BILLS DIGEST NO. 9, 2018–19              13 August 2018

Customs Amendment (Illicit Tobacco Offences) Bill 2018

Monica Biddington
Law and Bills Digest Section

Date introduced: 28 March 2018

House:  House of Representatives

Portfolio: Law Enforcement and Cybersecurity

Commencement: Section 1 to 3 on Royal Assent. Schedule 1 will commence the day after Royal Assent. Schedule 2 will commence on the later of (a) the start of the day after this Act receives Royal Assent and (b) immediately after the commencement of Schedule 1 to the Treasury Laws Amendment (Illicit Tobacco Offences) Act 2018. However, the provisions do not commence at all if the event mentioned in paragraph (b) does not occur.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at August 2018.

Purpose of the Bill

The purpose of the Customs Amendment (Illicit Tobacco Offences) Bill 2018 (the Bill) is to amend the Customs Act 1901 to insert new offences for imported tobacco products into section 233BABAD of the Customs Act, and to extend the power of arrest in the Customs Act to these new offences (Schedule 1). The Bill will also make amendments in Schedule 2 to enable Customs officers to investigate and enforce the new illicit tobacco offences in Subdivision 308-A of Schedule 1 to the Taxation Administration Act 1953 (the TAA) that do not require the origin of the tobacco to be proved.

Background

The 2016–17 Budget announced measures to address the growing trade in illicit tobacco to help reduce the ‘deliberate and highly calculated defrauding of the Australian public by criminal organisations smuggling illicit tobacco in to the Australian market.’[1] This Bill aims to disrupt and deter these criminal groups and, together with the Treasury Laws Amendment (Illicit Tobacco Offences) Bill 2018 (Treasury Bill),[2] intends to create a regime targeting the importation, possession, purchase, sale and production of illicit tobacco.[3]

Illicit tobacco includes cigarettes, cigars, loose tobacco and tobacco plant matter, that are either grown, manufacture and/or produced in Australia without an appropriate excise licence, or is tobacco that is imported into the domestic market without customs duty being paid.[4] The illicit trade causes a loss of Commonwealth revenue and can act as a funding source for serious and organised crime.[5] An example of this is the case of Commonwealth Director of Public Prosecutions v Afiouny (2014) where Mr Afiouny was found guilty of paying bribes to attempt to circumvent border protection controls, and to avoid payment of between $25 million and $27 million in customs duty and taxes on the imported tobacco.[6]

The Australian Border Force (ABF) is responsible for detecting, deterring and disrupting the illicit trade of tobacco before the border, at the border and in the post-border environment, while the Australian Taxation Office is responsible for illicit tobacco produced or manufactured domestically.[7]

Although yet to report, submissions to a long-standing parliamentary inquiry on illicit tobacco point to some significant issues with the existing framework. The 2015 Parliamentary Joint Committee on Law Enforcement’s Inquiry into Illicit Tobacco lapsed at the time of the 2016 election and was reinitiated in October 2016. The Committee received 172 submissions and conducted public hearings which revealed significant impediments to the law enforcement regime.[8] This Bill, together with the Treasury Bill, appears to address key terms of reference of that Committee’s inquiry, namely:

•       the role of Commonwealth law enforcement agencies in responding to the importation, use, manufacture, distribution and domestic growth of illicit tobacco

•       the loss of revenue to the Commonwealth arising from the consumption of illicit tobacco products

•       the involvement of organised crime, including international organised crime, in the importation, distribution and use of illicit tobacco in Australia and

•       the effectiveness of relevant Commonwealth legislation.[9]

Current law

Existing section 233BABAD of the Customs Act has two offence provisions. Subsection 233BABAD(1) requires the prosecution to prove that the person has imported tobacco products with the intention of defrauding the revenue. Subsection 233BABAD(2) requires the prosecution to prove that the person conveyed or possessed tobacco products with the knowledge that the goods were imported with intent to defraud the revenue. While the maximum penalty is high (ten years imprisonment or a fine of five times the amount of duty that would be paid, or 1,000 penalty units ($210,000)), the standard of proof has created a barrier for both enforcement and for prosecution. The Government is responding to stakeholder concerns that current legislation is not an effective deterrent to those involved in the illicit tobacco trade:

The current Commonwealth legislation does not allow relevant agencies to mount a comprehensive and flexible response to the illicit tobacco risks. This situation has come about due to the historical formulation of Commonwealth Acts such as the Customs Act and the Excise Act which have been based on the past needs of the responsible agencies. The organised crime threat posed by illicit tobacco has now out-grown those pieces of legislation and the capabilities of the agencies who enforce them.[10]

Proposed laws

This Bill creates new offences in the Customs Act for those who are reckless as to whether importing tobacco results in the defrauding of revenue. The standard required to establish recklessness entails a lower level of culpability than that associated with intention or knowledge, alleviating any barriers to enforcement or successful prosecution of these criminal offences.

The Bill also strengthens the illicit tobacco enforcement regime by allowing the ABF to investigate offences in the Treasury Bill where the origin of the illicit tobacco is unknown. This will allow opportunities to prosecute illicit tobacco offences as it will not be necessary to establish whether the illicit tobacco was imported or illegally manufactured.

Illicit Tobacco Taskforce

As part of the Government’s focus on the illicit tobacco trade, a multi-agency Illicit Tobacco Taskforce will be established to ‘bolster the government’s capability to enforce the new laws and dismantle illicit tobacco supply chains’.[11] The Taskforce will replace the Australian Border Force’s Tobacco Strike Team which was established in 2015 to target serious organised crime syndicates and other commercial enterprises exploiting the border to make significant profits from illicit tobacco. The new Taskforce will have additional powers and capabilities to enhance intelligence gathering and proactively target, disrupt and prosecute serious and organised crime groups at the centre of the illicit tobacco trade.[12]

Treasury Laws Amendment (Illicit Tobacco Offences) Bill 2018

This Bill, together with the Treasury Bill, will significantly amend the penalty and offence framework in the Excise Act 1901. That Bill will introduce a tiered offence regime with higher penalties which intend to be able to prosecute offenders more effectively. At the time of introduction of the Treasury Bill, the Minister for Revenue and Financial Services, Kelly O’Dwyer, announced that, with this Bill, ‘the government is delivering on its 2016–17 budget commitment to address the growing risk of illicit tobacco and criminal activity.’[13]

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills made no comment on this Bill in its report of 9 May 2018.[14]

Policy position of non-government parties/independents

There has been no public comment on the provisions of this Bill by non-government parties or independents.

Position of major interest groups

There has been no explicit comment on the Bill. However, the broader issues that the Bill is addressing were presented to the Parliamentary Joint Committee on Law Enforcement’s Inquiry into Illicit Tobacco in 2015 and 2016. The Committee received 172 submissions, including one from Philip Morris International who argued that ‘legislation of offences should be crafted in such a way that it is possible to achieve a conviction, rather than creating offences which are impossible to prove in a court of law.’[15]

Other submissions noted the need for reform of the relevant legislation. For example, the Australian Strategic Policy Institute stated:

Arguably the current legislation and enforcement regime encourage the importation, distribution, sale and consumption of illicit tobacco to be viewed as a regulatory misdemeanour: and most definitely not a crime.[16]

The Australian Federal Police submitted that ‘there remain opportunities to further strengthen this deterrent [in section 233BABAD] and improve the operation of the offences.’[17]

More broadly, some submissions noted the impact that the lack of effective legislation was having on small businesses:

The Australian Government is losing out. It’s no secret excise from legal tobacco sales is a significant contributor to Government revenue. As at October 2015, the illicit tobacco market was estimated by KPMG to account for 14.3% of total tobacco consumption nationally in the 12 months to June 2015.

Sold legally, this would have generated an extra $1.42 billion in tax revenue for the Australian Government. Legal tobacco is an extremely important product for convenience stores. Though it is low margin, it still represents a considerable proportion of sales and is a key reason for consumers to visit our members’ stores.

The rise in the illicit tobacco market is hurting small businesses especially, as the major supermarket chains are much better positioned to absorb the regulatory costs and the loss. The illicit tobacco market robs legitimate businesses of sales and market share and the Government of its entitled revenue from the sale of tobacco.[18]

The Business Action to Stop Counterfeiting and Piracy believes that ‘the level of illegal consumption of tobacco in Australia is worryingly high. The growth in the illicit tobacco trade has been exacerbated by regular hikes in tax on tobacco along with legislative measures such as plain packaging’, and quoted the Australian Crime Commission’s report of 2013 stating that ‘involvement in Australia’s illegal tobacco market is perceived by organised crime groups as a low risk, high profit activity: they see it as a market in which large profits can be made with minimal risk of detection or significant penalties.’[19]

Financial implications

The Explanatory Memorandum states that the financial impact is an ‘unquantifiable increase to revenue over the forward estimates period’.[20]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[21]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considered that the Bill did not raise human rights concerns in its report of 8 May 2018.[22]

Key provisions

Section 233BABAD of the Customs Act contains criminal offences for importing goods which are tobacco products with the intention of defrauding the revenue, and conveying and possessing tobacco products that the person knows were imported with intent to defraud the revenue.

The new offences are based on the element of recklessness, rather than intent. This is because ‘while the penalty is high, the standard of proof has created a barrier for effective enforcement and prosecution and is no longer an effective deterrent to those who engage in tobacco smuggling’.[23] The Explanatory Memorandum goes on to explain the existing inconsistency between tobacco-related evasion offences in the Customs Act and the Excise Act:

•       the Customs Act offences can only apply where knowledge or intention to defraud revenue can be proven

•       the Excise Act offences are associated with relatively low penalties and do not provide a sufficient deterrent to those dealing in illicit tobacco and

•       an offence can only be successful prosecuted if it can be proven whether the tobacco was imported or produced domestically (proof of origin).[24]

To demonstrate that the offences are not resulting in successful prosecutions, the Explanatory Memorandum indicates that 69 out of 114 people have been successfully prosecuted under the Customs Act. This amounts to just over 60 per cent and the Government intends that the amendment made by this Bill, together with the Treasury Bill, will allow ‘greater opportunities for successful prosecution of those involve in the illicit tobacco market.’[25]

Item 1 of Schedule 1 will repeal and substitute the heading to section 233BABAD of the Act. The heading will be ’Offences involving tobacco products’. The provision currently requires that a person has either an intention to defraud the revenue or knowledge of an intention to defraud the revenue. Item 2 will insert two new tobacco smuggling offences. Proposed subsection 233BABAD(2A) will require a person to be reckless as to whether or not there is defrauding of revenue when the person has imported tobacco products. This means the prosecution will need to prove beyond reasonable doubt that a person is aware of a substantial risk that the circumstance (of whether there would be defrauding of revenue) exists, or will exist.[26] Then, having regard to those circumstances, the prosecution must establish that it is unjustifiable to take that risk. Proposed subsection 233BABAD(2B) will similarly insert recklessness into the offence relating to a person conveying, or possessing the tobacco products. The existing offence has a penalty of imprisonment of up to ten years, or a fine, or both. The new penalty will be reduced, to a period of imprisonment of a maximum of five years, or a fine, or both. This is appropriate given the change in the fault element to both the offences.

Existing subsection 233BABAD(6) provides that a person who is convicted or acquitted of an offence against subsection 233BABAD(1) or (2) in respect of particular conduct is not liable to proceedings under section 233 in respect of that conduct. Section 233 contains the general offences for smuggling of goods, as well as other offences. Item 6 of the Bill will ensure that a person who is convicted or acquitted of an offence against subsection 233BABAD(2A) or (2B) is also not liable to be prosecuted under section 233 in respect of the same conduct. It would not be appropriate for a person who has been convicted of an offence against section 233BABAD to be liable for prosecution under the general smuggling offences in section 233.

Item 8 will amend existing subparagraph 210(1)(a)(iii) of the Customs Act to allow a Customs officer or police the power to arrest a person without warrant if the officer believes on reasonable grounds that the person has committed or is committing an offence against subsections 233BABAD(1), (2), (2A), or (2B) of the Customs Act. The amendment now includes the new offences and the safeguards in Subdivision H of Part XII of the Customs Act which will apply, including not using more force than is necessary and reasonable; not doing anything that is likely to cause the death or grievously harm a person; inform the person of the offence for which they are being arrested for at the time and be taken into police custody or be brought before a magistrate as soon as practicable.

Schedule 2 will enable Customs officers to investigate and enforce the new illicit tobacco offences in Subdivision 308-A of Schedule 1 to the TAA. This will be achieved through amendments to the definition of authorised person in subsection 183UA(1)(b) and (c) of the Customs Act. Similarly the definition of forfeited goods and offence in section 183UA of the Customs Act will be amended to include goods forfeited to the Crown under paragraph 116(1(aa) of the Excise Act because of an offence committed against a provision in Subdivision 308-A in Schedule 1 to the TAA. The definition of offence will relate to the certain offences, as explicitly listed in the Explanatory Memorandum in Subdivision 308-A.

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[1].              A Taylor, ‘Second reading speech: Customs Amendment (Illicit Tobacco Offences) Bill 2018’, House of Representatives, Debates, 28 March 2018, p. 3056.

[2].              Parliament of Australia, ‘Treasury Laws Amendment (Illicit Tobacco Offences) Bill 2018 homepage’, Australian Parliament website.

[3].              Taylor, ‘Second reading speech: Customs Amendment (Illicit Tobacco Offences) Bill 2018’, op. cit., p. 3056.

[4].              Australian Taxation Office (ATO), ‘Illicit tobacco’, ATO website, last modified 11 July 2018.

[5].              Department of Immigration and Border Protection (DIBP), Submission to the Parliamentary Joint Committee on Law Enforcement, Inquiry into Illicit Tobacco, 2016, p. 3.

[6].              Commonwealth Director of Public Prosecutions v Afiouny [2014] NSWCCA 176, 4 September 2014.

[7].              DIBP, Submission, op. cit.

[8].              Parliamentary Joint Committee on Law Enforcement, Inquiry into Illicit Tobacco, Submissions, Inquiry website.

[9].              Parliamentary Joint Committee on Law Enforcement, Inquiry into Illicit Tobacco, ‘Terms of reference’, Inquiry website.

[10].              R Pike, Submission to the Parliamentary Joint Committee, Inquiry into Illicit Tobacco, [submission no. 166], 12 January 2017, p. 25.

[11].              K O’Dwyer (Minister for Revenue and Financial Services) and P Dutton (Minister for Home Affairs), New Illicit Tobacco Taskforce and tobacco duty measures to fight organised crime, media release, 6 May 2018.

[12].              Australian Government, Budget measures: budget paper no. 2: 2018–19, p. 12.

[13].              Taylor, ‘Second reading speech: Customs Amendment (Illicit Tobacco Offences) Bill 2018’, op. cit., p. 3056.

[14].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 5, 2018, The Senate, 9 May 2018, p. 32.

[15].              Philip Morris Limited, Submission to the Parliamentary Joint Committee on Law Enforcement, Inquiry into Illicit Tobacco, [submission no. 84], 11 February 2016, p. 27.

[16].              Australian Strategic Policy Institute (ASPI), Submission to the Parliamentary Joint Committee on Law Enforcement, Inquiry into Illicit Tobacco, [submission no. 10], n.d., p. 2.

[17].              Australian Federal Police (AFP), Submission to the Parliamentary Joint Committee on Law Enforcement, Inquiry into Illicit Tobacco, [submission no. 161], February 2016, p. 3.

[18].              Australian Association of Convenience Stores (AACS), Submission to the Parliamentary Joint Committee on Law Enforcement, Inquiry into Illicit Tobacco, [submission no. 21], 25 January 2016, p. 5.

[19].              Business Action to Stop Counterfeiting and Piracy (BASCAP), Submission to the Parliamentary Joint Committee on Law Enforcement, Inquiry into Illicit Tobacco, [submission no. 5], Inquiry into Illicit Tobacco, 27 January 2016, p. 4.

[20].              Explanatory Memorandum, Customs Amendment (Illicit Tobacco Offences Bill) 2018, p. 3.

[21].              The Statement of Compatibility with Human Rights can be found at pages 4–11 of the Explanatory Memorandum to the Bill.

[22].              Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 4, 8 May 2018, p. 96.

[23].              Explanatory Memorandum, Customs Amendment (Illicit Tobacco Offences Bill) 2018, p. 14.

[24].              Ibid., p. 5.

[25].              Ibid., p. 15.

[26].              The fault elements for the offence are taken from Division 5 of the Criminal Code Act 1995 (Cth). Recklessness is defined in section 5.4.