Governments need holistic solutions, not just tax stamps

Governments need holistic solutions, not just tax stamps

By Telita Snyckers and Michael Eads

As we discussed in our previous article[1]withat least 117 countries being unable to meet the requirements under either the FCTC Convention or the Protocol in the foreseeable future, what should be an undeniably enticing opportunity for potential solution providers 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. The long-standing history and prevalence of tax stamps make them an ideal platform for FCTC implementation, but with two possible distractions: they are often thought of as simple tax collection structures, belying their potential value as a platform around which broader excise modernisation strategies can be developed; and with cheaper, less-sophisticated, less effective stamps and marks potentially diluting the value proposition around marking.  

The same intractable challenges time and again

While the 117 countries certainly pose an opportunity, experience suggests that at least some level of scepticism is warranted. The tax stamp and secure printing industry appears to face the same intractable challenges time and again: solutions are pitched that never go to tender; tenders are issued but are never awarded; awarded tenders are challenged both in court and in the media; tenders are awarded for solutions that are never implemented; intentions to expand to other products never materialise; implementations are criticised as being ineffective; contracts are not renewed; and the tax stamp and secure printing industry ends up expending a considerable amount of resources on programs that never materialise. 

 Four key reasons for low implementation rates

There are arguably four key drivers that explain why tax stamp and secure marking programs meet with less success than they could (or should): absolute inertia at tax and customs agencies; agencies being at the mercy of industry-driven rhetoric around illicit trade and potential solutions; failing to leverage potential allies in the public health fraternity and academia; and a myopic focus that concentrates simply on pre-existing solution models that may not necessarily meet agencies’ overall needs.  

Agency inertia

 As we saw in our previous article[2], only 35 percent of agencies with obligations under the FCTC Protocol have or are considering implementing track and trace solutions[3]. Only 52 percent of them collect data on cross-border trade in tobacco products; and only 18 percent keep data related to the smuggling of tobacco products. 

Agency inertia – when it comes to managing the risks around excisable products like tobacco – is understandable: For many agencies, excise duties constitute a very small part of their revenue take (in some countries as low as 2 percent of total tax revenues), and with nothing to suggest otherwise, large manufacturers are assumed to be compliant and are treated as strategically important taxpayers. There tends to be a limited understanding at agency level of the different faces of illicit trade in excisable products, and little appreciation of how they are often intricately interwoven with organised crime more broadly. Little effort has likely gone into assessing the revenue losses from illicit trade or developing a comprehensive strategy to counter illicit trade. Even assuming agencies clear these hurdles, they tend to be fundamentally unschooled in terms of technology in general or the role a secure marking solution could play in curbing illicit trade in particular; have a limited understanding of the revenue optimisation potential; or succumb to the pressure of what are often undeniably some of their biggest employers and taxpayers (as a result of capture, corruption or simple political pressure).

 There is no burning platform jolting agencies out of their state of lethargy.  Or if there is, may well be driven by an industry agenda focused on eliminating smaller competitors, with information, rhetoric and agendas largely being driven by big tobacco or their proxies (see for instance the series of events now playing out in South Africa, with a controversial illicit trade survey funded by big tobacco being used to lobby for the targeting of smaller local manufacturers[4].)

The tax stamp industry tends to be in the business of selling what often boils down to “ink and paper,” and not holistic solutions, not crafting a strong-enough business case to jolt agencies out of their torporous state.

Industry controlling the rhetoric

By far the majority of the rhetoric and arguments around illicit trade and curbing it comes from the well-oiled machinery of the tobacco[5]industry and its proxies and intermediaries, with industry rhetoric drowning out the voices of more independent academics and NGO’s. 

This means that the public and policy makers most likely – but wrongly - believe that illicit trade is solely attributable to smaller local manufacturers and crime syndicates; that tax stamp programs are expensive and ineffective; that all tax stamps are easy to counterfeit; and that additional regulation simply increase levels of illicit trade as legitimate manufacturers struggle to compete; and that the increase in illicit trade will likely result in plant closures and job losses. 

 With little to balance this out in the media, this is the rhetoric that pervades, and the rhetoric that very often drives policy decisions. And as the tax stamp initiative traces its way through conceptualisation to the drafting of tender documents, the awarding of the tender, implementation and operationalisation, the attacks follow a fairly predictable course - one that could easily be countered with the right data points and factoids, but too often isn’t. 

Instead of pre-emptively empowering agencies with the relevant data and research and factoids that consolidate the best of academic research on what arguments to expect from industry, and how to respond when industry pushes back (either through capture, corruption political pressure or aggressive media campaigns), much of it is relegated to the chronicles of academia, and hardly ever dusted off and given the prominence it deserves. 

The tax stamp and secure printing industry has an opportunity to fundamentally shift the paradigm of considerations that shape public opinion and policy makers’ decisions. The result can only be more informed decision-making, with more tax stamp programs being implemented. 

Failing to leverage potential allies in public health and academia 

We remain astonished at the relative disregard the public health community has for the tax stamp industry. What should be an obvious partnership is instead characterised by distrust and almost no interaction. Where the tax stamp industry should have a seat at the table when it comes to developing and implementing secure marking solutions for cigarettes as part of something like the FCTC Protocol, it does not, and is instead pertinently excluded - even as observers during the 2017 MOP1 and COP8 meetings (made all the more egregious because the tobacco industry is known to have had a voice through proxies, as is evidenced by e.g. the Dirty Ashtray Awards handed out to some countries for parroting industry rhetoric.)

The tax stamp and secure printing industries are undoubtedly the single best and most uniquely positioned to deliver on some of the Protocol’s most fundamental objectives.  Instead there is poor if any communications and no formal structures for two parties who should be allies to come together.  The result may well be the tobacco industry’s solution paradigm (largely based on Codentify/Inexto) being implemented as a track and trace solution for governments. (There are already indications of this happening with the EC approving related entities as data service providers under the EC’s weak criteria for independence set out in the Commission’s Implementing Regulation (EU) 2018/574.[6])

If the collective aim is to eliminate the illicit trade in excisable products like tobacco (or even if only driven by a profit motive that seeks simply to increase the number of tax stamp programs implemented), the enmity and scepticism on the part of the global health fraternity needs to be far better managed. 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 something like the FCTC Secretariat seems like a natural fit. Unfortunately, the Protocol’s 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 the very industry it was meant to control.  

Solutions that only partially solve the problem 

Tax stamps and secure marks are an inordinately important part of the ecosystem of solutions that help ensure better production control, traceability and overall compliance in respect of excisable products across the supply chain. But secure track and trace is only one element in an agency’s illicit trade strategy.  In order to be fully effective, and provide a comprehensive service offering it needs to be augmented by strong business intelligence, data analytics, enforcement capabilities and oftentimes additional cargo tracking and container security initiatives. 

This is not necessarily always immediately apparent to client agencies, who may well naively implement a secure marking and traceability solution believing it to be a panacea that does not require additional investment or capacity on the part of the agency.

This dilutes the effectiveness of tax stamps, secure marks and traceability programs across the board: how do you superimpose a generic solution if you don’t know what problem you are trying to solve? If your service offering only focuses on the secure track and trace component, but little else, how does that substantively translate into value-for-money for cash-strapped agencies? How does it actually improve not just production control for local manufacturers, but contribute to actually reducing the prevalence of illicit trade? And how does it help to mitigate rhetoric (very often planted by industry) that tax stamp programs are ineffective?

Focusing on broader outcomes

There is nothing wrong with being driven by a profit motive. There is nothing wrong with touting cost-effective solutions that maximise a company’s return on investment. But until the tax stamp/secure printing industry begins to develop holistic solutions that actually speak to illicit trade in very real terms it will continue to face the challenges it now does, and will continue to limit its potential success. 

Never forget why we have tax stamps, secure marks and traceability programs: to ensure that taxes are paid on excisable products, rooting out illicit traders that benefits from not paying taxes and duties. The challenge in 2019? Do more than just sell stamps – empower agencies to make informed decisions, and sell holistic solutions that have a quantifiable impact on illicit trade and transforms the way in which agencies administer their excise portfolios. 

Our next article explores just how that can be done by helping customer agencies better understand the problems they are facing, tailoring solutions to fit the problem taking agency capacity into consideration, help agencies position marking regimes within the context of a broader illicit trade strategy, and using tax stamp and fiscal marking programs as a platform to more broadly transform customs and excise administration.

[1]“117 countries may need your help. Some don’t know it. Many can’t afford it”, Tax Stamp News November 2018

[2]Ibid

[3]This number excludes countries who are not signatories to the Protocol. Moreover, 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/

[4]For a brief summary, see e.g. http://www.tobaccotactics.org/index.php?title=South_Africa-_Country_Profile

[5]Although of course increasingly also alcohol, sugar and other manufacturers of excisable products.

[6]https://ec.europa.eu/health/sites/health/files/tobacco/docs/primaryrepositories_approvedproviders_en.pdf

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

Tax stamps and secure marks: Five avenues to a strategic advantage

Tax stamps and secure marks: Five avenues to a strategic advantage

In one of our earlier articles we explored how difficult it can be for tax stamp and traceability programs to gain traction, which will likely become increasingly more difficult as more potential solution providers enter the market, and even as more governments begin to seek compliance with their track and trace obligations under the FCTC.  

Watching from the side-lines, and particularly in the role of advising government agencies, I was struck by how many untapped opportunities there remain, to both improve the take-up rate of traceability solutions in general, and to improve individual companies’ potential success rates. Between ITSA and its members, there seem to be a number of avenues that would even better position the industry, including doing more to demystify track and trace; leveraging partnerships with untraditional partners; doing more around pre-sales marketing; creating more narratives around the successes that have been achieved through tax stamp and traceability programs; and preparing agencies to better anticipate and counter industry tactics aimed at derailing traceability programs.

The first avenue is both obvious and daunting: doing more to demystify tax stamps and track and trace. Even the simplest of concepts remain poorly understood by the officials who need to choose them, and the politicians who are supposed to fund them. There is very little real support to agencies, politicians, the media and the public in general aimed at demystifying exactly what these pieces of paper or codes are and what they do. What little is available is often highly academic and not written in an accessible style, on obscure websites that you and I may know about but that are hardly likely to feature on the average person’s newsfeed. Much of the narrative that isavailable, is critical of tax stamps and the companies that develop them (most likely driven by the very industries the tax stamps are meant to better control). 

If I were a lawyer at a customs and excise agency, facing a challenge of rampant illicit trade in excisable goods or needing to urgently bolster excise revenue collections, where would I start? It’s a veritable maze, with rabbit holes and back doors. Trying to understand the options and solutions and implications is more herding cats than science. Knowing who to trust – and, by contrast, whose opinions come with a heavy dose of self-interest – is tricky.

As an industry, we tend to be so quick to jump into conversations around overt and covert security, or the difference between digital and material tax stamps, that we often forget to start at the very beginning. Agencies often literally do not understand the difference between track and trace as we know it, and GPRS tracking devices on trucks. There are no simple guides aimed at translating industry jargon into something an average excise officer can relate to. Presentations are often highly sophisticated and overwhelming, potentially leaving agencies with little real understanding of the implications of the options they choose, or the alternatives that might be available to them, and are not empowered to ask the right questions that would help them in choosing the best possible solutions for their individual situations. 

Investing in a solution provider-agnostic, simple guide, that speaks to the average excise officer and their political masters, detailing what questions to ask, what options they could potentially choose from, and what the implications of those different options would be, would be a substantial strategic win for the secure marking and tax stamp industry. It would allow agencies to make more informed decisions, and in doing so, would be a sound PR win for the industry.

A second avenue, that would similarly constitute a bit of a PR triumph, perhaps lies in better leveraging partnerships with – in particular – the health fraternity. Of course tax stamps and traceability programs go far beyond just securing compliance with the FCTC, but it has the potential to be a powerful promotional driver for the industry. 

Unfortunately, much of the tax stamp and secure marking industry is viewed with some scepticism by the health community, which refuses to partner or even engage with industry. At the FCTC meetings in Geneva in 2018, the MOP and COP sessions explicitly excluded securing marking industry representatives – while the tobacco industry managed to get a seat at the table through its proxies. It represents a real lost opportunity for two sectors who at least in this one regard have a common goal in mind – reducing the illicit trade in excisable products. 

The relative lack of trust and engagement is a loss to both industry and the health fraternity, and something of a win for those manufacturers of excisable products out to cheat the system. We end up attending our own conferences, reading our own newsletters, preaching to the choir, and not leveraging what could be an inordinately powerful ally in better securing supply chains.

 I firmly believe that the tax stamp and secure printing industry shouldhave a seat at the FCTC table, and developing a roadmap that begins to deliver on this goal would similarly be a strategic investment in even more robustly positioning the industry. 

Part of developing both the simple guide and gaining more trust within the health fraternity perhaps lies in a third avenue of strategic advantage: doing more to exploit the real value that tax stamps and secure marks can potentially contribute. 

We were recently asked to compile a quick list of examples of successes achieved using secure marks. As it turns out, this is quite a tricky request. The studies that are available tend to repeatedly focus on the same small number of sample countries, and don’t necessarily convincingly make the case – in a powerful and accessible way – that investing in tax stamps and secure marks goes beyond simple rhetoric or an obligation imposed by the FCTC, but actually yield real, substantive, measurable successes. We need far more substance around the success stories attributable to tax stamps and secure marks.

It is extremely difficult to sell a product or a service when there isn’t a compelling story to tell – and without a comprehensive list of country examples where secure marks made a notable difference, there simply isn’t a compelling story. Perhaps what is needed is an anonymised case study – ensuring that specific vendors or countries aren’t identifiable – detailing simply what type of security features were used, and what impact they had on excise collections, excise declarations and illicit trade in general. 

A big part of this conversation should arguably expand the way in which success is measured, beyond simply the number of products marked, or an increase in excise revenues, to broader measures around a decrease in illicit trade, and strike rates of enforcement activities, and the rate of successful prosecutions – all of which should be the real reasons governments invest in tax stamp and secure marking programs.

Implementing tax stamps and secure marks should be an easy sell, but often is not. A consolidated, global study that anonymises solution provider data, whilst still detailing the nature of the different solutions (and perhaps what other supplementary solutions were implemented), together with an indication of type of successes achieved, would be a win for the industry as a whole – particularly considering the fact that agencies indisputably in practice dohave a choice whether or not to pursue what is often a contentious issue. 

A last worthy investment for the industry would be very strongly investing in more robust guidance to agencies on the kind of pushback and obstacles they can expect from the industries they are trying to regulate – whether this is the tobacco industry, or alcohol, or sugar, or whatever other behemoth agencies may have in their sights. 

We know from experience that these industries tend to have a somewhat generic set of tactics, arguments and rhetoric that they use to dilute, derail or delay the programs that are meant to better regulate their supply chains.  And we also know from experience that much of these tactics and rhetoric is easy enough to counter or engage with constructively, but that an unprepared agency may well not be able to do so. As a result, we see far too often how even the best of programs fall by the wayside, simply not gaining traction, as the larger manufacturers flex their fiscal muscles, relying on the soft power that comes from being a significant revenue contributor; argue that they are capable of self-regulating; propose that government should instead be focusing its efforts simply on low-cost manufacturers; deflect more sophisticated solutions with concerns about costs; and on occasion even capture or corrupt agencies. And far too many agencies bend and bow and sway to this pressure, walking away from engagements which they could easily direct – if only they had easier access to facts and counter-arguments. 

A simple generic guide to the reasons why tax stamp and secure marking programs fail, highlighting the type of narratives and arguments and agency is likely to be faced with, and a set of facts and counter-arguments for agencies to rely on, would go a long way to ensuring that even more programs make it out of the gate and actually get implemented. 

What is needed is more generic, industry-wide efforts, that do more to simplify what is otherwise a somewhat opaque business. What is needed is far more technology-agnostic publications on the principles, options and implications of different choices, written in a simple, accessible style. What is needed are compelling stories that sell the concept, and I’m convinced we’re on the road to even greater things. 

Enabling legal frameworks for secure tax stamps and traceability

Enabling legal frameworks for secure tax stamps and traceability

Telita Snyckers, Michael Eads

INTRODUCTION

A tax stamp program has the potential to significantly disrupt illicit trade and excise-related non-compliance – but only insofar as it is supported by a responsive, empowering legislative framework that gives an agency the flexibility and powers it needs to do so.

Legislation can only deliver on these outcomes if a rigorous legislative design process precedes it, which is the focus of this article.  

Excise agencies are creatures of statute– they can act, regulate and enforce only insofar as they are empowered to do so in terms of legislation. If the legislation is weak, the solution is weak. Governments that are contemplating either establishing a new, or transforming a traditional tax stamp regime into a modern, secure tax stamp and traceability program, have a few key issues to consider from a legal perspective. The efficacy of any tax regime is highly dependent on the underlying legislative framework. No amount of clever solution design or technological wizardry can adequately make up for a poor legislative foundation.

DRIVERS SHAPING THE FUTURE OF TAX STAMP PROGRAMS

There are a number of drivers likely to shape the future of tax stamp programs, which put pressure on policy makers to revamp existing legislation in order to adapt and establish the flexibility required to underpin this evolving field. These include:

·       Governments’ expanding mandates -To balance revenue generation, trade facilitation, border protection and consumer health and safety across a broader range of activities, in an increasingly fluid environment and ever-tightening fiscal climate;

·      The profitability, growth and sophistication of illicit trade -Much of the growth in illicit trade is attributable to organized crime syndicates finding ways to introduce illicit products into legitimate supply chains, and to blur both the origin and chain of custody of goods;

·      Consumers are demanding safe, genuine products, and looking for solutions that let them validate the choices they make;

·      Technologythat allows government to utilise information related to revenue management in more innovative ways; 

·      Expanding regulatory and industry-drivenmandates  -The rise in the number of regulatory initiatives related to the pedigree, provenance and critical supply chain events for various types of goods, and including the World Health Organisation’s Framework Convention on Tobacco Control Protocol on Illicit Trade in Tobacco Products (“FCTC Protocol”) and the European Union’s Tobacco Products Directive (“TPD”); and

·      An increase in industry-driven supply chain integrity initiatives that run the risk of developing organically, eventually resulting in a series of disconnected systems that are more difficult to integrate over time, unless managed strategically by government. 

CONSIDERATIONS RELATED TO DRAFTING BESPOKE LEGISLATION

Drafting regulations to underpin a secure tax stamp and traceability program requires a significant amount of customization in order todeliver bespoke legislation thatis specifically tailored to the agency and its unique requirements. One cannot simply transplant law wholesale from another country or jurisdiction.

A full traceability regime requires the development of bespoke, tailored legislation – simply because legislation is not a copy and paste exercise: 

·      There is no global model tax stamp or supply chain security legislation;

·      There is a dearth of examples of legislation expressly aimed at securing full FCTC compliance, exacerbated by the lack of guidance from the FCTC Secretariat insofar as supply chain-related provisions in the Protocol are concerned;

·      Legislation has to be responsive to the agency’s objectives, mandates, demographics, compliance cultures, and external legislative frameworks. What works in one jurisdiction may not be appropriate or effective in another; and

·      Different agencies have different operational capabilities, and particularly smaller administrations may simply not have the capacity to implement or enforce provisions that a larger administration may find easy to do.

THE LEGISLATIVE DESIGN PROCESS

The purpose of promulgating new legislation is not to simply introduce a “thou shalt mark” obligation. It needs to:

·      Secure a system of regulation that has the necessary powers, obligations and discretions, and checks and balances to make it (near) impervious to fraud, manipulation, arbitrage and interpretive loopholes;  

·      Sufficiently empower the agency to deter, prevent, detect, assess, remedy and punish non-compliance and fraud; and

·      Be responsive to where real risk lies; flexible enough to allow the agency sufficient discretion to adjust its operations from time to time; give effect to agency and government objectives; and be relatively technology and product agnostic.

Legislation can only deliver on these outcomes if a rigorous legislative design process precedes it,which includesan assessment of the agency’s environment, developing explicit objectives, ensuring alignment with the solution design, assessing what legal powers the agency requires to give effect to its objectives, and only then crafting an appropriate legislative and regulatory framework.

DEVELOPING EXPLICIT OBJECTIVES THAT ARE RESPONSIVE TO THE AGENCY’S ENVIRONMENT 

Any legislative design has to start with an assessment of the agency’s environment,including an assessment of the prevalence and manifestations of excise fraud, reviewing the legal obligations imposed on the administration, considering the agency’s operational maturity, and understanding how the agency could benefit from international good practice. 

There is no solution that can stop all types of fraud or non-compliance, so it is important that the agency truly understands the problems they are trying to solve.  Typically, this involves conducting a thorough diagnostic or environmental scan, as well as assessing the agency’s overall strengths and weaknesses. Without a solid business case, there is little chance that a solution will be able to withstand resistance from well-entrenched status quo interests.  

Key questions an administration needs to ask in terms of understanding its environment include:

·      How prevalent are the different types of excise fraud, and at what cost to the fiscus?

·      Given existing operational capacity and maturity, what can practically be implemented? 

·      Does the agency have specific non-negotiable obligations (e.g. under the FCTC Protocol / TPD)?

·      What is allowed in terms of existing legislation?

Only once the agency has a deep understanding of its environment, can it begin to develop specific, explicit objectivesfor the program, which could include e.g. safeguarding revenue, combating illicit trade, and complying with FCTC or TPD obligations. Key questions an administration needs to ask in terms of setting objectives include:

·       What are the three or four single biggest objectives the agency hopes to achieve?

·       Which of these objectives are non-negotiable, imposed as a result of a legal obligation to secure compliance with specific rules?

·       Which of these objectives are aspirational and form part of a longer-term view, and which are important to the agency immediately?

·      How organisationally mature is the agency, and how sophisticated does the solution need to be?

·      To what extent does current legislation support the agency in achieving these objectives?

ASSESSING THE LEGAL POWERS THE AGENCY REQUIRES 

A traceability regime requires a number of building blocks from a legislative perspective. Some of the provisions are fairly generic (e.g. around licensing, debt and dispute management), while others require the introduction of new, tailored provisions. The precise legal powers an agency needs depends on its objectives, and grows in complexity as the agency’s objectives become more ambitious, but in general, tax stamp regulations require at least the conditions for release of goods, licensing, stamp specifications, liability for dealing in unmarked goods, and the like.  Insofar as the agency may have compliance with its FCTC or TPD obligations as an objective, it also needs to review the extent to which its legislation and practices meets the requirements of the Convention and Protocol. 

Alignment and engagement with non-traditional network partners (particularly where an agency is seeking compliance with its FCTC obligations)with whom the agency may not have an existing relationship, to manage overlapping mandates, interdependencies and pre-existing regulatory obligations including other government agencies (OGA’s) like the revenue agency, border protection agency, police, judicial system, consumer protection agencies, anti-money laundering authorities, the health department, etc. 

Equally important, though, is an understanding of the administration’s own legislationbeyond simply tax stamps, in particular in respect of officers’ powers, the limitations on the agency’s powers from a constitutional perspective, and other regulatory limitations or obligations that may be imposed on the administration (for example, data privacy rules and electronic evidence rules), and other legal instruments (e.g. customs union harmonization obligations; regulations around the placement of health warnings on tobacco etc.) 

Assessing the extent to which the agency is legally mandated to implement a traceability solution, empowered to enforce the obligations it seeks to impose; extent to which non-compliance is sufficiently criminalised; extent to which different rules would be required for different products; the impact that the specific solution would have on existing licensing requirements; system limitations the agency (and manufacturers) are likely to face; the impact on small, manual manufacturers who do not have automated manufacturing lines; and the impact of the solution design on existing import, export, transit and manufacturing processes; etc.

But perhaps equally importantly is to develop a legislative and regulatory framework that strategicallysets the agency up to counter typical legal challengesthat tend to emanate from industry and non-compliant players.

Key questions an administration needs to ask in terms of assessing its legislative gap:

·      In plain language, what are the key principles we want to introduce?

·      What legal powers do we require to give effect to this? 

·      What legal powers do we have currently? 

·      To what extent can we meet our objectives under existing legislation and discretionary powers, without requiring any changes in legislation?

·      Where amendments to legislation are required, what discretions and powers does the agency have to amend legislation itself, and what requires tabling in Parliament?

CRAFTING OF A LEGISLATIVE AND REGULATORY RESPONSE 

Only once the agency has established clear objectives, developed a high-level solution design and completed a legal gap analysis should is start crafting legislation. 

An agency may want to consider promulgating legislation in distinct phases, considering the limitations imposed under existing legislation, the time it would take to amend legislation, and the agency’s operational capacity. An agency could consider initially using existing legislation to institute basic controls; then retaining existing powers under primary legislation and changing only subsidiary regulations in-house to effect for instance production control measures; and then over time seeking to promulgate entirely new primary legislation to give effect to full traceability or to secure FCTC or TPD compliance. 

Key questions an administration needs to ask in terms of closing its legislative gap:

·      Does the new draft adequately give effect to the agency’s objectives, and protect it against fraud, arbitrage and subterfuge?  

·      Are there any other provisions in current legislation that are inconsistent with the proposed new legislation, and that would need to be repealed or amended? 

·      Could the agency benefit from phasing the promulgation of legislation? 

·      To what extent could timelines around the promulgation of legislation potentially impact on the planned delivery and implementation dates of the technology solution being considered?

What other (external) legislation potentially impacts on the solution design (e.g. the positioning of mandatory health warnings on cigarette packs, or legislation around the use of electronic evidence)

CONCLUSION

A tax stamp program has the potential to significantly disrupt illicit trade and non-compliance, to empower an agency to better meet its objectives, and to enable an agency to better target its resources – but only insofar as it is supported by a responsive, empowering legislative framework that gives the agency the flexibility and powers it needs. 

Implementing a full-traceability tax stamp program is a potentially audacious goal for any excise agency. It need not be, though, if agencies: 

·      View the program as an iterative journey, implemented in phases, and working towards a longer-term goal of full traceability over time;

·      Align the program with other good practices: entity-centric design, collaborative partnerships, whole-of-government solutions, standards-based solution design, and data-centric decision-making; and

·      Follow a structured process in developing empowering legislation, which is aligned with international good practice, but uniquely tailored to the agency’s specific environment. 

Supply chain security, and by definition, tax stamp programs, are an incontrovertible part of excise agencies’ futures. Without them, agencies will increasingly find it difficult todeliver on their ever-expanding mandates and respond to the ever-increasing threat from illicit trade.It is a journey that all agencies – regardless of size or level of sophistication – need to embark upon. But it is a journey that begins and ends with a robust, flexible legislative framework.

New FCA Guidebook on Implementing Article 8 Track and Trace

New FCA Guidebook on Implementing Article 8 Track and Trace (written for Tax Stamp News, published by the International Tax Stamp Association)

Background 

The Framework Convention Alliance (FCA) commissioned a guidebook[1]on implementing Article 8 of the Protocol to Eliminate Illicit Trade in Tobacco Products (the Protocol)relating to the tracking and tracing of tobacco products. 

One of the challenges in implementing the Protocol lies in the fact that it was predominantly developed by health experts with little experience in illicit trade, customs administration, supply chain security or traceability programs, and separately needs to be implemented by customs agencies who are typically not traceability experts and who may not have developed deep domain expertise in dealing with tobacco in particular (and who, frankly, often seem to view the Protocol as largely a health-related instrument, not attaching the necessary importance to pursuing its implementation, as is evident from the relatively poor implementation rates of traceability across the globe.)

Approach of the guide

Article 8 sets out broad requirements for Parties to implement a tracking and tracing system, but does not specify business requirements or technological options that are immediately actionable or implementable, and interpretation of the requirements and translation into operational and technical specifications is required. 

The guidebook was intended to be a simple, introductory overview for implementing agencies – and to a lesser degree perhaps also for those administering the Protocol in the FCTC itself – to better understand the key concepts, principles and terminologies used in traceability solutions, and to position agencies to better engage with potential solution providers.  In that sense, the guidebook is intended to be a resource for policy makers that need to implement the Protocol. It provides an overview and historical context of how the Protocol came into being before providing an overview of the main elements of tracking and tracing and offering guidance on how policymakers can choose an appropriate system for their particular context. At 81 pages it makes for hefty reading, but in the process provides practical guidance on a broad range of issues and options agencies are likely to encounter.

The guide does not proscribe a specific system or approach but rather sets out options and considerations to form a basis from which Parties can make strategic decisions in relation to implementing their obligations under the Protocol, given the current state of track and trace technologies. 

The guidebook is a first instalment, with the intention to publish additional, more detailed chapters in the future, including possibly a section on dealing with illicit tobacco in free trade zones. 

What the guide contains

The first part of the guide is structured around a number of introductory sections: the Protocol’s objectives and key requirements under the Protocol; an overview of the illicit trade in tobacco in broad terms; key components, benefits and country successes achieved from the marking of tobacco products; supply chain events explained in simple terms; exploring the key components of a track and trace solution including unique identifiers, serialisation, aggregation, security features (types, layering and application methods), and tamper evident non-removable marks; authentication, and data management; and other supply chain security measures that agencies should consider, beyond just tax stamps and secure marks.

The second part of the guide focuses on practical considerations in the journey of implementing a track and trace and secure mark solution: the types of planning and analysis that is required upfront, estimating the size and prevalence of illicit trade, and understanding the agency’s customs capability gaps; designing a solution around a governance  framework and considering the stakeholder universe; build considerations, including whether to use a straight tender or a public private partnership model; assessing the extent to which the agency’s legislative paradigm allows for the introduction of stamps and marks; and aligning the traceability program with a broader enforcement strategy.

Finally, the guide includes a series of other practical implementation considerations around independence, engagement with the tobacco industry, understanding key arguments advanced by the tobacco industry against track and trace, how to convert existing tax programs into full traceability programs, and measuring the outcomes and impact of traceability programs.

Importantly, throughout the guide, practical checklists are included for a range of issues, along with key questions agencies should ask themselves on the various aspects relating to the journey of implementing a secure mark and tax stamp program, making the guide less academic and more concrete.  

How solution providers can use the guide 

One of the key constraints in implementing track and trace programs lies in the fact that customs agencies – who are typically responsible for implementing these programs – are not traceability experts, and often tend to find it difficult to develop suitable tender specifications, or to engage appropriately with solution providers.  This guide is primarily aimed at these implementing agencies, and with this audience in mind is written in a relatively accessible, simple style. Although it was not intended for subject matter experts who already have deep domain expertise, it should form a valuable weapon in any solution provider’s arsenal of tools in demystifying track and trace for potential client agencies, and has the potential to contribute towards closing the knowledge gap between vendors of traceability systems and governments seeking to procure a track and trace regime for tobacco products in order to fulfil their Protocol obligations. This can only mean more successful programs being implemented!

[1]FCTC Protocol to Eliminate Illicit Trade in Tobacco Products

Guidebook on Implementing Article 8: Tracking & Tracing, https://www.fctc.org/wp-content/uploads/2019/11/ITP-Guidebook-.pdf

Stop Policy Brief on Protecting Track and Trace Systems from the Tobacco Industry

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