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

Setting the record straight: Tax stamps work (published in The Sowetan)

Setting the record straight: Tax stamps work

By Telita Snyckers, Michael Eads and Saveera Kalideen

We read with some amusement the article “SARS’s track plan might not work,” that appeared in the Sowetan on 10 September 2019. 

The article is disconcerting on many levels. SARS is indeed poised to implement a track and trace system for tobacco products.  That much is true. Such systems are endorsed by the World Health Organisation, law enforcement agencies and pretty much anyone who knows anything about tackling the illicit trade problem.  So, when a publication simply publishes sound bites from a party that is inherently biased (like BAT), the record must be set straight.  

The article does remind us that it is a heartening indicator that SARS is indeed on the right track, and SARS should continue along the road that lets it better secure the tobacco supply chain. 

Ultimately, illicit trade flourishes for one simple reason: because the tobacco supply chain is almost entirely opaque, making it virtually impossible to figure out where packs come from, where they are supposed to be, and whether tax has been paid on them.  So, when someone buys a pack of cigarettes irrespective if it came from a national chain or a corner tuck shop, there is no way of knowing if the product is licit or illicit. The traceability solution that SARS is seeking to introduce is one of a range of measures that work together to fix this. 

There are a number of fundamental issues with the article:

First, research shows that as much as 98% of illicit cigarettes come from licensed, known tobacco manufacturers. Second, research also shows that as much as one third of all export consignments of cigarettes go missing somewhere along the supply chain. When one considers that BAT South Africa, on its own account, ships its packs to at least 22 other countries the fact that we have no way of knowing that those packs actually left or where they went,  should give us all pause.  SARS is planning to implement a track and trace system for tobacco products - albeit with some delays – and as it is obliged to do under the Framework Convention on Tobacco Control – which South Africa has signed – that requires track and trace systems to be implemented.  

The current paradigm used by SARS to “prove” that taxes have been paid, known as the “diamond stamp” is nothing short of useless. There is no control of the supply of physical die stamps (that simply make a dent in the shape of a diamond on the bottom of the pack) and they tell you nothing about the origin of the packs, where they are supposed to be or if the taxes has been paid.   This needs to change if SARS is to have any chance of fighting the growing scourge of illicit tobacco on the market.

The benefits of such programs are both obvious and well documented.  The article cites a BAT company statement about the Kenyan system and states “the system that SARS wants to introduce has not worked in Kenya and may therefore also not work in South Africa”.  This is patently false and contradictory to what the Kenyan Revenue Authority (KRA) officially reports on their highly successful system. Portraying Kenya’s use of secure marks as a failure is nothing short of disingenuous. The truth is that Kenya is widely held up as a case study of the very positive impact the introduction of a tax stamp can have. Through their program the Kenyan Revenue Authority managed to seize more than 350,000 illicit packs; secured a 100 percent prosecutorial success rate in more than 400 criminal cases; and increased their excise revenue collections by 53%[1]. 

In fact, according to an official with the Kenya Revenue Authority who saw the article, the tax stamp program there resulted in a reduction in the illicit trade in cigarettes, from 15 percent, to less than 5 percent, and indeed actually benefited BAT, as it resulted in the closure of all of the other local manufacturers – BAT is now the only licensed manufacturer left in Kenya. 

Tax stamps and secure marks work: More than 140 billion tax stamps used by more than 150 national and local governments around the world. Other country case studies show clear successes: In California the tax stamp system resulted in a 37 percent drop in tax evasion within two years of implementation, and an additional $870million in excise tax revenues. Some countries have noted a 61 percent reduction in smuggling and 38 percent less tobacco-related fraud; they’ve seen their tax revenues increase by as much 50 percent and the illicit trade prevalence drop by a significant 6 percent. 

In the article, BAT is quoted as raising other spurious claims about highly secure modern tax stamps. 

Suggesting that “the system will make it difficult for manufacturers to export to other countries” displays a distinct lack of understanding of how the solutions are implemented– cigarette packs are marked differently depending on whether they are intended for the local market, or for export.  The use of secure marks has not presented in this respect a problem in any of the other 150 countries and states where tax stamps have successfully been implemented, and it is patently simply an alarmist statement intended to scare SARS off. 

The statement in the article that “ten thousands farmers will be immediately wiped out, putting another 35,000 dependents at risk" is equally simply alarmist rhetoric. The simple fact is that BAT only employs around 2,187 people in the country. The rest of the number includes what BAT itself elsewhere has called “indirect and induced” numbers[2]which essentially includes the cashier at the fuel station who rings up your pack of cigarettes – making their numbers a bit of a stretch.

The truth is that what BAT is doing is laying the groundwork for an argument that SARS should use a traceability system that the tobacco industry itself developed (the “digital market printed on a pack at the machine,” that is referenced in the article) 

The problems facing the industry-developed and punted solution are substantial: BAT is unlikely to tell you that this very same traceability solution was initially developed by the tobacco industry to fulfil an obligation under an EU court order where they were fined a few hundred million euros, for the smuggling of their own packs[3]. The solution was developed by the industry, for the industry. It was never meant to be an anti-illicit device for government.  And the digital codes – which is only a simple a alphanumeric number – are incredibly susceptible to fraud themselves, because a legitimate code can simply be “cloned” or copied, and used multiple times without anybody being any the wiser. Why would any government choose a solution that lets the foxes guard the henhouse? 

The BAT statement, and the article that followed, is aimed very simply at getting SARS to adopt a solution that favours the very industry that is being told to toe the line. BAT has been extremely vocal about how SARS should be clamping down on illicit trade. Introducing a secure mark that makes it possible to see where packs came from, and to validate that they are where they are supposed to be, is the very best way to do so. Any company that legitimately wanted to fight against illicit trade would welcome the initiative. The fact that BAT does not do so may suggest that the company itself would prefer the tobacco supply chain to remain opaque. 

SARS would do well to learn from the Kenyan story, and ignore industry rhetoric designed to preserve the status quo.

[1]http://www.wcoomd.org/-/media/wco/public/global/pdf/media/wco-news-magazines/wconews_75.pdf

[2]http://www.batsa.co.za/group/sites/bat_a2elad.nsf/vwPagesWebLive/DOA2LJ7R/$FILE/medMDAG2LAG.pdf?openelement

[3]https://tobaccocontrol.bmj.com/content/25/3/254#ref-25; https://tobaccocontrol.bmj.com/content/25/3/254

Tobacco Industry Interference Index – What it means for secure track and trace (for Tax Stamp News)

NOTE: This article first appeared in the Tax Stamp News, published by the International Tax Stamp Association

Background

 The 2019 Global Tobacco Industry Interference Index[i]was just released. Tthe concept is not a new one, and borrows from the methodology originally developed by South East Asia Tobacco Control Alliance[ii]to assess the extent to which the tobacco industry was unduly influencing governments in Asia.)

The report confirms what we already know: how the tobacco industry works strategically to delay and defeat tobacco control measures using various tactics. Governments have identified tobacco industry interference as the most serious barrier to
passing strong tobacco control measures[iii]– and yet better controlling this lies almost entirely in government’s own hands.

In support of the World Health Organisation’s Framework Convention on Tobacco Control a set of recommendations were adopted to protect governments from industry interference. The Interference Index measures the extent to which governments have adopted those recommendations, across a number of dimensions: tobacco industry involvement in policy development; the use of CSR campaigns to influence government relationships; the securing of preferential treatment for the industry; the extent of unnecessary interaction between government departments and the tobacco industry; the transparency of government engagements with the industry; and the extent to which there may be a conflict of interest on the part of government officials vis-à-vis the tobacco industry. 

Customs agencies at particular risk

The first Global Tobacco Industry Interference Index shows that major improvement is needed, with a lack of transparency in many countries when dealing with the tobacco industry, and with particularly non-health government departments (like tax and customs authorities) remaining vulnerable to industry interference. This is particularly true because tax and customs agencies have historically developed close relationships with the tobacco industry, in part because of the ongoing operational interaction between them, but also because these companies invariably end up being significant revenue contributors, and frequently enter into MOU’s with government. The close nature of the relationship – and the very significant capacity constraints that tend to face most government agencies – means that governments often resort to policy positions advanced by the industry itself. 

Country performance on the index

 The 10 countries most at risk from tobacco industry interference are rated as Japan, Jordan, Bangladesh, Lebanon, Indonesia, Egypt, China, USA, South Africa and Tanzania.

In respect of these countries in particular, the report highlights a number of examples: 

In Japan, government owns 33 percent of JTI, allowing JTI significant clout of interfering in policy development. When senior government officials retire, they move to key leadership positions in JTI. (The current Chairman of JTI started his career in the Ministry of Finance, including a stint as Special Advisor to the Cabinet before being appointed as Chair of JTI.)

In Pakistan, the previous previous Finance Secretary and Secretary General, Finance and Economic Affairs, became the Chairman of the Board of Pakistan Tobacco. In Bangladesh the former Senior Secretary of the Ministry of Agriculture and the former Secretary of the Ministry of Industries are both Independent Directors of BAT. In Cambodia, the owner of a cigarette business was appointed a Senator.

In Egypt closed meetings held with government allowed for pricing agreements to be reached; in several countries, non-health ministers were involved in endorsing tobacco-related CSR activities; in Indonesia, VAT for all consumer products is charged at 10 percent - cigarettes are taxed at 8.7 percent.  

In South Africa, promises to introduce a secure marking solution have (to date) come to nought, with government now indicating its intention to rely on production counters in factories – a solution that was apparently proposed by the tobacco industry. 

The tobacco industry is known to have had closed door meetings with the Finance Ministry on taxation issues, without disclosure of the agenda, in at least Bangladesh, Indonesia, Malaysia and South Africa. And Bangladesh, Brazil, India, South Africa, Jordan, Lao PDR, India, Lebanon and Ukraine all receive some form of technical assistance from the tobacco industry in the fight against illicit trade.

Two thirds of the countries reviewed in the Interference Index allow political contributions from the tobacco industry. 

The challenges are equally pressing in countries where governments enter into state-owned enterprises (SOEs) or joint ventures, as happens in e.g. China, Egypt, Japan, Lao PDR, Lebanon, Thailand and Vietnam, where government officials may find themselves inadvertently conflicted in adopting tobacco control measures – and with many of countries performing poorly on the Interference Index because of pressure to give preference to business interests over tobacco control and creating situations with senior officials moving from government to the industry. 

The bottom line is that countries where the tobacco industry has a stronger influence, are less likely to adopt policy positions that may antagonise these behemoths, because they are often viewed more as partners than as subjects to be regulated. Influence too easily becomes administrative capture, leaving governments adopting rhetoric that favours the industry, without applying its own mind objectively. 

How does industry interference influence the implementation of secure marking traceability solutions?

I did a quick analysis, comparing the ranking of countries in respect of the Interference Index  and the WHO Country Reports on the status of FCTC implementation to assess at a very rudimentary level whether there is any correlation between the extent of interference, and the policy positions governments adopt. 

A key issue immediately become apparent: at least some of the data in the WHO Country Reports is either simply wrong, or outdated. So, for instance, the Country Reports note the USA, Tanzania, Iran and France as not using tobacco tax stamps, when we in fact know that they do. And on the “best performing” list – where the WHO Country Reports suggest that  Iran, France and the UK don’t use tax stamps - it would in fact only be Uruguay that doesn’t use tobacco stamps.

Bottom line: 90 percent of the best performing countries on the Interference Index use a combination of tax stamps and secure marks, against only 50 percent of the worst performing countries that do.

More work is required to fully understand the statistical relationship between industry interference and the statistical likelihood of secure marking and traceability solutions being implemented. But even a very cursory provisional assessment suggests that traceability solutions are more likely to find application in countries where there influence of the tobacco industry is more restricted. In the ten worst performing countries on the Interference Index, only 50 percent have introduced some kind of tax stamp or secure marking – compared to 90 percent in the best-performing countries on the interference index, suggesting that industry interference may have a role to play in how governments choose to respond to illicit trade. 

There is also a second observation worth mentioning: countries with a poorer score on the Interference Index are also less likely to adopt sound policy measures relating to the countering of illicit trade in general. Comparing the scores of countries that are rated on both the Interference Index and the Economist’s Illicit Trade Index highlights how countries with higher levels of interference have a lower chance of adopting good policy practices (which would, obviously, include the use of tax stamps and secure marks.) The average score in respect of the adoption of good policy practices on the Illicit Trade Index for countries that perform poorly from an interference perspective is 61 – for countries with lower levels of interference, the average score for adoption of good policy practices is 75 percent. 

However, these observations are made simply as a place holder, and more work is required to unpack other indicators around the statistical impact that industry influence may be having on the types of solutions governments choose in curbing illicit trade. 

Importance of findings for secure marking and traceability

Experts agree that the single biggest way in which to curb the illicit trade in cigarettes is to better secure the supply chain, and a critical component of that lies in securely marking cigarettes, and being able to trace them through the supply chain. Despite the value of the solution being indisputable, it often fails to gain traction – in large part because of the disproportionate power the tobacco industry has, and its influence over government agencies. 

For solution providers to increase their conversion rates, an understanding of the extent and impact of industry inference is critical – as is the development of a strategy that allows them to counter some of that influence, by making it easier for governments to understand the dynamics at play, simplifying how solutions are pitched, and increasing the visibility of the importance of better securing the tobacco supply chain and the best ways in which to do so. 

[i]http://exposetobacco.org/wp-content/uploads/2019/10/GlobalTIIIndex_Report_2019.pdf

[ii]https://seatca.org/dmdocuments/SEATCA%20TI%20Interference%20Index%202018.pdf

[iii]World Health Organization. 2018 Global progress report on implementation of the WHO Framework Convention on Tobacco Control. Geneva: World Health Organization; 2018. Licence: CC BY-NC-SA 3.0 IGO.