Even though smoking tobacco was linked to lung cancer and other diseases more than a half-century ago, the sale of tobacco products is still big business worldwide. In fact, the tobacco market size was valued at 851.9 billion in 2021 and projected to grow to $1,063.91 billion by 2030, according to a SkyQuest report.
Not surprisingly, tobacco products are highly taxed and regulated with rules that differ between countries and regions. If you are considering adding merchants who advertise or sell tobacco products to your portfolio, then you need to be aware of the risks involved.
What are the risks of having tobacco in your merchant portfolio?
For payment providers and marketplaces, there are four main types of risk in taking on merchants that advertise or sell tobacco products. These include:
- Legal and regulatory risk: The sale of tobacco is subject to complex and ever-changing regulations, including age verification requirements, tax compliance, and restrictions on certain product categories. Non-compliance with these regulations could result in penalties, fines, and potential loss of the ability to process payments.
- Risk of counterfeit and fraudulent activity: The tobacco industry is vulnerable to counterfeit products and fraudulent transactions, which could result in financial losses.
- Money laundering or other criminal activities: Given its cash-intensive and profitable nature, the tobacco industry has long been associated with organized criminal networks smuggling illicit tobacco products for profit. Processing payments for merchants involved in the illicit product trade could result in serious legal ramifications.
- Reputational risk: Because tobacco products are associated with health concerns and societal debates, processing payments for tobacco merchants may expose acquirers and financial institutions to reputational risks. Negative publicity or public perception could harm brand and market standing.
Tobacco regulations
The need to take action at a global level to limit tobacco use was reinforced in 2003 when the World Health Organization Framework Convention on Tobacco Control (WHO FCTC) treaty was adopted by the 56th World Health Assembly.
A total of 168 countries signed the agreement, which created a set of minimum universal standards to regulate everything from tobacco production and distribution to sales and advertising. Countries were also encouraged to set their own standards to supplement the standards set by the treaty. In the U.S., there are three primary pieces of legislation aimed at controlling tobacco products. Designed to protect public health, the Family Smoking Prevention and Tobacco Control Act (Tobacco Control Act) gave the U.S. Food and Drug Administration (FDA) authority to regulate the manufacture, marketing, and distribution of tobacco products in 2009. Since that time, the FDA has issued a number of warnings about the illegal marketing of tobacco products and the use of misleading claims suggesting reduced harm or risk from tobacco products.
The Contraband Cigarette Trafficking Act (CCTA) was passed in 1978 to prevent criminal organizations from trafficking cigarettes and selling them on the black market to generate profits to fund criminal and terrorist activities. In 2006, the bill was amended under the Patriot Act to include non-state cigarettes and smokeless tobacco. The CCTA is enforced by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), which was created to protect the public from crimes involving firearms, explosives, arson, and the diversion of alcohol and tobacco products.
Also in the U.S., the Prevent All Cigarette Trafficking (PACT) Act requires those who sell tobacco products online to pay applicable federal, state, and local taxes.
Tobacco products and criminal activity
In August 2023, a group of U.S. Senators across party lines wrote a letter to the U.S. Secretary of State Anthony Blinken indicating their belief that the illicit trafficking of tobacco products poses a threat to national security and “provides a significant revenue for transnational criminal organizations.”
The letter referenced a 2015 report by the State Department, which said that tobacco trafficking is used to finance crimes such as “money laundering, bulk cash smuggling, and the trafficking in humans, weapons, drugs, antiquities, diamonds, and counterfeit goods.”
In 2023, the U.S. Department of the Treasury announced that its Office of Foreign Assets Control (OFAC) had reached a $508 million settlement with British American Tobacco (BAT) after the London-based tobacco company allegedly violated U.S.with British American Tobacco (BAT) after the London-based tobacco company allegedly violated U.S. sanctions against the Democratic People’s Republic of Korea.
The settlement was the largest penalty ever imposed by the OFAC on a non-financial institution, according to the Department of the Treasury. According to a separate announcement by the U.S. Department of Justice, BAT and its subsidiary, BAT Marketing Singapore (BATMS) will actually pay a total of $629 million in combined penalties and fines to resolve bank fraud and sanctions violations charges.
Mitigating risks associated with tobacco
Tobacco products are highly regulated, with many regional variations – some jurisdictions impose restrictions on advertising, sales to minors, and product ingredients. Websites selling tobacco products may also be associated with criminal activities including money laundering and fraud. Quick detection and assessment, as well as ongoing monitoring, are necessary to mitigate risks of conducting business with merchants advertising tobacco products.
EverC can help to identify merchants that are potentially involved in suspicious or criminal activity, even when their activity is purposely hidden. Our technology leverages AI for increased speed and precision in detection rates, enhancements to features and tools, and unmatched customization capability, for solutions that allow you to meet your business goals while aligning with your RBA and industry priorities.
