UNITED KINGDOM: Smuggling of Alcohol, Tobacco, and Drugs
Introduction
Due to the illegal nature of certain activities, it is difficult to fully discern the impact of their trade on the UK economy, however the Office for National Statistics (ONS) has produced an estimate for the smuggling of alcohol, tobacco, and drugs into the UK. The scope, methodology, compilation practices and data sources for these commodities are outlined below. The report also aims to highlight linkages across statistical domains and ends with outlining the challenges and conclusions that compilers face when producing this data.
Scope, Methodology, Compilation Practices, and Data Sources
Scope
Estimates of smuggled tobacco volumes involves cigarettes, cigars and hand-rolled tobacco; smuggled alcohol refers to beer, spirits and wine; smuggled drugs include crack cocaine, powder cocaine, heroin, ecstasy, cannabis and amphetamines.
Data Sources and Methodology
Alcohol
Volumes of smuggled alcohol are estimated using current price data rom Her Majesty’s Revenue and Customs (HMRC) and a variety of price indicators. Figures from HMRC are produced by comparing estimated total UK consumption (including direct imports by households) with legally purchased volumes. These estimates therefore use a demand-side based approach. To improve the reliability of estimated consumption, HMRC supplements data from direct surveys of consumption patterns. Sources for these indicators include HMRC, a commercial organization and INSEE (the French Statistical Institute). Volume and price data are combined, using a range of assumptions, to estimate the impact of smuggling on the production, expenditure and income approach to the measuring of GDP. Assumptions are based on market intelligence provided by HMRC in 2000-2001. Volumes of beer and spirits are based on HMRC published estimates. A historic estimate is used for wine, based on market intelligence from HMRC, carried forward from 1997.
For cross-border smuggling, sellers of contraband alcohol are assumed to pay French prices, as published by INSEE, without any mark-up. Prices to final consumers are assumed to vary according to the type of outlet through which the smuggled goods are sold on. Fixed proportions, based on market intelligence provided by HMRC in 2000-2001, are used to allocate total smuggled volumes between the different types of outlets.
Tobacco
HMRC provides data on smuggled volumes of cigarettes and other tobacco products. The data for cigarettes covers both smaller consignments and larger scale ‘freight’ smuggling. Based on market intelligence provided by HMRC in 2000-2001, it is assumed that 92% of smuggled cigarettes reach the UK through ‘freight’ smuggling. Fixed proportions, based on market intelligence from HMRC, are used to allocate final sales of smuggled tobacco between the different types of outlets.
Assumptions on the prices paid by the sellers and final consumers of smuggled tobacco are also based on market intelligence from HMRC. For tobacco smuggling (excluding freight smuggling of cigarettes), sellers are assumed to pay Belgian market prices. Sellers of freight smuggled cigarettes are assumed to pay a lower price. Prices to final consumers for ‘street’ sales are assumed to be lower than for other outlets and are estimated as fixed mark-up on Belgian prices. Retail shops, bars and restaurants are assumed to sell smuggled tobacco at the same prices as their other stock. Other outlets are assumed to sell it at 10% below typical retail price.
Drugs
Like alcohol smuggling estimates, a demand-side method is also used with illegal drugs.
A reference year of 2003 is used for the time series, and these values were created through a set of detailed surveys regarding drug use, conducted by the home office over the period 2003-2006. From this, an estimate of the sales of illegal drugs in 2003 was derived. Since the 2003 value is a current price value, the appropriate index is a composite one: (volume index) x (price index). The chosen volume index is the number of users of the drug from the Crime Survey for England and Wales (scaled up using population to the United Kingdom), while the price index is the price series from the UN.
Half of cannabis sales are set aside as domestic production. The remainder (i.e. 50% of cannabis sales plus all sales of other drugs) leaves the sales of imported drugs. Dividing this value by retail drug prices sourced from the United Nations’ World Drugs Report gives us a quantity of drugs sold in kilograms. Adjusting this for purity using data from police and border seizures and multiplying by the UN wholesale drug prices gives us imports. For home-grown cannabis, we assume that the only inputs are electricity and seeds and planting stock. The Department for Environment, Food and Rural Affairs (DEFRA) produce annually an estimate of UK domestic agricultural output and intermediate consumption. Using the ratio of output, we estimate the two components of intermediate consumption.
Compilation Practices
Alcohol
Smuggling of alcoholic drink results in increased output in the Statistical classification of economic activities in the European Community NACE Rev. 2 division 47, ‘Retail trade, except of motor vehicles and motor cycles’ and in (NACE) Rev. 2 division 56, ‘Food and beverage service activities.’
‘Street’ sales of smuggled alcohol and sales through off-licensed retailers are recorded as production in NACE 47 (retailing). Output is measured as resale margins and intermediate consumption is estimated as a proportion of output. The proportion for a particular year is based on analysis of the pattern of intermediate consumption in comparable legal activities. The analysis was last updated in 2012. The product breakdown of the intermediate consumption is also based on the pattern for comparable legal activities.
Sales of smuggled alcohol through bars and restaurants are recorded as production in NACE 56. Output from sales through these outlets is given by the value of sales to final consumers. Intermediate consumption is estimated as a proportion of the resale margin plus the amount paid by the seller for the smuggled goods. The product breakdown of the element that is estimated as a proportion of the resale margin is assumed to be the same as for the comparable legal activities. Sales through bars and restaurants are treated differently from sales via other outlets as it is assumed that bars and restaurants carry out product transformation in the sale of smuggled alcohol, whereas other outlets do not.
Although ‘diversion’ fraud affects alcoholic drink that is produced in the UK, there is no change to estimated UK production in NACE Rev. 2 division 11, ‘Manufacture of beverages’, as a result of measurement of diversion fraud. This is because it is assumed that the producers of the drink involved report their sales correctly, with the ‘diversion’ fraud taking place subsequently.
Tobacco
‘Street’ sales of smuggled tobacco, sales through off-licensed retailers and sales through other (non-licensed) outlets are recorded as production in NACE (retailing). Sales through bars and restaurants are recorded as production in NACE 56 (catering and restaurants). Output from all sales of smuggled tobacco is measured as resale margins and intermediate consumption is estimated as a proportion of output. As with smuggled alcohol, the proportion in individual years is based on analysis of intermediate consumption in comparable legal activities. The analysis was last updated in 2012. The same analysis is used to inform the product breakdown of the intermediate consumption.
Drugs
The activity of reselling imported drugs is balanced: domestic output increases by the value of the margin and imports increase by the value of sales less the margin; together supply increases by the value of sales. Household final consumption expenditure (HHFCE) increases by the value of sales, increasing demand. All this happens within the pharmaceutical product.
UK cannabis production, however, is not balanced. Domestic output increases by the value of sales and this is the increase in supply; HHFCE increases by the value of sales; less the value of electricity consumed, and intermediate consumption increases by the value of the seeds and planting stock and electricity used in production. So, there is “extra” demand equal to the value of the seeds and planting stock used. This is because we assume that the seeds and planting stock were previously recorded on the supply side but not the demand side.
Linkages Across Statistical Domains
Alcohol
‘Street’ sales of smuggled alcohol and tobacco and sales through off- licensed retailers are included in the Classification of Individual Consumption by Purpose (COICOP) 02.1 and classed as N2 exhaustiveness adjustments.
HHFCE on smuggled alcohol is measured at purchasers’ prices, that is, the price paid by the seller (basic price), plus any trade margins. The intermediate consumption associated with these sales is offset with equal deductions from HHFCE. These deductions are made across a range of COICOP categories and are applied through the supply and use balancing process, to eliminate double counting.
Tobacco
All sales of smuggled tobacco are included in COICOP 02.2 and classed as N2 exhaustiveness. HHFCE on smuggled tobacco is measured at purchasers’ prices, that is, the price paid by the seller (basic price), plus any trade margins. To avoid double-counting, the intermediate consumption linked to the supply of smuggled tobacco is offset with equal deductions from HHFCE.
Drugs
In addition to the direct impact on COICOP 02.3, inclusion of narcotics in HHFCE results in deductions to COICOP 04.5.1 (electricity). This is to correct for intermediate consumption of electricity in UK cannabis production that would otherwise wrongly be included in HHFCE. The deduction is calculated as a proportion of the volume of UK cannabis production and is classed as a conceptual adjustment. Proportions are updated annually, using information from the Department for Environment, Food and Rural Affairs (DEFRA) on intermediate consumption in UK agriculture.
Current Challenges and Conclusions
Alcohol & Tobacco
Sources are outdated; new ones need to be identified.
Drugs
The latest UN World Reports on Drugs do not appear to contain the drugs prices we have used to create these estimates. Therefore, alternative sources must be found. One such source may be the International Drugs Monitoring Unit, a professional expert witness firm. Investigations into the quality and methodology of this data source are ongoing and a decision on whether to use them should be part of any future work.
Furthermore, the closure of the Forensic Science Service means that no purity data will be available for future years. Any future work should include a search for a new source.
Annexes