|kvl-homepage||The Illegal Cigarette Market in Germany: A Case Study of Organized Crime
by Klaus von Lampe
paper presented at the 1st annual meeting of the European Society of Criminology, Lausanne, Switzerland, 6 September 2001.
[This paper is also available as a PDF-file including the slides used in the presentation. Click here!]
The purpose of this paper is to present an ongoing research project on the illegal cigarette market in Germany and to discuss its relevance for the study of organized crime.
First, I would like to briefly outline the basic characteristics of the illegal cigarette market.
Second, I would like to raise the question of what makes a study of organized crime a study of organized crime.
Third, I would like to provide an overview of our approach to the study of the illegal cigarette market and of some of our preliminary findings.
THE ILLEGAL CIGARETTE MARKET: AN OVERVIEW
The cigarette black market is an example for an illegal market that centers around a commodity which per se is legal. What makes the dealing in cigarettes illegal is the circumvention of taxes and customs duties.
In Germany a black market for untaxed cigarettes of major proportions has emerged in the late 1980s and early 1990s, accounting for about 5 percent of the overall retail market for cigarettes.
There are roughly three channels through which cigarettes are supplied to the black market:
1. Cigarettes are purchased in low-tax countries and smuggled into Germany.
2. Cigarettes are purchased in Germany or other EU countries for export to non-EU countries, typically in Eastern Europe, but are diverted to the black market before they leave the country.
3. Cigarettes purchased in Germany or other EU countries are exported, typically to Eastern Europe, only to be smuggled back in.
Once cigarettes have been procured for the black market they are either sold to consumers through clandestine networks or by street vendors, mostly of Vietnamese origin, who have established themselves in various parts of East Germany, particularly in East Berlin. One remarkable feature of the open market for untaxed cigarettes is the victimization of Vietnamese street vendors by rivalling Vietnamese extortion gangs who in the past have waged gangland style wars against each other. In recent years, the flow of contraband cigarettes has somewhat changed in the sense that Germany has increasingly become a transit country for shipments destined for high-tax countries such as Great Britain.
THE STUDY OF THE ILLEGAL CIGARETTE MARKET AND THE STUDY OF ORGANIZED CRIME
While the primary goal of our project is to explore the illegal cigarette market, the ultimate objective is to contribute to a general understanding of organized crime.
This objective is premised on two assumptions,
1. that there is-at least potentially-a general understanding of organized crime in the sense of a cumulative body of knowledge, and
2. that the illegal cigarette market can in some way or other be considered a part of organized crime so that our study of the illegal cigarette market can contribute to this body of knowledge.
These concerns, of course, are not unique. They arise with any study that sails under the flag of organized crime research and have to do with the difficulties of translating "organized crime" as a heterogeneous socio-cultural and political construct into a scientific concept.
So far these difficulties have not been overcome by a generally accepted definition of organized crime. Not surprisingly so, because such a definition would require a thorough understanding of the pertinent phenomena and the interplay between them that is currently not available.
Where "organized crime" is not just used as a non-committal label, a certain degree of reciprocity of research has only been achieved by either taking Mafia imagery as a common measuring rod or by reducing the concept of organized crime to partial aspects, that is to illegal markets and illegal enterprises, on which the conceptual framework of economics can be transferred.
The enterprise model allows valuable insights, not least when-as in our case-an illegal market is chosen as the object of study. However, before the background of the public and scientific debate it means that the scope of the concept of organized crime is arbitrarily narrowed down to exclude, for example, criminal structures not directly affected by market dynamics, such as criminal fraternities and criminal subcultures and groups engaged in non-market crimes like fraud.
I would like to suggest that in the absence of universally accepted defining criteria the common ground of organized crime research has to be found not in a mutual understanding of the nature of organized crime but in an agreement on how to eventually reach such a mutual understanding.
There are three notions I believe should guide the study of organized crime.
First, the field of study should be defined by the scope of the public and scientific debate. Organized crime, then, is what people so label. This includes just about any kind of cooperation for the rational commission of illegal acts and certainly it comprises a phenomenon like the illegal cigarette market.
Second, within this broad framework there are a number of recurring themes that need to be carefully conceptualized, for example the personalities of so-called organized criminals, the types of crimes, including victimless and predatory crimes, the structural patterns of criminal cooperation, the concentration of power in criminal milieux and illegal markets, the relation between the illegal and legal spheres of society and the social embeddedness of criminal structures. Instead of worrying about how to define organized crime, more efforts should be invested in defining these smaller scale concepts.
Third, the aspects of the social universe that are subsumed under the umbrella concept of organized crime should not be treated as static. Whereas definitions of organized crime have a tendency to frantically focus on one specific constellation of these aspects, namely complex criminal organizations using violence and corruption to attain monopoly control over illegal activities and to undermine legal institutions, it seems preferable to place the emphasis on the fluidity and diversity characterizing collective criminal behavior.
This entails exploring in as many social and historical settings as possible how the pertinent phenomena vary in time and space and in what combinations they appear. From this research it might be possible to build a typology of different constellations of organized crime. Such a typology will for example highlight the fact that contrary to Mafia imagery, it does not always take complex organizations to put criminals in a position to exert influence on legal institutions, just as it is not always required to influence legal institutions to engage in continuous criminal activity. This seems to be true, at least, in the case of the open market for untaxed cigarettes in Germany.
One step further, the construction of a typology may serve as the basis for creating an analytical model of organized crime which comprises a set of concepts and indicates by what interrelations they are connected and how they relate to basic conditions.
This research agenda, of course, rests on the fundamental allegation that despite cultural differences and constant social change there are persistent patterns of human structure and behavior to be uncovered.
In sum, I would like to suggest that studies of organized crime, including our study of the illegal cigarette market, should be designed so that they are reciprocally meaningful in order to contribute to a cumulative body of knowledge about the phenomena subsumed under the term "organized crime". In order to obtain this compatibility, research should be based on a set of clearly defined concepts and should aim at viewing the pertinent phenomena within one frame of reference.
INVESTIGATING THE ILLEGAL CIGARETTE MARKET
Choosing the Cigarette Black Market as an Object of Study
Ideally, organized crime research would take a given geographical area as an object of study to determine what people, integrated in what structures, are involved in what types of planful illegal activities, applying what modi operandi, exerting what influence on legal institutions and being supported and influenced by what basic conditions. Because of the broad scope of the subject, however, vast amounts of information would have to be collected and in the end, given the scattered data sources, it is most likely that still only a very fragmentary picture would emerge.
Taking one illegal market in a specific geographical area as the object of study is an attempt to minimize these methodological problems. It allows a close-up look at a clearly defined detail of the overall conglomerate of people, structures and events without reducing the conceptual frame of reference. This is true, at least, for the illegal cigarette market in Germany.
One major reason for choosing the illegal cigarette market as an object of study is that in some way or other it reflects about every facet of organized crime imagery, from trigger-happy gangsters to white-collar criminals, from ethnically homogeneous criminal organizations to criminal networks deeply rooted in mainstream society.
Another reason for selecting the illegal cigarette market in Germany is the limited time frame of about 10 years within which it has emerged and gone through several distinct phases of development. That provides us with a good opportunity to study the evolutionary history of an illegal market.
Data Sources and What They Can Reveal
It is not possible in this paper to give a complete account of the study which, in fact, is still in its early, preparatory stages. However, a few comments can be made on the conceptual frame of reference, data sources, methods and preliminary findings.
In order to obtain a clear and comprehensive picture we try to tap as many sources as possible, including published material, such as statistics and media reports, unpublished material, such as law-enforcement agency records, and original data that have to be generated in the course of our research, such as interviews with investigators and market participants.
Published Material and the Size of the Cigarette Market
Published sources are valuable, for example, in that they can tell us something about the overall volume of the illegal cigarette market. Students of illegal markets usually face insurmountable difficulties in determining the magnitude and scope of the problem. They either have to turn to statistics on arrests and seizures or rely on extrapolations from individual cases.
The cigarette black market in Germany permits a different approach because of its rather quick emergence and the continued coexistence with the legal cigarette market. Consumer statistics show a significant drop in legal sales of cigarettes in the early 1990s parallel to the establishment of the street sale of untaxed cigarettes in East Germany, while consumer surveys indicate that overall consumption of cigarettes has remained stable. As a result, the volume of consumption of untaxed cigarettes can be deducted from the difference between the former and latter levels of legal sales of cigarettes.
Unpublished Material: Customs Service Case Files
The core of our research will be made up of the analysis of judicial files pertaining to investigations of the customs service.
Currently, a pre-test is conducted on proceedings of the Berlin office of the customs service involving some of the cases with the highest amounts of cigarettes and highest number of participants involved from the time period 1990 until 1997. So far, the analysis of 14 case files has been completed.
Careers in the Cigarette Black Market
One pattern that has emerged in the pre-test is that the cigarette black market has initially attracted a great diversity of participants with regard to social and professional backgrounds. For many of them, however, the involvement in the distribution of contraband cigarettes was apparently only an episode to overcome financial difficulties in the period of transition following the fall of the iron curtain. This observation applies, for example, to Poles operating in small vertically integrated enterprises consisting of about four persons tied by friendship and marriage who procured cigarettes in Poland, smuggled them across the border and then sold them either on the street to consumers or to retail dealers. Many of these Polish entrepreneurs, it seems, had a good education, had a family with children and held legitimate jobs. Probably for these reasons they were low risk-takers who tended to leave the cigarette business after being apprehended for the first time. A somewhat similar career pattern can be observed in the case of Vietnamese street vendors. The first generation of Vietnamese involved in the cigarette black market were former guest workers recruited by the East German government in the late 1980s who were laid off work shortly after the collapse of the communist regime. They took over the street sale of contraband cigarettes from Polish and other Eastern European tourists in 1991 and 1992. When Germany granted former guest workers permanent residence status in 1993, options for legitimate income opened up so that most of them moved out of the cigarette black market. Those that remained, established themselves as middle-level dealers. They now supply street vendors who have come to Germany as illegal immigrants specifically for the purpose of selling cigarettes.
The upper levels of the black market today are dominated by illicit entrepreneurs with the necessary skills and financial capacities to purchase bulk loads of untaxed cigarettes from legitimate sources. On the outside they may appear to be legitimate businessmen but the management of contraband shipments is likely to be an important part of their overall business activities.
Middle-level dealers tend to operate in an illegal setting. They usually hold menial jobs or are unemployed and derive most of their income from the cigarette business. Both upper and middle-level dealers recruit unskilled labor from marginalized segments of society or from abroad for exposed tasks such as unloading cargo.
Patterns of Cooperation
The case files also give an impression of the structural patterns of cooperation, although a clearer picture will have to be gained from interviews with market participants.
Our approach to the analysis of criminal structures is basically a network approach. This means that we take the ties connecting two actors as the basic unit of study. In the analysis, three dimensions of criminal ties are taken into consideration: 1. the instrumental relations pertaining to a given criminal activity, 2. relations rooted in non-economic criminal structures such as criminal fraternities or criminal subcultures, and 3. the underlying social relations that can provide a basis of trust for criminal cooperation, for example familial or friendship ties. The general assumption is that the higher the risks involved in a criminal activity, the greater the likelihood that patterns of criminal cooperation are embedded in pre-existing social networks.
The first observation that has to be made with regard to the patterns of cooperation in the cigarette black market is that the tasks required to procure untaxed cigarettes can be and partly even have to be performed in legal settings, most notably the purchase of untaxed cigarettes from legal sources within the EU. The first time laws in Germany are visibly violated is when contraband cigarettes are unloaded for distribution to black market dealers.
As a result, the procurement of untaxed cigarettes for the black market seems to lie in the hand of legitimate businesses. Employees of these companies may unwittingly be involved in illicit activities so that considerations regarding the form and content of criminal relations do not apply.
In contrast, the handling of untaxed cigarettes on the various levels of the distribution pyramid takes place in illegal settings and thus entails high risks of detection. Therefore, it could be expected to find the actors involved in the unloading, storage and passing on to lower-level dealers to be connected by strong network ties. This, however, is not always the case. On the contrary, many cooperative relations are even established on an ad-hoc basis, i.e. without being embedded in pre-existing networks.
In one case, four Slovaks were hired by a Polish importer/whole-sale dealer for the loading and transport of contraband cigarettes in Germany based on a chance meeting in their home town. They were given free accommodation in Berlin and received a payment of 50,-- Deutsche Marks (25 Euro) for each transport of several hundred thousand cigarettes from an autobahn parking lot near the Polish border to Vietnamese customers in Berlin.
The calculation behind such arrangements seems to be that the perceived risk of damaging testimony is smaller than the risks the illegal entrepreneurs would incur if they performed the pertinent tasks themselves. In fact, in the case of the four Slovaks and in similar cases the hired hands willingly testified after being arrested. The information they could supply, however, was found to be insufficient for an indictment and in some cases even for an identification of the respective employer. A similar lack of underlying bonds of trust is apparent in buyer-seller relations. From the available evidence it seems that Eastern European suppliers of contraband cigarettes have initially taken the risk of directly approaching Vietnamese mid-level and retail dealers without prior introduction by a third party or any other preceding contact. Apparently, the Vietnamese buyers and Polish suppliers were likewise confident that members of the respective ethnic group would be trustworthy.
In one case involving the sale of a truck holding 11.5 million cigarettes, however, this assumption proved false. The Vietnamese buyer turned out to be cooperating with the customs service. In this case, too, buyer and seller had no prior contact. The connection between them was made through a chain of weak ties within the Polish community. The person linking this ethnic network to the Vietnamese informant was a naturalized Pole who had served time with him in a Berlin prison.
Only the core groups constituting the management of illegal enterprises have the tendency of being held together by strong ties. Where pertinent information is contained in the files it points to long lasting friendship, familial ties and quite often marriage.
Group structures, to the extent they become visible, in general appear to be simple with little vertical and horizontal differentiation, especially because "criminal laborers" are mostly hired only for one specific task or only for a limited period of time, so that they cannot be considered parts of durable enterprise structures. One reason for this phenomenon may be that more sophisticated structures are not required to meet the demands of the cigarette black market as there is, for example, no complex technology to be handled.
The assumption, however, that complex criminal structures are least likely in a hostile environment with the highest risk of exposure is not necessarily true in the case of the illegal cigarette market. Ironically, it is the street market for untaxed cigarettes that displays the highest levels of organizational sophistication.
Originally, street vendors were independent entrepreneurs who operated completely on their own. A change occurred only after increased law-enforcement pressure in response to the flare-up of violence between extortion gangs forced vendors into more complex enterprise structures. In order to safeguard against raids, look-outs were positioned around vending locations. To minimize losses from confiscations, the contraband cigarettes were kept separate from the vendor so that store keepers became necessary for guarding the merchandise and to hand out cigarettes once the vendor had come to an agreement with a buyer. Likewise, to avoid the forfeiture of monies, cash had to be kept separate from the cigarettes which required the position of cashier. While the precise internal structure of these vending operations remains unclear, there is anecdotal evidence that vendors and cashiers are hired for a fixed salary to work at specified times. This points to a continuous enterprise structure with at least a two-level hierarchy of employers and employees and a division of labor comprising a set of different positions. The reason why in this case an increasingly hostile environment has led to the emergence of complex criminal structures instead of a reverse development has probably to be sought in the peculiar status of Vietnamese immigrants. Before the background of light sentences imposed on the street sale of cigarettes which allow vendors to quickly return to their business after each arrest, German authorities cannot use extradition as a sanction against vendors. Vietnam requires entry visa even from its own citizens and appears to be reluctant to facilitate the return of Vietnamese involved in the cigarette black market. Therefore, the risks of being identified as a participant in a complex vending operation is outweighed by the risk an individual vendor would bear of having merchandize and sales proceeds confiscated by police or customs service.
Illegal Power Structures
A clear-cut horizontal and vertical differentiation could also be found in Vietnamese extortion gangs that at the height of their power in the mid 1990s featured specialized divisions for collecting money and for exerting violence within a military-like hierarchy. A greater significance than that of a complex structure, however, lies in their effort to establish exclusive control over an illegal market, the street sale of untaxed cigarettes, by means of intimidation and violence. This aspect is only vaguely reflected in the investigations of the customs service as they have no jurisdiction over these types of cases. Another reason may be that extortion in and by itself has little impact on the way the street vendors are conducting their business.
From the available information it can be said that the violent struggle for exclusive control over the open retail market eventually led to the dismantling of the competing gangs and also to a significant reduction of the street sale of untaxed cigarettes. The blatant use of violence, culminating in shoot-outs on shopping streets in broad daylight, brought a tremendous amount of media attention and provoked a relentless response by the police and customs service. This sheds some light on the interrelation between certain types of illegal behavior, media attention, and the direction and intensity of law enforcement.
Leaving the extortion of street vendors aside, there are no indications of monopolistic tendencies except for the fact that there are economies of scale in the bulk procurement of untaxed cigarettes which serves as a natural barrier of entry for financially less capable market participants on the upper level of the black market.
Interfaces Between the Legal and Illegal Spheres of Society
One final comment should be made on the interfaces between legal and illegal structures. There are numerous constellations that have to be taken into consideration, including the corruption of public officials, the use of legitimate businesses, and dealer-consumer relations. One aspect, however, deserves particular attention, the role of the legal cigarette industry. In other countries cigarette manufacturers have been found to have colluded with smugglers and illegal dealers in supplying the cigarette black market. In Germany and Western Europe in general, no similar evidence is available and the industry insists that it was in its own best interest to cooperate fully with authorities to curb the distribution of untaxed cigarettes. On the other hand, there seems to be an objective incentive for cigarette manufacturers to keep the black market going, because their profits are the same regardless of the circumstances under which the cigarettes are eventually sold to consumers and because the low black-market prices promise increased sales. In addition, there are indications that cigarette manufacturers turn a blind eye to the diversion of their products to the black market. In one case analyzed for the pre-test involving a British manufacturer, container loads of cigarettes were sold for export to Eastern Europe. The place of delivery, however, was a bonded warehouse in Portugal. Such a detour only made sense because the cigarettes were never meant to leave the EU. Instead, the buyer of the cigarettes used forged customs stamps to pretend proper export to Poland. The transit documents with the forged stamps were presented to Portuguese customs officers who were unable to identify the forgery because-not surprisingly so-they were unfamiliar with the stamps used by the German customs service on the Polish-German border. It is hard to believe that the British manufacturer was unaware of these implications.
In conclusion, I would like to stress that the examination of the illegal cigarette market can serve as a case study of organized crime to the extent the findings promise to be meaningful for a better understanding of the diverse phenomena subsumed to the umbrella concept of organized crime. There is a good chance that this ambitious goal can be achieved considering the broad range of themes characterizing the public and scientific debate on organized crime that can be addressed in the context of the cigarette black market and considering a fairly convenient access to a broad data base. Since the trafficking in untaxed cigarettes is not confined to Germany, but rather a global phenomenon, it would be desirable to extend our study to other countries.
Klaus von Lampe (2002). The trafficking in untaxed cigarettes in Germany: A case study of the social embeddedness of illegal markets, in: Petrus C. van Duyne, Klaus von Lampe, Nikos Passas (eds.), Upperworld and Underworld in Cross-Border Crime (141-161). Nijmegen: Wolf Legal Publishers.
Klaus von Lampe (2003). Organising the nicotine racket: Patterns of criminal cooperation in the cigarette black market in Germany, in: Petrus C. van Duyne, Klaus von Lampe, James L. Newell (eds.), Criminal Finances and Organising Crime in Europe (41-65). Nijmegen: Wolf Legal Publishers.