TRACKING AND TRACING TO FIGHT ILLICIT TRADE IN TOBACCO PRODUCTS

Illicit tobacco trade – A worldwide danger to public health and economy

THE CONTEXT OF TOBACCO AND ILLICT TRADE

Tobacco is the largest avoidable health threat in the EU:

• The cause of nearly 700.000 premature deaths per year;

• Half of all smokers die an average of 14 years younger than non-smokers;
• The addictive and harmful characteristics of tobacco clearly set it apart from other commodities on the market.

Nearly 10% of the global cigarette trade is illicit; this is significantly higher in low and middle-income countries, reaching up to
50% and above.

Consequences of illicit tobacco trade:

1. Poses severe risks to public health: estimated to account for 9,5% to 12% of all cigarette
a. Increased accessibility, affordability and consumption of tobacco consumption worldwide or 570-680 billion cigarettes.(4)(5)
product; b. EU estimates based on seizure figures indicate more than €10
b. Higher chance of attracting vulnerable groups especially young; billion losses of revenue annually with large-scale smuggling as
c. Increased burden on healthcare systems the major and increasing problem (from 8,3% in 2006 to 10,4%
2. Supports organised crime: in 2011). (6)
a. Tobacco is one of the most smuggled commodities in the world (1). 4. Destroys fair trade.
b. Profits from illicit trade fund other criminal activities, Destroys the licit market and fair competition by deterring the
c. Feeds terrorism and international and local crime including money economic competitiveness of legitimate traders and brands.(7)
laundering, bribery, fraud (2). 5. Have negative ecological consequences.
3. Inflicts significant economic harm and loss in government revenue: Destroys the environment by generating uncontrolled waste.
a. Illicit tobacco trade (ITT) evades revenue collection globally
estimated at minimum US$39 billion(3) to $50 billion and is

THE MISCONDUCT OF THE TOBACCO INDUSTRY

The illicit trade The Tobacco Industry Strategies to Diminish Controlling
Policies

Illicit activities are undertaken not only by the illicit players, but also by WHO highlights that despite the above accusations and settlements,
players considered as legitimate. the tobacco industry portrays itself as a key partner in combating illicit
trade and is constantly using different strategies to oppose
Four major international tobacco companies have been accused of international efforts to implement independent tobacco controlling
direct and indirect involvement with illicit trade including smuggling: policies like the EU Tobacco Products Directive (2014/40/EU) or the
WHO Framework Convention on Tobacco Control and its Illicit Trade
• Claims made by the European Union against the tobacco industry Protocol:
resulted in settlements (PMI 2004, JTI 2007, ITL and BAT 2010) with 1.Total opposition. At the onset of a legislative proposal, the tobacco
the European Union. industry uses every argument possible to oppose new legislation
• Since 2004, tobacco companies have paid billions of dollars in fines including threats of closing factories, firing employees and warnings of
and payments to settle cigarette smuggling litigation in Europe ($2,4B) decrease in tobacco tax revenues.
and Canada.(8) 2.Next, the tobacco industry delays approval and weakens policy
• Still complicity is suspected when companies export billions of language to ensure minimal restrictions on its business.
cigarettes to countries or hubs that do not have a demand for such 3.While forced to accept the new legislation, the tobacco industry
large volumes. Just in 2014, BAT was fined £650,000 by HMRC for presents itself as a necessary implementation “partner” to
over-supplying its own product to Belgium. (9) governments, showcasing its obligatory commitments as an example
of good will with the goal to further delay the implementation, keep
control in its own hands and revert government control to secondary
targets. It offers governments its own solution CODENTIFY - free of
charge - as the only complete solution to illicit trade.
TRACKING AND TRACING TO FIGHT ILLICIT TRADE IN TOBACCO PRODUCTS
Illicit tobacco trade – A worldwide danger to public health and economy

In general, the tobacco industry fights to keep the control of According to the WHO FCTC governments cannot use tools that are
information on its real production volume, export data and the real owned by the tobacco industry. However, the tobacco industry is so
market proportion related to illicit trade. determined to keep control of information on production volume and
tobacco trade that it decided to transfer the rights to its own internal
Currently, after the European Commission decision to not extend the controlling system CODENTIFY to the newly created “independent”
PMI settlement agreement beyond July 2016, the tobacco industry is company INEXTO for 1 Swiss Franc, despite claimed cost of 400
actively seeking ‘engagement’ with governments and its agencies for million Euros for creating such a system of.
‘collaboration to fight illicit trade’ based on government-tobacco
industry agreements.

Can INEXTO independence to be trusted?

How CODENTIFY become independent:
• 2004 Philip Morris Intl settlement with EU with OBLIGATION to create system of marking its products with serial codes.
• 2005 Philip Morris Products developed and PATENT CODENTIFY
• 2010, PMI licensed the system, at no cost, to its three main competitors – BAT, JTI, IT
• 2011, PMI, BAT, JTI, IT formed the Digital Coding and Tracking Association (DCTA) that promotes CODENTIFY to governments
• 2016, DCTA transferred Codentify to newly created INEXTO, affiliate of French Impala as “fully independent from any tobacco company”,

INEXTO is just the next step in evolution of created by PMI CODENTIFY.

TRACK AND TRACE AS AN EFFECTIVE TOOL TO PREVENT

TOBACCO ILLICIT TRADE
EU, WHO and WCO recognise track and trace as a key tool to effectively control the supply chain and prevent illicit trade.

Track and trace systems are already and successfully used to control Track and trace systems of tobacco products will become obligatory in
tobacco production and trade in several countries in the world. They the EU by 20 May 2019 due to the implementation of Art. 15 and 16 of
are shown to significantly increase tax collection, create new legal the Tobacco Products Directive (2014/40/EU) (10). They are also due
businesses, improve public health and consequently decrease smoking for implementation globally based on Art. 8 of the WHO FCTC Illicit
prevalence. Trade Protocol. (11)

Consequences of illicit tobacco trade:

Track and trace or tracking and tracing (T&T), is a process of determining the current and past locations, the time and status and other
information of a unique item. More specifically (12) :

• Tracking is the concept of marking products with a unique identifier • Tracing is the ability to identify the past or current location of an
so they can be monitored at each step of the process from the point of item. Where an item is intercepted, tracing allows for verifying the
production up to the point of sale, creating a time and location history product’s route back to its origin and retrieving a specific product’s
for every step. time and location history.

In short, a track and trace system can in real time monitor production, movement and trade and determine the history of tobacco products that
are properly marked by a secure and unique identifier.

An immanent part of a track and trace system is security. Security features are needed to ensure that the right product is monitored and that its
identifier remains unchanged and non-manipulated during the movement of a product along the whole supply chain. A lack of proper security
features may result in an original identifier being replicated to legitimate an illicit product. Security features are also needed to recognise
whether a product is genuine or falsified.
TRACKING AND TRACING TO FIGHT ILLICIT TRADE IN TOBACCO PRODUCTS
Illicit tobacco trade – A worldwide danger to public health and economy

Why tobacco track and trace is important and beneficial

Due to its unique ability to monitor production and movements of tobacco goods, T&T systems can help Member States fight illicit trade, increase
tax collections and create better fair-trade conditions for compliant producers, importers and traders. Finally and most importantly, they save
thousands of lives and provide a better protection of the health of EU citizens and of the environment.

Benefits for fighting illicit trade

Studies (13)(14), indicate that tracking and tracing can enhance Critics of T&T systems argue that T&T may be useless, because only
capabilities among Member States both in combating illicit trade and legally produced goods can be marked, leaving the illegally
in enhancing the collection of customs, duties and taxes: produced goods unmarked and out of the control of T&T.
1. Eliminates under and mis-declaration of production and trade
volumes. It is true that due to the nature of illicit trade, governments cannot
2. Detects diversion of goods including re-entering of exported goods mark illicit products. However by marking all legal products,
and round-tripping. automatically all illegal products can be recognised by not having
Specifically, the tracking function can be used to monitor flows of government ID marks. This may significantly increase visibility and
legally produced products in real time, and thus to protect against eventually detection of illicit products and criminals.
diversion into the illicit market. Tracing can help identify the history of
movements of marked products, allowing authorities to investigate Secondly, regarding the ID mark, T&T can be used as a guard to
where, when and by whom products are diverted into the illegal verify if a product is eligible for trading in a legal supply chain,
market. automatically isolating noncompliant illicit products from the legal
3. Detects carrousel frauds and ghost exports. market.
Abilities to monitor real movement and identification of unit products
can assist in eliminating both in-transit and trans-shipping offences If T&T covers the full supply chain including points of sales, it will
(when original products disappear from local markets or in transit enable protection of customers from involuntary purchase of illicit
countries), origin offences (when goods are combined or the or counterfeit products.
presentation is physically changed to conceal the true origin) and
drawback frauds (such as fictitious/ghost export, incorrect quantities,
substitutions of products).
4. Supports Member States’ tax revenue forecasting and planning and
provides real time trusted data and visibility of trade.

Benefits for tax collection

There are two obvious benefits in securing tax collection:

1. Initial increase in tax collection b. A T&T system can help to secure collection of appropriate taxes by
a. Observed in the first period after introduction of tracking and tracing reducing under declaration and can restrict forestalling (creating a large
system due to capture of under-declared and miss-declared overstock released to the market prior to tax increases, which reduces
production and trade volume that leads to proportional increase in tax tax and revenue collection).
collection. c. In Brazil, after T&T implementation in 2008, the government
b. The business case of Turkey demonstrates that tax collection on significantly increased the tax rate by +30%, which resulted in a 5%
tobacco products can increase by 31,5% in the first year after decline in market volume while tax collection increased by 6%.
introduction of T&T.(15) Similarly, after changing the tax structure and adding a specific tax to
the ad valorem tax in 2012, tax collection increased by 15,9% in 2013
2. Protecting tax income after increasing excise taxes or implementing despite a 23,9% drop in tobacco sales.
more restricted policies
a. Collecting appropriate taxes is usually a challenge after taxes or duty
levels have increased. Firstly, higher prices reduce the volume of
demand; secondly increased taxation is an incentive for
under-declaration, which may decrease tax collection.
TRACKING AND TRACING TO FIGHT ILLICIT TRADE IN TOBACCO PRODUCTS
Illicit tobacco trade – A worldwide danger to public health and economy

SALES TAX REVENUE

14 TAX COLLECTION
6
packs Bn Reals
6
With Tracking &Tracing System
11.64
12 Bn local currency
+ 31,5% Tax rate Additional
5.5 5.5
increase specific
10 8.85 +30%
SALES
tax
5 -5% 5
8 +14%

6 4.5 +6% 4.5

SALES
4 4
-24%
4

2
3.5 3.5
0 Year Y Year Y+1
Without Tracking &Tracing With Tracking &Tracing System
3 3
2006 2007 2008 2009 2010 2011 2012 2013
Tobacco sale Tax collection

Significant increase in tax collection after introducing of Brazil case: increase of tax collection after 30% tax rate
track and trace in Turkey in 2009. increasing

Benefits for public health

According to WHO, increasing the price of tobacco through higher 1. Decreasing smoking prevalence;
taxes is the single most effective measure to encourage tobacco users 2. Decreasing the percentage of children and young people starting
to quit and prevent children from starting to smoke. smoking and;
3. Protecting the customer from involuntary purchases of illegal
In that way, tobacco track and trace, which supports increased tax products by implementing validation of the authenticity of products.
collection can contribute to:

Benefits for fair trade

1. T&T can help to isolate and protect legitimate compliant businesses 3. It was observed that a number of legally registered entities
and customers from illicit products and criminal organizations. significantly grew after implementing T&T due to a better
2. Better control of the market and elimination of illicit trade can create competitive environment.
fair and same competitive conditions for all players and boost the
economy.

Benefits for ecology and the environment

1. Every year more than one trillion cigarette butts contaminate our 3. This may reduce the volume of waste, support recycling and
soils, rivers and seas. eventually protect our environment.
2. Thanks to the ability to identify unit products and determine the
origin of each product, T&T can support waste management systems
in making producers and importers of tobacco products responsible
for collecting litter and rubbish generated by them.

Recommendations for effective tobacco track and trace

Full supply chain protection
1. Member States and EU citizens will achieve the greatest benefits if T&T covers the full supply chain from the producers of raw materials to
retailers.
2. All partial solutions, which could be considered as steps in the right direction, may still not protect the customer from involuntary purchase of
illicit products.
3. Covering the full supply chain can be achieved by:
a. Automatic control of production and marking of all products in the beginning of the supply chain.
b. Including fiscal cash registers as the ultimate controlling element of T&T and enable them to read and authenticate tracking IDs. This will result
in all products within legal point of sales being automatically controlled and their purchase being automatically reported, which leads to securing
the legal supply chain by eliminating sale of illegal (fake or untaxed) products from the legal market.
TRACKING AND TRACING TO FIGHT ILLICIT TRADE IN TOBACCO PRODUCTS
Illicit tobacco trade – A worldwide danger to public health and economy

Secure marking of all legal tobacco products

1. Member States shall ensure that all unit packets and outside packages of tobacco products are marked with unique and secure identifiers .
(16)(17)

2. Such marking shall be performed automatically on production lines, independently from producers and controlled by the government or an
authorised entity.
3. The unique identifier as a key element to identify a product must not only be unique, but also secured in itself, otherwise the identifier, crucial
for data integrity, can be replicated and used to legitimate illicit or fake products on the market.

Separation controlee–controller duties

1. To ensure its full efficiency and transparency T&T shall guarantee separation of controlee-controller duties.
2. Member states shall not accept constant attempts from the tobacco industry to be a necessary “partner” in implementation of T&T. Instead,
the tobacco industry shall be treated as subject to control.
3. Member States shall reject any solution created by the tobacco industry like CODENTIFY (currently INEXTO), even if such solutions are
proposed by “independent” third parties or a state-owned entity.
4. Independently from the tobacco industry, governments shall:
a. Automatically monitor production and sources at manufacture sites, including
i. Authentication: Secure, unique marking of each unit of products and packaging;
ii. Volume Control: Automating recognition of product type and produced volumes according to fiscal/customs categories,
iii. Aggregation control of product packaging
iv. Identify intended and real market,
v. Share information in real time.
b. Along the distribution chain:
i. Control all critical events and share information in real time.
ii. Trade volume reconciliation in real time.
c. In all retail points:
i. Validation of authenticity and origin of all units of tobacco products.
ii. Reconciliation of trade volume.

Cross checking and interoperability with other control system

1. To increase effectiveness, data from the T&T system shall be crosschecked with other control systems already implemented by Member
States, like EMCS, road transport control, VAT, etc.
2. System intersection allows for export control and can help fight anti-carousel fraud.

Founded in 1997, The European Network for Smoking and Tobacco Prevention (ENSP) is an international organisation based in Brussels and consists
of more than 50 organisations across 36 countries active in tobacco control. ENSP aims to develop strategically coordinated actions in tobacco
control by sharing information and experience on research, prevention and treatment; as well as running common EU-wide joint projects with the
objective to end tobacco in Europe. www.ensp.org

(1) (Interpol, Office of Legal Affairs, 2014)Foreword

(2)(Financial Action Task Force/OECD, 2012)
(3)(Euromonitor International, 2013)
(4)(Euromonitor International, 2013) “570 billion stick market in 2013 with estimated value of US$39 billion.”
(5)(Interpol, Office of Legal Affairs, 2014) p.1 11.6% (657 billion cigarettes)
(6)(European Commision, 2012)
(7)(WCO World Customs Organisation, 2015)
(8)(Joossens, Smuggling the Tobacco Industry and Plain Packs, 2012)
(9) The Times. Fines for tobacco companies ‘fail to rein in black market’. November 27 2014. Available from:
https://www.thetimes.co.uk/article/fines-for-tobacco-companies-fail-to-rein-in-black-market-nrd9ndpv9qb
(10)Directive 2014/40/EU of the European Parliament and of the Council of 3 April 2014 on the approximation of the laws, regulation and administrative provisions of the Member States concerning the
manufacture, presentation and sale of tobacco and related products and repealing Directive 2001/37/EC, further: EU TPD or Directive.
(11)WHO Framework Convention on Tobacco Control, Protocol to eliminate illicit trade in tobacco products. 2012, further: FCTC ITP or Protocol.
(12)Source:(Eurogroup Consulting and Sovereign Border Solutions, 2015) p.64
(13)(Chaloupka, Edwards, Ross i al., 2015)
(14)(Analysis and Feasibility Assessment Regarding EU systems for Tracking and Tracing of Tobacco Products and for Security Features, 2015, p. 36)
(15)Source: (Ross, 2015) following Turkish Ministry of Finance
(16)Ibid.Art.15.1
(17)Ibid.Art.15.1