The European Court of Auditors has laid bare a transformation in the continent's illicit tobacco trade that most policymakers have barely begun to grasp. Until recently, the problem was framed as one of smuggling: lorries crossing borders, containers slipping through ports, parcels moving through courier networks. That picture is now outdated. Organised crime groups have brought the factory inside the fence.
A report published this week by the auditors reveals that illegal production facilities, some running multiple industrial lines around the clock, have been uncovered in almost every EU member state. The largest lines can turn out roughly one million cigarettes an hour. In Belgium, investigators found a site with four such lines operating continuously. The auditors estimate that these domestic factories, combined with traditional smuggling, now supply nearly one in ten cigarettes smoked across the bloc, draining an estimated €13 billion a year from EU and national budgets in unpaid excise duties, VAT and customs duties.
From smuggling to domestic manufacturing
The shift is strategic. By moving production from Ukraine and other non-EU locations into the Union itself, criminal networks shorten supply chains, reduce interception risk and gain direct access to European consumers. The auditors note that equipment costs can be recovered within weeks. Once a site has paid for itself, operators can abandon it and reappear elsewhere, often in border regions where jurisdictional friction slows enforcement.
This mobility was illustrated by the largest illegal factory ever dismantled by Spanish authorities. The operation yielded around three million packets of counterfeit cigarettes and spanned Poland, Ukraine, Romania, Greece, Slovakia, Italy and Spain. Coordinated action across seven countries was required to bring it down, a reminder that criminal networks treat national borders as administrative inconveniences while law enforcement still contends with divergent legal frameworks.
The data vacuum at the heart of policy
Perhaps the most striking finding is not the scale of production but the scale of ignorance. The European Commission, the auditors conclude, does not possess an independent and reliable EU-wide estimate of the illicit market's size, structure or economic impact. Current assessments lean heavily on seizure figures, which reflect enforcement success rather than market reality. Several member states rely on their own modelling; others depend on external studies, a significant share of which are funded by the tobacco industry itself.
The Commission has commissioned a new study to improve measurement, but until it delivers, policymakers are effectively flying blind. Without a credible baseline, it is impossible to judge whether existing countermeasures are working or whether resources are being directed at the right targets.
Regulatory gaps that criminals exploit
The EU regulates the production and sale of finished tobacco products, but key upstream elements remain outside common rules. Raw tobacco leaf and the machinery used to process it are not harmonised at Union level. Inspection regimes, enforcement powers and penalty frameworks differ from one capital to another. For a criminal enterprise, that patchwork is an opportunity: if pressure mounts in one jurisdiction, production simply moves to the next.
Price disparities between member states, driven by divergent excise rates, continue to fuel cross-border smuggling alongside the new domestic production. High taxation creates a price umbrella under which illicit operators can undercut legal products while still earning substantial margins. The auditors argue that this dynamic undermines both public finances and health policy, since cheaper illicit cigarettes weaken the deterrent effect of tax increases designed to reduce smoking prevalence.
New products, new frontiers
The problem is not confined to traditional cigarettes. The Commission estimates that the illicit market for heated tobacco and e-cigarette refills already amounts to nearly 21,000 tonnes annually in the EU. These products fall into regulatory grey zones where rules are newer, less harmonised and often poorly enforced. As consumer preferences shift, criminal networks are adapting faster than the legislative framework.
How the blind spot developed
For years, the EU's tobacco control strategy focused on demand reduction through taxation, packaging rules and advertising bans. Supply-side enforcement was treated as a national competence, with coordination limited to Europol-supported operations and the European Anti-Fraud Office (OLAF) investigations. The 2014 Tobacco Products Directive and the 2016 ratification of the WHO Framework Convention on Tobacco Control's Protocol to Eliminate Illicit Trade in Tobacco Products added legal tools, but implementation has been uneven. The auditors' report is the first comprehensive attempt to map the resulting landscape, and it reveals that the supply side has industrialised while the oversight architecture has not kept pace.
What happens next
The auditors have handed the Commission a list of recommendations: develop an independent EU-wide measurement methodology, close the regulatory gaps on raw tobacco and machinery, harmonise inspection and penalty regimes, and extend tracking and tracing obligations to novel products. The Commission's response, due in the coming months, will indicate whether it treats this as a technical adjustment or a strategic priority. Meanwhile, the next meeting of the Customs 2027 programme board in October will discuss operational coordination. For now, the factories keep running, the losses keep mounting, and the data vacuum persists.
People mentioned
Organisations
European Court of Auditors · European Commission
