117 countries may need your help. Some don’t know it. Many can’t afford it.

117 countries may need your help. Some don’t know it. Many can’t afford it. (For Tax Stamp News, published by International Tax Stamp Association)

By Telita Snyckers and Michael Eads

The Protocol to Eliminate Illicit Trade in Tobacco Productsfinally came into force on 25 September 2018, which means that signatories – formally referred to as “Parties” – now have five years to implement a series of obligations. With track and trace obligations under both article 15 of the Convention, and article 8 of the Protocol, this leaves some 181 potential new customers obligated to have track and trace solutions for cigarettes. Many of the parties, for the most part, are nowhere near ready to fulfil these obligations.

A report issued by the World Health Organisation in October 2018 measured, amongst other things, the readiness of the respective Parties against the requirements of the Convention, in particular highlighting the overall lack of maturity of authorities and the lack of funding available for implementation. (Unfortunately the report does not separately track the readiness of signatories to the Protocol, as opposed to the broader Convention, but still sheds light on the relative readiness of countries to implement track and trace solutions, whether under the Convention, the Protocol, or simply because it is a sensible strategic investment to make.) Our own experience in working directly with governments on excise modernisation and track and trace solutions, validates the generally low level of knowledge of track and trace and related concepts and technologies in most agencies.  This is a treaty developed largely by the public health community and not customs – neither of whom have a core competence in developing track and trace solutions.  This raises very real concerns around the probability of substantive compliance.  It also keeps the door wide open for the tobacco industry to promote its own solution.

Opportunity

 The Convention and Protocol requirements to implement a track and trace regime pose an obvious opportunity for the secure printing and tax stamp industries. While[1]66 percent of Parties[2]have noted that they already mark tobacco products to establish if packs found on the market are legitimate[3], and 63 percent reportedly mark packs so their origin can be established, only 64 Parties – 35 percent – report that they have or are currently in the process of developing a track and trace regime (a number which is likely overstated)[4].  

Complex environment

With at least 117 countries unable to meet the requirements under either the Convention or the Protocol in the foreseeable future, the opportunity is undeniably enticing for potential solution providers. However, this may prove to be a challenging and complex environment to navigate – of the 117 countries that potentially need your help, any number of them probably don’t even know it, and many likely can’t afford it.

·     There may not be any real impetus for implementation with the actual implementing agency:The Convention and Protocol are both predominantly driven by a health agenda – not a revenue one. Its signatories may or may not have coordinated with their local customs and revenue counterparts during the process prior to ratification. As a result, the agency that would traditionally be responsible for the implementation of a track and trace system (the customs or revenue agency) may well not even be aware of its obligations, or may view them as a simply burdensome requirement that has little to do with their core mandates of revenue collection and border protection. Additionally, customs and revenue and health agencies are not natural partners as might be the case with other government agencies that have a border control mandate, like agriculture, immigration, or standards, which have developed close operational ties and in many cases share facilities at ports and borders.  With more than a quarter of the Parties not yet having established a tobacco control coordinating mechanism[5]the likely result is that, without some prompting, either from the local health department or solution providers, the agencies actually responsible for implementation (customs and revenue) may be slow to pursue their track and trace obligations. With five years for Protocol signatories to procrastinate, an active campaign is likely needed to popularise both the actual requirements, and to craft a suitably inspirational call to action. Finally, the tobacco industry has invested a lot of time, money and effort to “partner” with customs agencies and already have relationships and influence in the law enforcement domain (and their position on independent track and trace is no secret.)  

·     The lack of financial resources may dilute the effectiveness of the solutions chosen. A significant65 percent of Parties noted that they lacked the necessary finances needed to comply with their obligations (and this wasn’t even focused on the track and trace systems, but just in general)[6]. This is exacerbated by the fact that the recommendations made by a panel of experts were not included in the draft MOP budget,[7]putting far greater pressure on Parties to secure cost-effective solutions. While low cost, less-sophisticated tax stamp solutions may tick the FCTC box, they are generally little more than “white elephant” systems that do little to actually address illicit trade, in turn diluting the effectiveness of the Convention and Protocol.

·     Small volumes in low income countries will likely discourage solution providers from tendering.Although countries have the option of getting the tobacco industry to bear the costs[8], this could still be a significant issue for low income countries with small volumes, where it could take a considerable amount of time to recover costs.  The traditional funding models used by the tax stamp industry – price per thousands of marks – may prove to be prohibitively expensive and may not be appropriate in some cases.  Between the limited funding available, and the fact that volumes may not make for an attractive business case, some countries may well have little choice but to choose cheaper industry-favoured solutions simply using digital codes printed directly onto packs – which come with the unavoidable risks of copying, cloning and counterfeiting, and are unlikely to achieve the actual objectives of the Convention, compromising the integrity of the FCTC program. 

·     Many agencies simply don’t understand either the problem or potential solutions well enough. Far more work may be required to create an empowering environment where particularly less sophisticated Parties see the value of track and trace solutionsbeyond simply being something prescribed in a health treaty, but as strategic revenue optimisation and enforcement tools that they would do well to invest in. Only 52 percent of Parties keep data in respect of cross-border tradein tobacco products.Only 18 percent of parties have data on the smuggling of tobacco products in their jurisdiction[9]. Our own interactions with client agencies highlight how many customs officers – on whose shoulders these implementations would rest – do not understand the simple difference between GPRS tracking devices (used on conveyances), and item level track and trace, let alone the difference between digital and material security features. But perhaps just as importantly, agencies who dochoose to invest in track and trace systems often erroneously believe that they are sufficient in and of themselves to curb illicit trade – which of course they are not, instead requiring a series of complementary capacities and capabilities to fully curb illicit trade. This leaves the tax stamp industry with some distance to go in terms of educating their potential customers and helping them design solutions that are fit for purpose and that serve a broader purpose in support of the agency’s core objectives.  

FCTC ‘s failure to engage an own goal?

The FCTC Secretariat and local health departments are quite capable of introducing most of the provisions detailed in the Convention and Protocol. The illicit trade provisions – and the track and trace provisions in particular – are different. They place obligations on third parties – customs and excise agencies - who in large part are not ready to fulfil those obligations. The main driving force behind FCTC compliance in a country – usually the department of health – is typically not heavily invested in engaging with solution providers or illicit trade experts (and indeed COP sessions in Geneva were heavily criticised for excluding interested parties from any engagement). With a significant proportion of countries not ready to implement a track and trace regime, not understanding the concepts or technologies related to track and trace – many not even having started on that journey – the Convention and Protocol requirements around track and trace are at risk.   

In the absence of a far more coordinated approach to empowering Parties to implement their track and trace obligations, and if simply left to develop organically, many Protocol signatories are either unlikely to meet their obligations by 2023, or will be more susceptible to choosing low cost, unsophisticated solutions that tick the FCTC box but that do nothing to actually counter the illicit trade in cigarettes. 

Arguably the best way to mitigate that risk would be by creating a network of allies working towards the same goal: reducing the illicit trade in cigarettes, through the use of proven technologies and strategies. In that sense, a partnership between organisations like ITSA and other trade associations, illicit trade experts, and the Secretariat seems like a natural fit. Unfortunately, opportunities for engagement have not materialised, and the track and trace regime is largely developing without the inputs of subject-matter experts who have real-world experience in implementing tax stamp or secure marking programs, or more broadly in curbing illicit trade – simply playing into the hands of illicit traders.  

Will the Convention and Protocol make a substantive difference to countries’ ability to curb the illicit trade in cigarettes? It very well could. But unless we address the obvious shortcomings in the current paradigm, and those briefly explored in this article, perhaps it won’t.

[1]Only 78 percent of Parties submitted reports, which means that the actual extent of readiness is likely far lower than these numbers would suggest. http://www.who.int/fctc/mediacentre/news/2018/launch-global-progress-report-2018/en/

[2]To the Convention, not necessarily signatories of the Protocol

[3]This number is likely over-stated, with reports typically being completed by local health departments who experience shows do not necessarily understand what a track and trace system actually is. These marks do not necessarily pose an effective solution in combating illicit cigarettes. So e.g. the diamond stamp used in SACU countries is a simple die impression which constitutes a mark, but serves little real purpose and does not meet FCTC requirements. The number of countries requiring new solutions that meet FCTC requirements is therefore potentially higher than the 117 countries referenced in the remainder of this article. 

[4]WHO FCTC Global Progress Report 2018, http://www.who.int/fctc/reporting/WHO-FCTC-2018_global_progress_report.pdf

[5]Ibid

[6]WHO FCTC Global Progress Report 2018, http://www.who.int/fctc/reporting/WHO-FCTC-2018_global_progress_report.pdf

[7]See e.g. What’s Next After Historic MOP1?Tax Stamp News October 208 (Volume 10) https://www.reconnaissance.net/tax-stamp-news/issues/october-2018/

[8]Ibid

[9]http://www.who.int/fctc/reporting/WHO-FCTC-2018_global_progress_report.pdf