates that the illicit tobacco trade in Cambodia generates profits of about $16 million a year in an industry worth just $30-40 million.

“The inefficient controls over the illegitimate transit trade through Cambodia and parts of the local industry, including the inability to collect taxes, means that the local industry is unable to compete on a level playing field as cigarettes are being brought into the market that do not comply with local regulations,” a BAT spokesperson said in an e-mail.

“The legitimate industry simply cannot compete on a level playing field with the transit brands that do not pay all their tax in full.”

Ly Yong Phat could not be reached for comment despite repeated attempts to reach him via phone and e-mail. But his assistant, Lap Lay, confirmed that Hero King was still a subsidiary of L.Y.P. Group and selling Hero cigarettes.

“We sell cigarettes to wholesalers and they distribute those cases to the markets in Cambodia and re-export them into Vietnam,” he said, adding that Hero King pays import taxes on its cigarettes and has no involvement with smuggling.

Theng Bunma could not be reached, as he is currently in hospital in Thailand.

BYZANTINE BUSINESS

The origins of the two brands in question, Jet and Hero, are as murky as the trade itself. Lettered beneath the Hero logo down the side of the pack are the words “Made under authority of Hudson Tobacco, London.” However, a 2010 public filing to a UK-based registrar shows that Hudson has had no business since it was established in 1985.

Nevertheless, several shipping receipts from 2010 show a firm called Hero King Co Ltd as the recipient of tens of thousands of cartons of Hero cigarettes at the Phnom Penh Autonomous Port from the Indonesia-based trading firm Pt Sumatra Tobacco Trading Company.

Hero King is a subsidiary of L.Y.P. Group, according to the conglomerate’s website, a subsidiary in which Ly Yong Phat is CEO and president, according to the Cambodian Chamber of Commerce website.

According to Thomson CompuMark, a subsidiary of Thomson Reuters, the British cigarette brand Jet is registered to Thai Boon Roong Co Ltd, whose owner is Theng Bunma.

Shipping receipts show that the Indonesian trading firm Pt Sumatra Tobacco Trading Company is also a key distributor of Jet cigarettes and sells the brand to Thai Boon Roong through deliveries made at both the Sihanoukville and Phnom Penh ports.

Those shipping receipts, by the Malaysian shipping service Hub Shipping Sdn Bhd, along with an invoice by Sumatra, show that $1.5 million was paid for more than 141 million Jet brand cigarettes that were shipped from Indonesia to Sihanoukville in June 2011. At 22 US cents (6.50 baht) per pack of 20 cigarettes, those packs are sold for between 50 and 70 cents (15 to 21 baht) on the Cambodian open market, and more than twice that in Vietnam.

Shipping receipts from 2010 also show that Hero King was the recipient of tens of thousands of cartons of Hero cigarettes at the Phnom Penh Autonomous Port.

Imported, then stored in factories in Phnom Penh, the two brands are openly available in Cambodian markets. They sit among dozens of other illegally imported brands from countries such as Indonesia, China and Malaysia.

BILLIONS UNACCOUNTED FOR

Data from the international market research agency ERC International Plc show that in 2008, Cambodia imported a total of 22.7 billion cigarettes, while producing another 4.5 billion. Of those, 525 million were legally exported while 6.4 billion were consumed, leaving 20.27 billion unaccounted for.

That is compared to 2000, when nearly 20 billion cigarettes produced and imported overshadowed about 7 billion that were consumed and exported, leaving 11.15 billion cigarettes unaccounted for in the market, according to the same data.

To tackle the smuggling of cigarettes and other goods across the Cambodian-Vietnamese border, the Department of General Customs and Excise signed a memorandum of understanding in April 2011 with Vietnam vowing to put in place stronger border checks.

The World Health Organisation is also lobbying the Phnom Penh government to prevent cigarette smuggling. The WHO is trying to convince the government to increase taxes on cigarettes in order to steer people away from the habit.

“Certainly, smuggling is already contributing to the problem [of smoking], because it prevents people from making the right decision on whether or not to smoke because it is so cheap,” said Dr Peter Van Maaren, WHO’s country representative to Cambodia.

The reason why the bootlegging of tobacco into Vietnam from Cambodia is so profitable is because smugglers can take advantage of dramatic tax differentials by marking up cigarette prices at the point of resale. The government has previously said it cannot increase taxes on cigarettes as it would risk putting farmers out of work.

Dr Van Maaren said raising taxes would not bring about such a scenario.

“The argument that raising taxation in Cambodia will somehow affect farmers is not true as we have seen that it has had little to no impact in similar examples in other low-earning countries,” he said.

Cigarette distributors in Cambodia have to pay the Customs and Excise Department three taxes based on notoriously low brand valuations made by the government. Those taxes are a 7% import duty, a 10% excise tax on import and a 10% value-added tax.

Using the current excise scheme, Cambodia has the lowest tobacco tax in the world at just 10% of the consumer retail price of cigarettes, according to the World Health Organisation. That is compared to 32.6% in Vietnam, about 65% in Turkey and 81% in the UK.

SPECIAL TAX TREATMENT?

Due to the reduced amount of cigarettes imported to Cambodia legally recent years, the General Department of Customs and Excise collected 12.78% less in revenues in 2011, at $40.65 million, compared to two years earlier, when revenues reached $46.61 million.

Even though customs officials said that Jet and Hero do, in fact, pay the tariffs on the cigarettes imported to Cambodia, tobacco valuations by the Ministry of Economics and Finance show that those brands pay substantially less compared with more common brands, raising concerns among cigarette manufacturers that those brands are getting special treatment.

According to figures from the Customs Department last year, the customs tax valuation for both Jet and Hero were $67.50 per case, or 500 packs, while other brands sold in the market, such as  Marlboro and 555, had to pay $100 per case.

Asked why brands such as Hero and Jet were being sold without a sticker showing they have paid the correct amount of tax, Bou Bunnara, chief of the public relations unit at the General Department of Customs and Excise, said that distributors can sell packs of cigarettes without it as long as they have paid their import taxes.

“They have the right to sell freely since they already paid the import tax ... but we will ban them from circulating inside or outside the country if they do not pay the tax,” he said.

Kong Vibol, the secretary of state at the Ministry of Finance in charge of the Customs Department, said yesterday that he was “busy in a meeting”, while attempts earlier in the week also failed to elicit comment.

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Writer: Philip Heijmans