Stop Policy Brief on Protecting Track and Trace Systems from the Tobacco Industry (written for Tax Stamp News, published by the International Tax Stamp Association)
Background
STOP published a global policy brief for countries on protecting their track and trace systems from undue influence by the tobacco industry[1].
(Stopping Tobacco Organisations and products (STOP) is a global tobacco industry watchdog whose mission is to expose the tobacco industry strategies and tactics that undermine public health. STOP is funded by Bloomberg Philanthropies and is a partnership between The Global Center for Good Governance in Tobacco Control, The Tobacco Control Research Group at the University of Bath, The Union’s Department of Tobacco Control, and Vital Strategies.)
The policy note is based on a simple premise: that the latest evidence suggests that the tobacco industry, including the big tobacco companies, remains involved in smuggling, and therefore have a vested interest in trying to control track and trace systems.
This latest policy brief from STOP summarises the most recent research, as part of its program to empower regulatory agencies and government departments to ensure that functional, independent track and trace systems are implemented.
The guide is structured to cover three key sections: evidence exposing the tobacco industry’s more recent involvement in smuggling its own products (and explaining why it would do so); how the major tobacco companies have sought to both create confusion about and control over track and trace programs meant to keep it in check; and what governments can do to better safeguard their track and trace programs against undue tobacco industry interference.
Industry’s ongoing involvement in supplying the illicit market
The first part of the policy paper outlines the evidence of the industry’s involvement in tobacco smuggling, both past and present, and its motivations for controlling tobacco tracking and tracing. Much of this is a useful summary of evidence that has been in the public domain for some time, including how overwhelming evidence from the major tobacco companies’ own documents showed they had been orchestrating the smuggling of their own cigarettes in vast quantities across the world. A third of global cigarette exports were ending up on the illicit market.
But importantly, this is not simply relegated to historical practices: there is growing evidence that the tobacco industry, including the major companies, remains involved in and benefits from the illicit tobacco trade. Indeed, the policy brief suggests that independent analyses of diverse data consistently shows that the majority—approximately two-thirds—of the illicit cigarette market today is made up of tobacco industry cigarettes. As the report notes, this can take many forms, including oversupply, under-declaration and “round tripping,” and with tobacco companies aiming to avoid culpability by outsourcing distribution to third parties, when in fact the industry could well far more closely control its distributors and supply chain, as other fast-moving consumer goods companies do, but seemingly choosing not to do so.
If a proper track and trace system were implemented, tobacco companies would face increased tax payments, fines and possibly further litigation related to tobacco smuggling. And, as all cigarettes that are now being sold in the illegal market are eventually fully taxed, tobacco consumption would inevitably fall, further decreasing the industry’s profits. The report consequently argues that the tobacco industry has a clear incentive to control and undermine tracking and tracing programs, with leaked industry documents showing they fear both the cost and a lack of control over track and trace systems, particularly enhanced tax stamp systems, run by independent solution providers.
Tactics used to create confusion about and secure control over track and trace
The second part of the report describes the tactics used by the major tobacco companies to both create confusion about and control over track and trace programs, and how they have hoodwinked governments, regulatory agencies, the media and the public. From the late 1990s, tobacco companies have worked to convert a public relations disaster into a success story, claiming that they are no longer perpetrators but now victims of new forms of illicit tobacco, particularly counterfeiting, and arguing that governments should work in partnership with them, which many governments now do.
Leaked industry documents referenced in the report help spell out the industry’s plan to create this confusion and divert attention from their own activities, including a tactic to continuously stress the existence of counterfeits and “illicit whites” - because these are forms of illicit for which the major tobacco companies are not held responsible and which eats into their market share. In fact, as the report explores, counterfeits and cheap whites actually comprise a small proportion of the illicit cigarette market (with research suggesting that tobacco industry illicit comprises 60% to 70% of the illicit market; counterfeit products are estimated to make up only 5% to 8%, and cheap whites somewhere between one-fifth and one-third, depending on the datasets used.)
Confusion around the prevalence of illicit white cigarettes is further exacerbated by wrongly labelling certain brands as “illicit whites” when they in fact have their genesis in the major tobacco companies – for instance, labelling the brand “Classic” (consistently one of the most seized brands in the illicit market) as an illicit white brand when it is in fact an Imperial Tobacco brand being manufactured in Ukraine. Other research suggests that some “illicit white brands” are also owned by the major tobacco companies: the trademark for the “illicit white” brand Premier is owned by a BAT subsidiary in Peru, in Russia by a JTI subsidiary, and in Uruguay by a PMI subsidiary. As a result, the prevalence of “illicit whites” is most likely significantly overstated in estimates, and the contribution of the major tobacco companies to the illicit market is likely understated.
Getting the data to tell a story that is sympathetic to the major tobacco companies is made easier with the tobacco industry controlling most of the data on tobacco smuggling, and using that data to generate misleading media coverage, with numerous reviews showing that the data the industry funds routinely exaggerate the level of illicit.
Tobacco companies combine the data and narratives with other public relations efforts to create further public confusion and ingratiate themselves with governments as partners in reducing illicit trade. This includes training border patrol and customs officials, funding sniffer dogs, sharing data from tracking devices (placed illegally on the vehicles of competitors) with authorities to enable raids on those competitors, and promoting ineffective memoranda of understanding with law enforcement and customs agencies. This help ingratiate the companies and paint themselves as both the victim and the solution.
Research piecing together leaked industry documents shows that the major tobacco companies have been working collaboratively to gain control of the global track and trace system envisaged in the ITP, undermining the independence requirement, with a four-pronged strategy: creating and promoting their own track and trace system, initially known as Codentify; actively opposing alternative tax stamp-based systems; disguising their links to Codentify by using a growing number of third parties to promote it and by renaming it Inexto Suite; and, in their own words, “proactively shap[ing] T&T regulation”. (Perhaps not surprisingly, the report is quite critical of Codentify / Inexto-related solutions: noting that experts have criticised it as inefficient and ineffective; and how - despite reportedly having been used in somewhere between 50 to 100 countries worldwide - illicit trade remains high, which it argues is further proof of Inexto’s failure to sufficiently secure the tobacco supply chain.)
Ultimately, the report notes that, “In light of the growing evidence of the tobacco industry’s ongoing involvement in illicit and reluctance to control its supply chain, the evidence that it is also seeking to control track and trace systems is very worrying. This would leave the major tobacco companies able to continue such practices without external scrutiny, thereby avoiding tax payments and in doing so, fundamentally undermining the ITP.”
What governments can do
The third part of the report contains guidance for governments on what to expect and what they can do to safeguard their track and trace programs against industry interference.
It notes that the major tobacco companies can be expected to change the name of their track and trace product (already changed from Codentify to Inexto Suite); actively adapt their product to fit with tender requirements; and continue using third parties to promote its digital track and trace system. Identifying the industry’s front groups, spokespeople, linked companies or coalitions will likely become increasingly difficult.
The report proposes the following tactics for governments:
1. Governments must ensure that their implementation of a track and trace system is fully in line with Article 5.3 of the FCTC and the requirement that obligations assigned to a party “shall not be performed by or delegated to the tobacco industry.” It includes a series of practical recommendations on how governments can safeguard themselves against industry-associated solutions, that could otherwise crowd out more independent solutions;
2. Governments must ensure that they maintain direct control of their track and trace system via their contractual relationships and governance model;
3. Governments should aim to include the following important technical elements in their track and trace systems: the use of generally accepted international standards pertinent to secure track and trace (like ISO 12931:2012, which details a process to identify appropriate security features, ISO 22382:2018, which provides guidance in relation to the implementation of tax stamps and track and
trace programs, and ISO/IEC 15459-1&4:2014, which pertain to the generation of unique identifiers and aggregation); the use of independently sourced solution components such as unique identifiers, security features which determine if a product is genuine, anti-tampering devices that establish security of the system within the manufacturing environment (e.g. cameras, seals, counters) and authentication devices; and security features designed to deter counterfeiting/ imitation, similar to those used for tax stamps, passports and banknotes;
4. Governments are advised not to take the European Union system as an example of good practice given evidence of industry influence on its development;
5. Small countries in particular, should consider cooperating as regional groups during the tendering process, possibly via regional economic integration organisations;
6. Parties should remember they have until 2023 to have their track and trace systems operational. Countries worried about tobacco industry interference should ask for help, rather than sign up with a system the industry might control; and
7. Parties must remember that while track and trace is a crucial element in the fight against illicit trade, it is not a silver bullet.
How solution providers can use the guide
The policy brief provides useful insights for the developers of independent track and trace solutions in positioning their solutions. The key challenge for solution providers now is using the arguments and evidence in the report to develop robust media and client briefs to ensure that the discussion – which is currently largely being dominated by the tobacco industry – is better balanced, empowering implementing agencies to make informed decisions about which solutions potentially offer them the best possible way of securing the tobacco supply chain.
[1]STOP, “Protecting Your Country’s Tobacco Track and Trace System From the Tobacco Industry”, https://exposetobacco.org/wp-content/uploads/2019/11/STOP_Track-andTrace-Brief.pdf