Illicit Trade – RRPs: The US

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Federal Task Force: June 2024

The US Department of Justice (DOJ) and the US Food and Drug Administration (FDA) announced the creation of a federal multi-agency task force to combat the illegal distribution and sale of e-cigarettes1.

Alongside with the FDA and DOJ, the task force will bring together multiple law enforcement partners to coordinate and streamline efforts to bring all available criminal and civil tools to bear against the illegal distribution and sale of e-cigarettes. These partners include the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), the US Marshals Service (USMS), the US Postal Inspection Service (USPIS) and the Federal Trade Commission (FTC). Additional agencies may join the task force in the future.

The federal task force will focus on several topics, including investigating and prosecuting new criminal, civil, seizure and forfeiture actions under the Prevent All Cigarette Trafficking Act of 2009 (PACT Act), the Federal Food, Drug, and Cosmetic Act (FDCA) as amended by the Family Smoking Prevention and Tobacco Control Act (TCA) and other assigned authorities. Violations of these statutes can result in felony convictions and significant criminal fines and civil monetary penalties. They can also result in seizures of unauthorized products. Through their participation in the task force, USMS will help effectuate seizures of unauthorized e-cigarettes within the US.

The Justice Department is also collaborating with ATF and USPIS on potential criminal and civil enforcement actions. The PACT Act requires online sellers of ENDS products to register with ATF and to verify the age of purchasers both at the point of sale and the point of delivery, as well as to comply with tax collection provisions and state and local laws. The task force will support these actions and coordinate the enforcement strategies.

Finally, the Federal Trade Commission (FTC), which releases reports about cigarette, smokeless tobacco and e-cigarette marketing, and enforces various statutory and regulatory prohibitions on false and misleading advertising, will support the activities of the task force, including by sharing its knowledge about the marketplace for vaping products. 

BAT – Status Update on Illicit Disposable Vapes: June 2024

[DB Global Consumer Conference] BAT claims that more than 60% of the £10Bn (retail value) US e-vapor market is made of illicit disposable vapes. 20% is open-system vapes whose status is unclear pending the definitive conclusion of the PMTA reviews. The remaining 20% is closed-system vapes (mostly, pods) in which BAT competes and achieves more than 50% share in terms of revenue (note that these figures are not completely in line with the independent retail audit / scan data).

BAT sees the clear conclusion of the PMTA review process (at some point this year) and public announcement of the products granted marketing orders (i.e. list of authorized products) as the key milestone based on the expectation that Key Accounts (selling 20% of the illicit vapes) will unanimously comply with the legitimate product list (once the uncertainty is removed). BAT also expects penalties to be put in place to address the violations at the vape stores and likes.

BAT highlights the State Directory Bills (see below for further details) as another turning point. In Louisiana, the first state to implement the Directory Bill in Nov 2023, BAT claims that illicit vape sale is declining in double-digits (instead of growing as in the rest of the US) and the most of this decline is captured by VUSE. BAT notes that only 3 out of the 20 states with enacted/pending bills have implemented the legislation so far and the vast majority is coming in early next year; thereby, together with the conclusion of the PMTA review process, a more noticeable improvement (in the “illicit vape issue”) is expected next year.

State Directory Bills – Latest status: May 2024

– Directory Bills are already in place in Alabama, Louisiana and Oklahoma.

– Directory Bill in Louisiana is re-enacted on March 18, 2024. Enforcement of the Bill was temporarily suspended following the filing of a lawsuit by a group of retailers in January 2024.

– Directory Bills are singed into law in Utah, Kentucky, Wisconsin and Virginia: the first two effective from January 1, 2025 and the latter two from July 1, 2025.

– Directory Bill is singed into law in Florida on April 26, 2024.

– The Legislature passed the Directory Bill in Iowa. The Bill is now awaiting state governors’ signatures to become law.

Iowa – Vape Bill: April 2024

State Directory Bill, HF 2677, clears the House of Representatives and the Senate in Iowa in a 90-4 and 42-4 vote, respectively. The Bill will now go to the Governor for a veto or signature. If signed into law, a directory of (permitted) products will be put in place by October 1, 2024. The Iowa Bill

– permits only the vapes that have received a marketing order from the US FDA (PMTA authorized) or have a pending PMTA (ongoing review)

– doesn’t permit the vapes that have appealed the marketing denial orders (MDOs) at court

– doesn’t permit vapes that contain synthetic nicotine

– foresees the formation of a system of fines for the violations by the retailers and wholesalers.

South Carolina – Vape Bill: April 2024

The “Vape Registry” Bill (S.994) cleared the Senate in South Carolina and will next be tabled at the State’s House of Representatives. According to the Bill, retailers in SC will only be able to sell the vapes that have received a marketing order from US FDA or have a pending (PMTA or court-ordered) review.

Kentucky – Vape Bill: March 2024

The State Directory Bill cleared the House on a 64-27 vote and the Senate on a 29-7 vote in Kentucky. The Bill will now go to the Governor for a veto or signature. The Legislature has the right to override the Governor in case of a veto. Opponents warn that the Bill promoted by Altria will lead to “monopoly” due to the long and expensive FDA approval process.

The Bill, which would take effect next year, limits vapes that can be sold in Kentucky to those that are FDA-authorized or have a PMTA under review (i.e. first review or successful challenge of previous FDA denial). The Bill will also require tobacco retailers to register at the Secretary of State’s office. The list of registered businesses will be sent to the Department of Alcoholic Beverage Control, which regulates tobacco and vape sales. For a first violation under the Bill, retailers will face a fine of $100 to $500. The penalty will grow to $1,000 for a second offense and $5,000 for third and subsequent offenses. The Bill also includes fines for wholesalers and manufacturers found to be involved in the distribution of unauthorized tobacco products.

Florida – Vape Bill: March 2024

After considering a proposal that would severely restrict the number of vapes allowed in Florida (to 23 vapes authorized by the US FDA), Florida lawmakers finally approved a weakened version of the Bill (HB 1007) outlawing only the vapes targeting children. The original had proposal sparked outcry from vape sellers and manufacturers who underlined that the plan would have shuttered mom-and-pop businesses throughout the state.

The final Bill allows the Attorney General (AG) to set up a registry of products deemed off-limits and pursue illegal vape manufacturers and sellers. The AG’s Office is expected to focus on removal of the flavored, disposable vapes from the market.

According to the Florida Retail Federation, Florida is the #1 State in the US in illegal vape sales with $363Mn turnover made in 2023.

Enforcement against illicit disposables: February 2024

In order to restrict the sale of illicit products at retail, 4 US states have already passed and 20 US States are considering legislation requiring manufacturers to certify that their products are compliant with FDA requirements. At the CAGNY Conference, Altria shared some initial data from Louisiana, a state with enacted legislation. The data show that the shipment volume (from wholesale to the tracked retail) for illegal disposable products declined to almost zero within six months after the effective date. Furthermore, the shipment volume for certified products increased accordingly. Note that the Louisiana’s list of permitted products (similar to the lists of Alabama, Oklahoma and Wisconsin) includes not only the 23 FDA-authorized products but also the products that have successfully appealed a marketing denial order or are pending PMTA review.

In Louisiana, more of the illicit volume at retail is in untracked channels (vape stores, e-commerce, smaller independent “bodegas”, etc.) as compared to traditional c-stores. Moreover, a growing number of “tracked channel” c-stores (larger and serviced by wholesale) were selling illicit disposables before the legislation; however, this was still much smaller than the untracked stores.

Back-of-the-envelope estimation: in the Louisiana data presented, certified products (“Directory Products”) have roughly 8 times the volume as illicit disposables in tracked retail in January 2023 (“first data point”) and July 2023 (“effective date”). Assuming that 50% of the overall e-vapor sales is in illicit disposables which could have a similar dominance against the certified products in untracked channels (i.e. 1-to-8) and ignoring any volume/value equalization corrections, the data imply that close to 90% of the illicit disposables were sold in untracked channels in Louisiana. Although this estimate is probably not accurate, it should be true at the order of magnitude level (i.e. vast majority: more than 75%).

Based on the data presented by Altria, we feel more confident that the illicit disposable issue can be addressed by the Directory Bills at the state-level for the tracked channels. However, this is the smaller part of the problem. We don’t know yet to what extent this legislation will be effective in the untracked (“below the radar”) channels (- i.e. for the much bigger part of the problem).

Our understanding is that: large tobacco companies are on top of the “illicit disposable” issue and any progress achieved against the illicit trade is both valuable and encouraging for them. However, both lack of an all-inclusive / effective enforcement (i.e. also covering the “untracked” channels) at the state level and actions taken only on a state-by-state basis could result in slow progress and limited volume recovery from the illicit trade. In addition, without an all-inclusive legislation and enforcement (All states, All channels, All across the supply chain), some consumers may shift to online channels and cross-state trade to continue buying their “illicit” product of choice (Recall: University of California (San Diego)’s research on online shopping for tobacco products following the flavored tobacco ban in California).

According to Altria: There are 9.5Mn disposable vape users in the US (i.e. up from 6Mn in 2022). The ~35% e-vapor category growth in 2023 is solely driven by illicit flavored disposable products – which is now over 50% of the category. Growth in illicit flavored disposable vapes made for 1.5% to 2.5% cigarette industry decline over the last 12 months.

According to BAT: There is currently ~£10Bn ($12.7Bn) revenue pool in the US e-vapor market, of which 60% is related to illicit disposable products.

New illegal vapes: December 2023

Thousands of new illegal e-cigarettes have been launched in the US over the past six months2: more than 11,500 unique vaping products are sold in the US stores as of November 2023, up 27% from 9,000 products in June 2023. Nearly all the new products are illegal disposable (flavored) e-cigarettes, according to the Circana (formerly IRI) sales data gathered from c-stores, gas stations and other retailers. Disposable vapes generated $3.2Bn retail sales in the first 11 months of 2023 (excluding the specialty stores ans online sales).

The rise in illegal e-cigarettes sold continues despite a record number of products being denied & detained. FDA refused entry to 374 shipments (consisting almost entirely of vaping products from China) in the first 11 months of 2023, more than triple the 118 shipments refused in 2022.

So far, FDA granted marketing orders to 23 tobacco-flavored vapes from three companies: BAT, Altria/NJOY and Japan Tobacco (for further details: “The US FDA: PMTA“). According to Circana, the combined sales of these 23 products are $174Mn in 2023 – or, in other words, just 2.4% of the total (tracked) market. FDA considers all other e-cigarettes (unless pending PMTA review) to be illegal. FDA aimed to complete all major outstanding PMTAs initially by the mid of 2023 and later by the end of 2023: the Agency recently stated that the process would stretch into 2024.

Joint Federal Operation: December 2023

The US Customs and Border Protection (CBP) seized 41 shipments containing ~1.4Mn units of unauthorized e-cigarette products3, including brands such as Elf Bar, EB Create, Lost Mary and RELX. The estimated retail value of the seized products totals more than $18Mn. The seizures were part of a three-day joint US FDA-CBP operation at a cargo examination site in Los Angeles International Airport.

The US FDA-CBP team worked for months to review shipping invoices and to identify potentially violative incoming shipments in preparation to the operation. In an attempt to evade duties and detection, many of these unauthorized e-cigarettes were intentionally mis-declared as various items such as toys or shoes and listed with incorrect values. Once the seized merchandise is forfeited to the Government, it will be disposed of in accordance with the law.

In a press release, FDA reiterated its commitment to stop the flow of illegal e-cigarettes into the US and reminded that Elf Bar is the most commonly used brand among youth according to the 2023 National Youth Tobacco Survey.

Mounting political pressure: December 2023

Members of the congressional committee on US-China relations sent a request to the Department of Justice (DoJ) and FDA, calling attention to the extreme proliferation of illicit vapes4 and demanding information on the actions taken to stop the recent influx of illicit vapes from China.

The bipartisan letter from 12 committee members requests the DoJ and FDA to work with the Customs and Border Protection to address the problem with all due speed. In addition, lawmakers specifically ask whether DoJ’s consumer protection branch has sufficient resources or expertise to litigate vapor-related referrals from the FDA.

This special congressional committee was established early this year with the goal of countering Chinese policies that can damage the US economy.

Altria – “flavored disposable e-cigarettes are eating into cigarette volumes”: October 2023

In Q3 2023 earnings release, Altria – for the first time – stated that there is more cross-category movement (from cigarettes to e-vapor) than previously assumed and the growth of illicit flavored disposable e-cigarettes contributed to cigarette volume declines in the range of 1.5% to 2.5% over the last 12 months. BAT has long been voicing concerns about the illicit e-cigarette sales; however, BAT’s concerns were focused around the unfair competition against the VUSE brand (- until the Interim Business Update in December 2023 when they stated that “illicit disposal vapes are having more and more impact on cigarettes as well”).

We understand Altria’s intention to signal that “enforcement against illicit e-cigarettes” will slow down the cigarette volume decline and could even lead to volume recovery to cigarettes (- the latter is unlikely). However, informed investors are likely to read this differently: “The Almighty Marlboro is losing adult smokers to Elf Bar!” Shocker! This is extremely damaging to the Marlboro’s brand equity (superior taste/flavor proposition) – the ultimate asset Altria owns.

After spending ~$16Bn, Altria has 2% share in the e-vapor category in traditional retail. It is unclear to what extent Altria can build up NJOY’s share; but, we know – for fact – that money-printing Marlboro brand has 42.3% share in US cigarette market. Even if the illicit e-cigarettes are removed from the market, the US FDA will eventually clear the PMTA review backlog and, over time, more scientifically-substantiated (tobacco flavored) e-cigarettes & heated tobacco products will be available to the US smokers. If “lower consumer stickiness to the Marlboro brand (flavor)” and “increased cross-category movements” are incorporated into Altria’s financial model, Altria’s market value will be fundamentally damaged.

Altria Management achieved the headlines they wished for; every major news outlet reported that flavored disposable e-cigarettes are eating into cigarette volumes. Nevertheless, what they wished for could turn out to be not in their best interest in the long-run.

Altria’s sweeping litigation: October 2023

Altria’s NJOY filed litigation against 34 foreign and domestic manufacturers, distributors and online retailers of disposable e-vapor products that violate California’s flavor ban law and are unlawful under federal law (subject to FDA action)5. Altria states that these companies illegally compete against companies that comply with state and federal laws. The suit seeks a nation-wide injunction against the import, marketing and sale of these products and significant compensatory and punitive damages. The litigation, filed in the US District Court of California, is brought under four claims: unfair competition, false advertising, false advertising in violation of the Lanham Act and violation of the Prevent All Cigarette Trafficking Act of 2009. Named defendants in the suit manufacture and distribute disposable e-vapor products which include brands such as Breeze, Elf Bar, EB, EB Create, Esco Bar, Flum, Juice Box, Lava Plus, Loon, Lost Mary, Mr. Fog and Puff Bar.

Altria notes that the defendants has not received pre-market authorization from the FDA and, in many instances, have not even filed PMTA. Despite a ban on the sale of flavored tobacco products that went into effect in December 2022, flavored vapor products make up more than 97% of the California market according to a recent study commissioned by Altria.

Cannabis vaping benefiting from lack of “legality”: October 2023

Cannabis vaping is reported to reach the same market size as the nicotine vaping in the US6 – as the legal e-cigarette category face the US FDA restrictions and cannabis vapes benefit from the lack of federal-level legality & regulation. US e-cigarette market is (under-)estimated at US$6Bn (after 15 years of existence) whereas a recent report claims that cannabis vapes already generate $6.8Bn in sales – about a quarter of the entire US cannabis market. With only state-by-state cannabis legalization and no federal regulator involved, the growth trajectory for cannabis vapes looks better than nicotine vapes (- another “JUUL Moment” brewing). 64% of the cannabis sales in the US is still illicit – despite the illicit share being down from 86% in 2017.

Smoore (CCEL), Ispire and Advanced Vapor Devices are named as the main suppliers for cannabis vaping devices – a segment claimed to be worth $700Mn.

Inflow of unauthorized e-cigarettes: October 2023

The US authorities are struggling to restrain the inflow of unauthorized e-cigarettes, mainly through major shipping hubs like Los Angeles and Houston. Chinese disposable e-cigarette, Elf Bar, is defying the US import ban by deploying a simple tactic: name change7. In May, US FDA directed customs officials to seize incoming shipments of Elf Bar and EBDesign: Elf Bar quickly re-branded itself as EBCreate and changed the product owner from Shenzhen-based, iMiracle Technology, to Hong Kong-based, Nevera HK Limited. The AP reported in June that the number of unique e-cigarettes in the US has tripled to over 9,000 since 2020, a surge driven almost entirely by Chinese-manufactured disposables. Elf Bar generated US sales of over $270Mn last year, according to the Nielsen data (note: this is an under-estimation).

Recall: In Feb 2023, BAT submitted a citizen petition asking the US FDA to adopt a new enforcement policy against illegal vapes.


The World Health Organization (WHO) defines “illicit tobacco trade” as “any practice or conduct prohibited by law and which relates to production, shipment, receipt, possession, distribution, sale or purchase including any practice or conduct intended to facilitate such activity”.

The most common form of illicit tobacco trade for cigarettes are:

– Contraband: genuine cigarettes that have been bought in a low-tax country and which exceed legal border limits or are acquired without taxes for export purposes, to be then illegally re-sold in a market with higher prices

– Counterfeit: cigarettes manufactured without authorization of the rightful owners and with intent to deceive consumers and to avoid paying duty

However, the situation is different for the RRPs. Like the category itself, the illicit trade in RRPs (heated tobacco, e-cigarettes and modern oral tobacco) are also in a nascent stage.

– E-cigarettes: As the category is largely un-taxed (i.e. no excise tax), prices vary little from one market to another. Thereby, contraband is not a relevant issue. Moreover, as there are no strong brands or technologically superior products (- with underlying technology being shared by the manufacturers), counterfeit is not a relevant issue either. Illicit trade activities most commonly observed for the category include: e-cigarette sales in countries/channels where the category is banned and selling e-cigarettes that don’t comply with the legal specifications in terms of nicotine content and/or flavors. The current situation of illicit trade in modern oral tobacco is similar to that of e-cigarettes.

– Heated tobacco: This category can be seen as the extension of traditional tobacco for which both contraband and counterfeit could be relevant. However, the emergence of sizable consumer group and well-known brands are the two prerequisites for the illicit product. PMI’s TEREA/HEETS (used with IQOS) is probably reaching a tipping point in this regards. There are already some reported cases of contraband heated tobacco sticks. However, considering the technology involved in the IQOS product, PMI is better positioned to fight the illicit trade when compared to the conventional cigarettes.


  1. Justice Department and FDA Announce Federal Multi-Agency Task Force to Curb the Distribution and Sale of Illegal E-Cigarettes | FDA ↩︎
  2. US seizes more illegal e-cigarettes, but thousands of new ones are launching – ABC News ↩︎
  3. ↩︎
  4. U.S. lawmakers are trying to ban Elf Bar and other e-cigarettes from China, again | Fortune ↩︎
  5. ↩︎
  6. FDA Vape Ban? Nicotine Devices Hit Trouble While Pot Vape Grows – Bloomberg ↩︎
  7. ↩︎

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