An increasing tobacco black market saw the Government miss out on $287.4 million in tax last year, a report reveals.
It comes at a time when further efforts are being made to crack down on cigarette smugglers with a new law and the New Zealand Customs Service fights an expanding war against organised syndicates operating here and offshore.
But one expert told the Herald the controversial policy of continually hiking up tobacco prices is "feeding organised crime".
The report by KPMG UK - prepared for Imperial Tobacco New Zealand Limited and released to the Herald - explored the illicit tobacco trade and its consumption in Aotearoa.
The total volume of all tobacco consumed in New Zealand during 2019 was more than 2000 tonnes. This was actually a decrease of 3.8 per cent on the year prior, but the volume of illicit tobacco used rose, the report shows.
If consumed legally, the report showed, last year's illegal tobacco would have represented an estimated tax value of $287.4m, when calculated using the excise tax rate for 2019.
A similar report was conducted for Australia and showed billions in missed tax revenue last year.
About 11.5 per cent of all NZ consumption in 2019 was illegal, some 230 tonnes, an increase from 10.2 per cent in 2018. It represented an 8.4 per cent increase in volume.
Despite the missed tax, an annual race to beat the January 1 excise hike had helped keep the Government's books in surplus. In February, Treasury released the accounts for the New Zealand Government for the six months to December 31, which showed the Crown ran a small surplus of $43m.
Unbranded tobacco, KPMG's report reads, accounted for most of the total illicit tobacco consumption last year, increasing from 16.7 per cent to 57.7 per cent of total illegal use in 2019.
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While the number of Customs interceptions grew by 76 per cent in 2019 the volume of tobacco seized only increased by 2 per cent on the previous year, suggesting a greater number of smaller interceptions.
Interceptions in 2018 were 53 per cent higher than the preceding year, Customs data released to the Herald under the Official Information Act shows.
Customs investigations manager Bruce Berry told the Herald the illicit tobacco trade has seen "the emergence of more organised criminal groups" and a move away from opportunism.
"We've also seen more and more crossover with other forms of criminal activity, particularly in the drug environment. We've seen the money laundering that goes with all of these illicit ventures ... they're using the same routes as the drug syndicates."
In May, Parliament passed legislation closing a loophole which allowed people to import cigarettes and loose leaf tobacco for manufacturing cigarettes and "roll your owns" for sale on the black market without excise tax.
The law came into effect on Wednesday with tobacco products, tobacco leaf and tobacco refuse now labelled as prohibited imports with a person needing a permit to import these products. A permit is not required to import cigars, cigarillos, water-pipe tobacco, chewing tobacco, snuff and snus.
Passengers arriving into New Zealand with tobacco do not need a permit and individual duty-free tobacco limits are unchanged.
Berry said the new legislation will help.
"It enables us to start targeting those people that are behind what I call 'systemic importations' where they are setting up multiple PO boxes to receive tobacco products. They are not opportunists - they are there to get in as much as they can in a commercial venture, with the aim of making money.
"It's all about money, the people behind these organised importations are just looking at profit ... Is the rise in prices making it more attractive to organised crime? Yes."
While Berry said there was a possible discrepancy factor in KPMG's findings, it was "indicative" of the trends he was seeing in the market.
New Zealand has the second most expensive tobacco in the Pacific-South East Asia region, KPMG's report showed, with a pack of 20 Marlboro cigarettes costing $32 - behind only Australia's price of $35.49 for the same brand.
Vietnam had one of the lowest prices in the region with $1.69 for the same brand and quantity - Myanmar was the lowest at $1.44 - while closer to home Tonga had a price of $9.92 and $13.68 in Fiji.
China and South Korea were the biggest source countries for seizures at New Zealand's border, Berry said, but a growing trend was an illicit trade from the Pacific Islands, which has included a "family-based syndicate" operating out of the Cook Islands last year.
New Zealand First leader and deputy Prime Minister Winston Peters has said the annual increased tax adds additional pressure on Customs and "disproportionately gouges the poor".
The policy had reached the limits of its effectiveness, Peters said.
"Clearly the price point has reached such a level that organised crime groups see economic opportunity. This places unnecessary pressure on our Customs service when it should be focusing resources on preventing the importation of illicit drugs."
Peters did not answer the Herald's questions this week on his previous comments and the Customs and Excise (Tobacco) Amendment Bill.
Only the Act Party voted against the bill with leader David Seymour arguing it would create more bureaucracy.
"It has done almost nothing to reduce smoking rates. What it has done is driven the supply of tobacco underground," he said.
Rohan Pike, a former Australian Federal Police officer and founder of the Australian Border Force's tobacco strike team, said high prices remained the key driver for smugglers in Australia and New Zealand.
"The profit margin is so high and the risk is so low," he told the Herald. "They don't care if there's a policy of seizure, they're just going to bombard the border.
"The governments created the policy to tax and that's created the crime environment," he said. "At the moment all we're doing is feeding organised crime."
Pike, now a consultant on fraud, corruption and bribery relating to the illicit tobacco trade, said the illegal supply lines often followed immigration lines where certain cigarette brands were already popular.
"New Zealand is in a slightly better position [to Australia], even though it's growing it's probably not quite to that exponential growth stage just yet."
Customs Minister Jenny Salesa, however, told the Herald she believed the new law gave Customs enough powers to stem the flow of illicit tobacco into New Zealand.
"The new law closes down international mail as a way for smugglers to import tobacco leaf and cigarettes into New Zealand to avoid taxes. Previously, Customs has had to prove the importation of tobacco products is for the purpose of evading excise tax, before the tobacco could be seized and destroyed," she said.
"Now, if the importer doesn't have a permit for imports through international mail, Customs can seize and destroy both tobacco and tobacco leaf immediately."
When asked if a smokefree New Zealand by 2025 was realistic and achievable, Salesa, the Associate Health Minister, said the Government was still committed to the challenge.
Some of the bigger Customs seizures in 2019 included:
• 2418 cartons of cigarettes (483,000 individual cigarettes) in July, equalling an evaded tax of $537,542.
• And 79.6kg of tobacco in November from the Cook Islands-Auckland syndicate, evading some $113,422 in tax.
Also last year a businessman, who has interim name suppression, pleaded guilty to dozens of charges for defrauding the revenue of Customs, making erroneous or defective importation entries, and selling goods without paying duties.
After a disputed facts hearing, Judge Tony Fitzgerald found he and his company had avoided $18.73m in tax by smuggling nearly 20 million cigarettes into New Zealand between 2015 and 2018 from China.
It was Customs' largest ever cigarette investigation, code-named Operation Whitethorn.
The businessman was sentenced last month to five years and three months' imprisonment, while his company was fined $9800.
The offending was described by Customs prosecutor Dennis Dow as "unprecedented large scale tax evasion, unprecedented large scale fraud".
As part of Operation Whitethorn - which began following a tip-off about the suspected smuggling of cigarettes inside sea container - the police's asset recovery unit also restrained two properties worth several million dollars, two luxury cars and several bank accounts.
A woman with interim name suppression was also charged in the investigation and remains before the court.
Just last month a 29-year-old Auckland businessman was arrested and charged for alleged tobacco smuggling.
In early January, Customs examined a sea cargo consignment of new household items and discovered it contained 75,000 undeclared Chinese-branded cigarettes.
Initial enquiries found the name of the person receiving the consignment was a false identity. Subsequent investigations allegedly linked the shipment to the businessman, and showed the use of a number of storage facilities and PO boxes across Auckland that had been opened using false identities.
The law: Tobacco increasingly regulated by NZ governments
Regulation of the tobacco industry in New Zealand has been increasing since the 1960s.
In 1963, advertising on television and radio was banned, while New Zealand was one of the first countries to introduce health warnings on cigarettes packets in 1974.
Since the turn of the century, a parliamentary inquiry was conducted in 2010 by the Māori Affairs Select Committee into the tobacco industry here and the consequences of tobacco use for Māori. It led to the goal of "Smokefree 2025" being adopted.
Smokefree is defined as a smoking rate of less than 5 per cent.
Also in 2010, the Excise and Excise-Equivalent Duties Table (Tobacco Products) Amendment Act made a minimum 10 per cent increase to the duties on all tobacco products. With the Customs and Excise (Tobacco Products - Budget Measures) Amendment Act in 2012 a further four cumulative 10 per cent increases were made on tax on all tobacco products annually from 2013 to 2016.
The then National-Government continued this trend in 2016 with yet another four cumulative 10 per cent increases on all tobacco products annually from 2017 to this year.