Internal documents question British American Tobacco's role in Iran smuggling

A recent study of British American Tobacco (BAT) internal documents shows that the manufacturer may be involved in the illicit trade of its products in Iran, despite its public statements of commitment to combating smuggling and counterfeiting. According to the authors, the manufacturer's various evidence or convictions in the illicit trade in several countries (North Korea, Cuba, Russia, Myanmar) could indicate that these practices are not isolated, one-off incidents, but part of a broader strategy.[1].

Illicit trade used by manufacturers to penetrate Iranian market

Various studies in the early 2000s showed that the tobacco industry relied on illicit trade to establish itself in the Iranian market, despite international sanctions against the country and various trade restrictions. The literature on illicit trade also highlights that illicit trade is regularly used by manufacturers as a means of establishing themselves in certain markets, as has been the case, particularly in former communist countries.

In 2000, Iran’s national tobacco authority signed an agreement with four tobacco companies, including British American Tobacco, to lift import bans and allow them to produce their products legally, with the aim of reducing illicit trade. Since then, little information has been available about the companies’ business strategies in Iran, their relationships with local authorities, or whether their illicit activities have continued. However, these years have been a time of great dynamism for BAT, which saw its market share in Iran nearly double between 2009 and 2015, from 17.8% to 33.4%. Although the United Nations lifted sanctions against the country in 2016, the US government reintroduced them in 2018–2019, while the Iranian government again banned the import of foreign cigarettes. As a result, in 2021, British American Tobacco was forced to sell its subsidiary in Iran.

The majority of illicit products in circulation come from cigarette factories

The researchers were able to rely on more than 15,000 internal and unpublished British American Tobacco documents, disclosed by a former employee of the cigarette manufacturer. These show that despite the manufacturer's signing of an agreement with the Iranian authorities in the early 2000s, British American Tobacco products continued to be smuggled. Thus, in 2009, BAT products represented 6.7% of the illicit market in Iran, according to the manufacturer's own estimates, which may underestimate the scale. An internal report also notes that the manufacturers' products constitute the vast majority of illicit trade in Iran, while counterfeiting is limited to 3% of the illicit market. The researchers point out that this reality contradicts the cigarette manufacturers' statements regarding the scale of counterfeiting. Overestimating the latter allows them to divert attention from their own responsibility in organizing or facilitating illicit trade.

The high presence of the manufacturers' products in the Iranian illicit trade does not only concern British American Tobacco, but also other cigarette companies, such as KT&G, or Philip Morris International (PMI). Indeed, in 2010, an internal British American Tobacco document estimated that these two manufacturers had the highest share in the illicit trade in Iran, and that PMI "has no licit presence on the market", and that "all their products are smuggled".

The instrumentalization of the fight against illicit trade to weaken competition

At the same time, internal documents document a broad strategy of “engagement” by the company against illicit trade. Despite Iran’s ratification of the WHO Framework Convention on Tobacco Control (FCTC) in 2006, which requires the country to protect its public policies from tobacco industry influence, BAT’s internal documents show that the company has developed “ongoing systematic engagement” with the Iranian government, the Ministry of Commerce, the Department of Anti-Smuggling, police officials, and Customs. The manufacturer has also lobbied to focus efforts to combat illicit trade on competing products. Finally, the researchers note that this engagement against illicit trade, in addition to targeting competing players, is designed as a reputational strategy with the government. Although BAT’s role in this decision is uncertain, British American Tobacco’s increased engagement in combating illicit trade has been followed by tax reductions on tobacco products.

From the return of sanctions to the sale of BAT's subsidiary

British American Tobacco has thus been able to take advantage of its public commitment against illicit trade, with weakened competitors, relationships established with the Iranian public authorities, and a reduction in taxes on tobacco products. In recent years, BAT has become the second player in terms of market share in Iran, totaling in 2020, 11.4 billion cigarettes sold in the country, for a turnover of 170 million pounds sterling and a profit of 60 million. However, the geopolitical context creates a "very complex commercial environment". The return of American sanctions against the country from 2018 and 2019 exposes the manufacturer to significant financial costs. Thus, in 2019, the company announced that it was selling its Iranian subsidiary, due to the risks weighing on British American Tobacco.

A call for a thorough investigation to verify possible involvement in illicit trade

In their conclusions, the authors note that British American Tobacco's track record in other countries, including North Korea manufacturer's sanctions bypass, should prompt the authorities to conduct a more in-depth investigation to determine whether illicit practices continue or not. The close relationship with the Iranian government, the weak control of the supply chain, the multitude of local distributors contribute to creating an environment conducive to involvement in illicit trade. Internal documents show that British American Tobacco is not at least unable to secure its supply chain, and raises questions about possible involvement in illicit trade.

Keywords: Iran, Illicit Trade, British American Tobacco

FT

[1] Gomis, B, Gallagher, AWA, Alebshehy, R and Rowell, A. 2024. Sanctions and Illicit Trade: British American Tobacco's Activities in Iran (2000–2014). Journal of Illicit Economies and Development, 5(1): pp. 34–46. DOI: https://doi.org/10.31389/jied.223