Why illicit trade strategies fail (for Tax Stamp News)

Gaps in agency thinking – and opportunities to fill them (for Tax Stamp News, published by International Tax Stamp Association)

Telita Snyckers

CURRENT AGENCY APPROACHES HAVING A LIMITED IMPACT

The impact many agencies have on the illicit trade in cigarettes is generally quite limited: So, for instance an agency may note that it seized an impressive-sounding 1 billion illicit cigarettes over the course of a year. However, that translates into less than 1 percent of illicit cigarettes being removed from the market.  This is not an isolated example - it is a pattern that repeats itself the world over, with only 0.7% of all illicit cigarettes being seized globally. 

Agencies’ limited success does not just lie in their inability to detect and seize illicit cigarettes, but also in other indicators like the relatively limited progress with the implementation of instruments like the FCTC treaty. There has been no progress in the implementation of 7 out of 16 substantive treaty articles since 2014 (with the tobacco industry continuing to be the most important barrier in the implementation of the convention.) 

Many substantive proposals aimed at curbing the tobacco industry’s powers and abuses have been tabled as part of international treaties - and have consistently been diluted:  references to the industry abusing international trade and investment rules was deleted; all references to “tobacco industry interference” have been removed; proposals that the right to health takes precedence over any laws related to tobacco use, now simply acknowledge that the FCTC contributes to the achievement of health. The industry describes these as “tremendous outcomes.”

Technology-driven solutions, like tax stamps and traceability solutions, are the one consistent feature thatdoallow agencies to have a more positive impact.This makes it all the more important for tax stamp programs to become ever more effective tools in curbing the illicit trade in cigarettes – and gives tax stamp service providers a real stake in securing agency success.  

WHY TOBACCO CONTROL STRATEGIES FAIL

Why are some agencies more successful in targeting illicit trade and others less so? Experience highlights a number of possible causes:

·      The strategic importance of excise administration is under-valued. Excise duties are generally not a big money spinner for the average agency, as it does not affect the agency’s revenue bottom line significantly. However, illicit tobacco poses more than a public health and revenue risk – it has strong links to money laundering, counterfeiting, smuggling, organised crime and terrorism, offering a complementary source of income and a way through which to launder money. Agencies should make the illicit trade in tobacco a strategic priority not because of its revenue impact, but because it sits at the heart of criminality more broadly. 

·      The approach to managing risk is simplistic and unstructured. Few agencies have the required level of business intelligence and analytics capacities to identify the right consignments, issues and entities. Few agencies have a technically superior inspections and auditing capacity, or state-of-the-art scanning facilities capable of detecting co-mingled goods as they cross the border. And few agencies have the capabilities to look beyond just excise fraud, to more complex schemes around money laundering, thin capitalisation, transfer pricing and fictitious revenue schemes. The average agency generally has relatively little insight into how the industry operates, what tactics it deploys, and how sophisticated its evasion can potentially be. Policies are designed to regulate the legal market and known behaviours - and not the illicit market with its more opaque behaviours. For many, “risk management” is simply an audit control or post-clearance inspection. 

·      Agencies often view risk from a transactional, single-tax, siloed perspective. Audits and enforcement action tend to have a single-tax, single period view, looking for transgressions from a transactional perspective - instead of seeing companies for the complex and dynamic entities they are. The information submitted from a VAT, corporate income tax, payroll tax, customs and excise perspective should correlate, but often don’t. Exports declared should match imports declared to agencies in other countries, but often don’t. Agencies are often so focused on the minutiae of validating volumes declared that they fail to notice the billions being lost to more aggressive tax evasion schemes. 

·      The consequences of being caught are easily offset by the potential profits: A single untaxed smuggled container can make as much as $2 million profit(depending on the tax rates of the jurisdiction). Heroin trade yields a profit of around 1886% - untaxed illicit tobacco yields up to 4,200%.Illegally trafficked cigarettes now have a higher profit margin than cocaine, heroin, marijuana or guns. A penalty, or even a conviction, becomes a simple calculated cost of doing business that is easily discounted against the profits being made on other consignments. Despite its broad impact on health, crime, and taxes, lenient sentences are the norm; in some countries, cigarette smuggling is not even considered a crime. 

·      Even when agencies do find and seize consignments, they don’t follow the money trail behind it. Ultimately the illicit trade in cigarettes is about money. The profits have to be accounted for somewhere. The money has to be spent somewhere, or laundered somehow. While the detection and seizure of illicit consignments is critical, agencies need to follow the money. Who is this funding? Where is this profit being accounted for, or spent, or hidden? 

·      Agencies fall victim to industry rhetoric and industry agendas: They believe that the illicit trade in cigarettes is attributable largely to low-cost manufacturers, or cross-border smugglers based in neighbouring countries. They buy the false logic that tax rate increases drive illicit trade. They enter into partnerships with industry, giving it access to its law enforcement and policy making structures, because they believe that big tobacco is the innocent victim of illicit trade. 

·      Responsibilities for FCTC implementation are spread across a disparate range of government agencies: The FCTC Protocol was largely drafted by the medical community, for the medical community. Other key agencies who have a critical role to play in implementing some of the meatier provisions around traceability and criminality (like tax and customs departments) are often not fully engaged, do not appreciate the importance of the role they play, and view the protocol as a health-issue (if they are even aware of it). 

OPPORTUNITIES FOR TAX STAMP SERVICE PROVIDERS

In and amidst the challenges facing agencies in curbing the illicit trade in cigarettes, lies a number of opportunities for tax stamp providers in how they pitch their products, and in the support they offer to agencies, including e.g.: 

·      Helping agencies to develop a business case on the importance of excise administration, beyond a revenue-generating line item in the budget; 

·      Developing solutions that integrate insights across a range of taxes – beyond just excise duty calculations (because the marking of cigarettes won’t just curb excise duty evasion – it could reduce corporate income tax evasion too). This would allow tax stamp providers to showcase how their solutions have the potential to uncover far more complex evasion schemes (like inflated sales volumes), beyond just tracking local production volumes, and developing business intelligence modules that provide insights into entities, and not just transactions; 

·      Assisting agencies with the development of strategies that incorporate tax stamps as partof a broader solution, rather than touting tax stamps as an entire stand-alone solution;

·      Using their international experience to empower agencies to better understand industry tactics and how to counter them. 

Tax stamp service provider successes are very closely tied to agency successes.  If agencies fail, so do the service providers. 

CONCLUSION

What agencies are doing is having a limited impact - almost without exception. What successes they claim to have - usually an increase in the number of seizures - are having a negligible impact on the extent to which tobacco companies across the spectrum are paying the taxes and duties they should.

More is needed to change the paradigm, by better understanding the industry and its tactics, understanding how industry behaviours lead to tax and duty losses, the industry’s intimate involvement in organised crime, and exploring opportunities around improving compliance across the industry. It is a journey that tax stamp providers – with their global experience and insights – are potentially well placed to help agencies with. 

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.

Developing track and trace solutions for the unique African environment

Developing track and trace solutions for the unique African environment

Telita Snyckers, Michael Eads

INTRODUCTION

A recent multi-part story by the Guardian highlighted the tobacco industry’s strategic focus on Africa as a growth market[1].  Indeed, recent months have seen increasingly more revelations about the extent to which big tobacco will go to capture markets in Africa. Facing increasingly stronger regulation elsewhere in the world, dramatically reduced rates of smoking in the West and increasingly hostile regulatory environments, Africa holds a number of strategic advantages for the tobacco industry[2].  Africa, with its growing wealth, booming youth market, generally low excise taxes (and cigarette prices), patchwork regulations, and relatively weak government structures, is ripe for the picking.  Tobacco is a business after all and business will always gravitate to these types of market conditions.  The downside for governments is that history has shown that as the industry executes its Africa-centric strategy, it brings with it a bevy of negative impacts. 

There are numerous reports of the industry turning to increasingly aggressive and some would argue “dirty” tactics; threatening and bullying governments, and filing lawsuits in order to delay or stop further regulation[3].

General estimates put the illicit trade in tobacco in Africa at around 43 billion sticks a year – with a trade share in some countries as high as 38% (Ethiopia,) and in several others hovering around an estimated 25% (e.g. Cameroon, Zambia, South Africa, Algeria, Nigeria etc.[4]), resulting in annual tax losses of around $10billion a year across sub-Saharan Africa alone[5].At the same time, African revenue agencies are under ever more pressure, with most facing daunting revenue challenges driven by the global economic downturn which bites especially hard when most countries’ economies are based on extractive industries (e.g., oil and gas, mining etc.).  Tax stamp and track and trace service providers should take notice as they are uniquely well placed to form strategic partnerships with agencies to develop solutions that will translate into tangible results.  Realising this unique opportunity will require some out of the box thinking and an appreciation for the unique challenges of Africa.  

 AFRICAN CONSTRAINTS & CHALLENGES 

With approximately 18% of surveyed countries in Africa having a tracking regime of any kind in place,[6]opportunities are rife for service providers. However, developing solutions for the African market is not like developing solutions for mature agencies in developed countries with advanced infrastructure and regulatory environments. Africa is unique – and solutions meant for it need to acknowledge that uniqueness. Experience across Africa highlights a number of aspects that solution providers may need to tailor their approach and service offerings:

INSTITUTIONAL CHALLENGES

Limited agency budgets, competing challenges and a negligible focus on customs and excise:Agencies the world over face budget constraints, but in Africa the challenges seem magnified. Most agencies in Africa are allocated miniscule budgets, with which they are required to improve compliance, replace legacy systems, professionalise staff, clamp down on corruption, and tighten long stretches of highly porous borders. Some government offices are still using old 286MB desktop computers, if any at all; most do not have professional data analysts, business intelligence capabilities or any concept or risk and compliance management; the majority do not have an explicit illicit trade strategy. For many, customs duty collections are a critical revenue driver (e.g. Lesotho, where 68% of tax revenue comes from customs); whilst for others, customs duties are virtually inconsequential from a tax revenue perspective (Mauritius at 2%, Algeria at 3%[7]).

 Tobacco industry revenues far exceed the gross national income of many African countries, making the playing field inordinately unequal:the average gross national income across Africa is $53 billion per annum–Imperial Tobacco makes $228 billion, JTI $235 billion, BAT $239 billion, and PMI $309 billion, per annum[8].

Service providers face two key challenges – a) securing financial support through external aid, technical assistance or donor funding, particularly for traceability projects (whose strategic importance may not be immediately apparent to agencies); and b) managing agency expectations in terms of the impact lower-cost solutions can be expected to have on illicit trade and compliance more generally. Best performing service providers may well be those who offer augmented strategy offerings beyond just traceability solutions, with a view to securing compliance beyond that which a tax stamp can secure, and offering governments the best possible value for money. This could include assistance with the development of broader illicit trade strategies, data matching and mining, targeted business intelligence offerings, and potentially outsourced field enforcement functions.

 Small budgets directly contribute to high levels of both corruption and capture: On the Corruption Perceptions Index published by Transparency International, countries with a score of less than 50 are regarded as having a serious corruption problem – in Africa, that accounts for 89% of countries[9]. While corruption is pervasive and potentially colours the entire continuum of a traceability project, service providers should not underestimate the extent to which many agencies have been captured by the industry – in everything from providing the intelligence on which an agency acts, assisting with the destruction of illicit goods on behalf of the agency, to developing illicit trade strategies for the agency, advising the agency where to target its enforcement activities[10]and prompting the agency on which solutions to choose – sometimes as part of overt partnerships that potentially flout FCTC rules[11], and sometimes more subtly. 

Regime change and lack of continuity: Throughout Africa we continue to see numerous examples of systemic instability that impede the functioning of government – we’ve seen unconstitutional changes in government in Algeria, DRC/Zambia, Ethiopia, Egypt, Nigeria, and more than a hundred coup d’états and counter-coups[12]. Unlikemany modern democracies, a change in government frequently results in a change in administration, often to the extent of replacing even lower level managers. The resulting lack of continuity, skills and loss of institutional memory and change in rhetoric is catastrophic for many projects – no matter how well conceived or justified, especially considering most track and trace programs require longer terms to yield positive returns for service providers. Consequently, contingency plans – in particular making sure that institutional knowledge and impetus are maintained in the event of a change in government – are perhaps more critical in Africa than in other more stable democracies.  Service providers should pay close attention to how they structure contracts to minimise risk and disruption as a result of potential regime changes.  They should be creative and look at ways to build in stability such as Public Private Partnerships (PPP) or other models that encourage a close working relationship with government. 

Exchange rate volatility:In Africa, some 14 countries use the CFA franc pegged to the euro, and three to the South African rand[13].  Forex volatility has escalated across most of the continent. In South Africa, political turbulence and international pressures have been reflected in the instability of its currency, and in its Volatility Index (a type of “fear gauge.”)[14],[15]. Angolahas had its currency almost double in the past four years to the US dollar. In Nigeria the naira has fallen from about N200 to $1 to almost N300.High volatility translates into risk for service providers and governments alike, potentially increasing the cost of solutions over time significantly. Finding local sources for key services and supplies is one way to ensure the solutions are not completely exposed to forex risk.  This is a win-win for both since governments generally want to encourage investment and capacity development and typically do not favour solutions that are wholly “imported”.

INFRASTRUCTURE

Limited internet and mobile phone connectivity: Africa has a relatively low internet penetration rate compared to the rest of the world (with the exception of concentrations in South Africa, Morocco, Egypt, Mauritius and Seychelles). A large percentage of internet traffic goes through expensive satellite links, making both internet and broadband access unaffordable to most[16].  Of the ten countries with the highest fixed-broadband costs in the world, seven are in Africa. Chad tops the list at $501 a month for a connection – in a continent where about 40% of people live on less than $1.90 a day.[17]Only around 43% of Africans can get a 3G data signal, and just 16% can access fast 4G mobile broadband.[18]The costs of downloading data are also higher in Africa than in most other parts of the world, in part because the data has to get there over thousands of miles of rough terrain. This means that it may not be possible to stream production data live to the agency; it may not be possible for officers to validate production data live during in-field inspections; and it may not be possible to capture enforcement findings directly to a central system. African markets likely need greater redundancies, offline solutions and backup systems.

Unstable electricity supply: The entire installed generation capacity of sub-Saharan Africa (excluding South Africa) is only 28 Gigawatts - equivalent to that of Argentina[19]. In many places less than a third of the country has electricity, and only around 26% of rural areas have electricity. Even being connected to the grid doesn’t ensure electricity supply – in South Africa up to 14% of electric connections never work, in Zimbabwe it is as high as 44%[20]. Ghana, Ethiopia, Nigeria, Zambia, South Africa and others have all been battling rolling power cuts[21],[22],[23]that have left the countries in darkness and businesses crippled. Solution design, in terms of marking solutions, data management and field enforcement solutions, need to be mindful of the impact of intermittent electricity supply and the impact of frequent power outages (and power surges) on equipment, battery life, and backup solutions. 

Rugged field conditions: Africa’s red dusty soil, corrugated roads, variable temperatures, torrential rains and intermittent flooding demand more from digital and technological solutions – especially those intended for field enforcement – to ensure that devices can hold up to a range of environmental stresses over the device’s operational lifetime. While devices might not need to comply with all 28 of the testing methods the U.S. Military requires (covering everything from temperature to fungal infestation and gunfire[24]), devices should at least be rugged enough to deal with both high and low temperatures, and be water resistant, humidity-proof, sand-proof, shock-proof, and oftentimes altitude-proof. Service providers could benefit from reviewing how best to reference standards like the US Army’s MIL-STD-810G standard, and Ingress Protection (IP) ratings[25], as a way of securing a strategic advantage for their in-field solutions.

BORDERS AND GEOGRAPHICAL CHALLENGES

 Porous borders:African governments find it difficult to police long, porous borders that are often the focus of conflict, separatism and smuggling[26].Nigeria has 84 official border crossings with its neighbours – and up to 3,000 fairly established unofficial ones, where most real trade is believed to take place[27], [28].South Africa’s long, porous borders comprises some 96 illegal points of entry [29]- 50 of them with Zimbabwe, and most known to be used by cigarette smugglers.[30](Police note that the borderline between South Africa and Zimbabwe is at a state of “complete collapse”.)[31]While some smuggling is effected corruptly at legal border crossings (for around $350-750 per container[32]), much of it is believed to be done at illegal crossings away from border posts – which is easily done with more than 61,000 kilometres of land borders stretching across the continent,[33]making managing the movement of people and goods an effort in near-futility. Effective solution design for client countries has to assume that national borders lack integrity, and include the development of complementary strategies that counter smuggling both at legal and illegal crossings.

 MARKET CONSIDERATIONS

Unique packaging configurations – conquering the continent stick by stick: In low-income countries it is common practice to sell consumer goods in the smallest possible volumes – you don’t need a dollar to buy a pack of cigarettes when you can buy a single stick for as little as 5 cents each (it’s twice as profitable to sell single sticks,[34]and is a way of securing a new generation of smokers). It is very commonplace – and generally not illegal - to find vendors in Africa breaking up cigarette packs and selling single cigarette sticks (often to children)[35]. Of course, the sale of single sticks severely limits the traceability of packs,[36]something that solution design needs to cater for.

Some of the drivers of illicit trade are relatively unique: A small component of the illicit trade in tobacco is arguably attributable to activities aimed at sanctions busting in countries like Zimbabwe: because of sanctions the country cannot freely export what is regarded as premium tobacco to Europe, so dealers re-brand Zimbawean cigarettes as South African[37].  Different drivers result in different behaviours and require a different response in terms of how solutions are structured. 

CONCLUSION

 Cigarette consumption in Africa continues to grow exponentially.  Western Europe saw a decline in consumption by 26% - over the same period Africa’s consumption grew by 57%.[38]And with 41% of its population under the age of 15, and the relative lack of regulation (compared to e.g. Western Europe) Africa is expected to continue to be a growth market for the tobacco industry.  With only around 18% of African countries having a traceability solution in place, it also constitutes a growth market for traceability service providers. Africa poses a unique opportunity to develop holistic solutions that cater for the unique attributes of African customers. Solution providers should think beyond traditional tax stamps and find ways to offer innovation and develop capacity. Across many industries, too often solutions offered to Africa are far too price focused and attempt to offer only basic functionality.  Instead, solutions should be aimed at generating more revenue for governments and paying for themselves over time.  A traditional, low cost tax stamp solution can only lead to a race to the bottom for the solution provider industry.   Instead service providers should define unique value-added solutionsthat partners them with agencies. This could include  assistance with the development of strategies targeting illicit trade more broadly, playing an advisory role in respect of FCTC implementation, assistance with data analytics, risk management and investigations.  It could even include the potential outsourcing of certain functions (e.g. market monitoring or even field enforcement) where government lacks capacity.  

There is an old saying that goes “Africa is not for sissies” and that is certainly true.  If you’re looking for a traditional, low risk market, Africa may not be for you.  But if you are willing to take the time to understand the client – from their perspective – and be creative about what you can offer, Africa may be worth your time.  Big tobacco has it sights set on Africa - so should traceability solution providers. 

[1]See for instance https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-marketand https://www.theguardian.com/world/2017/aug/18/british-american-tobacco-cigarettes-africa-middle-east

[2]http://articles.latimes.com/2012/dec/12/world/la-fg-south-africa-smoking-20121213

[3]https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-marketand https://www.theguardian.com/world/2017/aug/18/british-american-tobacco-cigarettes-africa-middle-east

[4]http://www.tobaccoecon.uct.ac.za/sites/default/files/image_tool/images/405/Training/Emerging_Researcher_Programme_2015/Illicit-Trade-Africa.pdf

[5]https://www.standardmedia.co.ke/business/article/2001235698/how-african-countries-lose-sh1tr-to-illicit-tobacco-trade

[6]As at the last FCTC implementation readiness survey, measuring “Tracking regime to further secure the distribution system developed”

[7]https://www.indexmundi.com/facts/indicators/GC.TAX.IMPT.ZS/rankings/africa

[8]Own analysis - industry revenues from http://www.statisticbrain.com/tobacco-cigarette-industry-sales-statistics/

and country GNI from https://data.worldbank.org/indicator/NY.GNP.ATLS.CD?year_high_desc=false

[9]Sub-Saharan Africa scores an average of 31 (Botswana the highest at 60, Somalia the lowest at 10.) https://www.transparency.org/news/feature/corruption_perceptions_index_2016; http://www.ey.com/Publication/vwLUAssets/EY-Transparency-International-Corruption-Perceptions-Index-2016/$FILE/EY-Transparency-International-Corruption-Perceptions-Index-2016.pdf

[10]See for instance BAT’s strong influence over South Africa’s illicit trade strategy over a period of years

[11]Something not just happening in Africa – see for instance recent coverage from Australia - http://mobile.abc.net.au/news/2017-08-26/big-tobacco-propping-up-law-enforcement-freedom-of-information/8841700?pfmredir=sm

[12]http://www.academia.edu/3034124/Unconstitutional_Regime_Change_in_Africa_TREND_PERSPECTIVES_AND_POLITICAL_REQUISITES_FOR_STRICTER_LAW_ENFORCEMENT

[13]https://www.fxstreet.com/analysis/african-currencies-nigerian-naira-and-the-new-us-dollar-volatility-201612071522

[14]https://www.jse.co.za/content/JSEBrochureItems/46%20-%20JSE%20New%20SAVI%20-%20April%202014.pdf

[15]https://vlab.stern.nyu.edu/analysis/VOL.SAVI:VIND-R.AGARCH; https://www.brookings.edu/blog/africa-in-focus/2016/10/14/figures-of-the-week-volatility-in-the-south-african-rand/

[16]https://en.wikipedia.org/wiki/Internet_in_Africa

[17]https://www.economist.com/news/middle-east-and-africa/21711511-mobile-phones-are-transforming-africa-where-they-can-get-signal-mobile-phones

[18]https://www.economist.com/news/middle-east-and-africa/21711511-mobile-phones-are-transforming-africa-where-they-can-get-signal-mobile-phones

[19]http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/0,,contentMDK:21935594~pagePK:146736~piPK:146830~theSitePK:258644,00.html

[20]https://techcentral.co.za/inside-africas-electricity-crisis/64637/

[21]https://qz.com/422357/charted-how-electricity-problems-are-limiting-growth-in-many-african-countries/; https://www.euractiv.com/section/development-policy/news/energy-crisis-looms-near-for-africa/

[22]https://qz.com/411384/nigeria-is-shutting-down-for-business-thanks-to-its-worst-ever-fuel-shortages/

[23]http://www.theigc.org/blog/lights-out-zambias-electricity-crisis/

[24]MIL-STD-810G  is a standard issued by the United States Army's that is used to prove that equipment will survive in the field. They were designed specifically to test military equipment, but are now used to test a wide range of both military and civilian products, including mobile computers.

See e.g. https://gcn.com/articles/2013/05/08/8-tests-behind-mil-std-ratings.aspx

[25]See e.g. https://www.handheldgroup.com/why-rugged-handheld-computers/what-is-rugged/, and https://gcn.com/articles/2013/05/08/8-tests-behind-mil-std-ratings.aspx

[26]http://edition.cnn.com/2015/07/24/africa/kenya-back-door-porous-border-security-threat/index.html

[27]http://www.nation.co.ke/oped/Opinion/In-defence-of-smuggling-and-Africas-porous-borders/440808-2687084-857een/index.html

[28]http://studies.aljazeera.net/en/reports/2013/09/201398104245877469.html

[29]https://www.idsa-india.org/an-may-8.html

[30]https://audioboom.com/posts/2419944-50-illegal-crossing-points-from-zimbabwe-to-south-africa-pose-a-major-health-terrorism-threat-to-the-population

[31]Major General Meetsi, South African Police Service, https://www.saps.gov.za/resource_centre/publications/maj_gen_kr_meetsi_presentation.pdf

[32]See e.g. http://www.news24.com/Africa/Zimbabwe/Illegal-border-crossings-flourish-20100817

[33]https://www.sporcle.com/games/skSK/african_long_borders

[34]http://articles.latimes.com/2012/dec/12/world/la-fg-south-africa-smoking-20121213

[35]https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-market; https://www.pressreader.com/south-africa/pretoria-news-weekend/20161210/281659664671990

[36]Other commodities pose unique challenges too, like beer being sold in plastic bags.

[37]http://www.b-metro.co.zw/cigarette-smuggling-big-business/

[38]See for instance https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4498629/

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

The SARS tender: Can an agency in turmoil be both agile and prudent? (for Tax Stamp News)

The SARS tender: Can an agency in turmoil be both agile and prudent? (written for the Tax Stamp News, published by the International Tax Stamp Association)

By Telita Snyckers

About the author: Telita Snyckers is an international tax and customs transformation consultant. Key clients include the International Monetary Fund and Sovereign Border Solutions, after having previously worked as an Executive at SARS and a compliance manager with the taxman in Singapore. 

At the recent Tax Stamp Forum in Budapest one question kept coming up: the status of the SARS tender for a tax stamp or secure marking solution for tobacco products. (The current SARS tender has already been extended twice, with the current closing date for submissions now set for 31 October 2019.)The tender has elicited great interest from potential solution vendors with more than a hundred people attending the briefing by SARS in May 2019. The short answer, of course, is that no one really knows as SARS has said little about the project from its original announcement earlier this year.  The tender was issued four days before new Commissioner Edward Kieswetter took office - following the dismissal of his predecessor Tom Moyane ( whose legacy of failure and corruption was described by a Commission of Enquiry as having turned the tax institution – once hailed as a world-class system – “on its head.”) The process is high profile, politicised and directly associated with much broader issues in relation to South Africa’s struggle against state capture. 

The question dovetails nicely with the presentation I did at the conference, on what more solution providers – and the secure marking industry in general – can do to improve their conversion rates and actually get solutions implemented.

As we’ve pointed out in earlier articles, and as we again explored at this year’s conference, it seems that solution providers 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 or cancelled; tenders are awarded for solutions that are never implemented; and the tax stamp and secure printing industry ends up expending a considerable amount of resources on programs that never materialise. 

A quick recap of the SARS history may be in order:

SARS efforts to address illicit trade in a meaningful way is long overdue: In 2007 the agency included a focus on illicit tobacco in its strategic plan. In 2010 it implemented a tobacco marking pilot project using an industry-developed solution. In 2013 SARS said it was considering replacing the diamond stamp, but indications are that resistance from the manufacturers made SARS walk away from the process. In 2016 SARS tabled a legislative amendment that would in theory have allowed for the use of secure fiscal marks and noted that it had completed a track and trace study into the cigarette supply chain. In 2017 SARS simply noted that it was working on developing a way of detecting illicit cigarettes and allowing it to better manually track the movements of cigarettes. In 2018 SARS signalled its intention to introduce production counters on cigarette manufacturing lines (arguably a simplistic, outdated, ineffective solution.) 

So, for SARS to finally have published a tender in 2019 was making big strides indeed.  

So why has it taken so long to get this over the line? Perhaps as a result of an interplay of several key reasons: conversations around secure marking are being driven almost entirely by the tobacco industry; the benefits of secure marks are being under-sold in general; SARS – like most agencies, has no experience with track and trace and the related technologies; and given recent scandals that have literally rocked the once-darling agency to its core,  SARS has reason to be extremely cautious.

The conversation is entirely being shaped by the tobacco industry 

A large part of the answer may lie in the presentation I did at the TSF: because the rationale behind secure marking, and the benefits it could potentially offer the country, has simply not been surfaced sufficiently. In fact, the only voices being heard on better securing the supply chain, and on the proposed marking of cigarettes, are those of the tobacco industry.

I did a quick analysis. In the few months since SARS announced the tender, around 22 directly-related articles appeared in the media. Of those, only 3 argued in favour of a secure marking solution: one by ITSA, one by my colleague Michael Eads, and one by South Africa’s Council Against Smoking. So, in South Africa, arguments supporting a sensible, proven solution to illicit trade feature in around 13 percent of media articles since the publication of the tender. 

The rest of the articles argue why the introduction of a secure marking and traceability solution would spell sheer devastation: secure marks “would not address the main problem of illegal tobacco trade,” the new system was described as “rushed” (well, it’s only taken them 10 years), the “paper-based fiscal markers are more easily stolen, counterfeited or forged,” “the system specified in the tender will capture only the legal market and could drive illicit trade up further”, and the industry noted its concern about SARS introducing“such a sophisticated, IT-intensive system” (SARS actually has a pretty good track record when it comes to rolling out sophisticated IT systems.) Alarmist statements have become common, with industry noting that: “The resultant adverse economic effects will not be limited to the loss of jobs and state revenue, but also all the local leaf growers and others who supply goods and services to the tobacco factories in SA. Ten thousands [sic] farmers will be immediately wiped out, putting another 35,000 dependents at risk.” And the system would simply see“a multi-billion rand tender awarded to a monopoly.” Every single one of the statements come from the industry body representing big tobacco. 

We know that the tobacco industry frequently meets with SARS to “coordinate” efforts to combat illicit trade.  And yet they are vehemently opposed to the one measure (track and trace) as agreed by experts and embodied in the FCTC Protocol that can best address the issue. (Any industry that legitimately wanted to fight against illicit trade should welcome the initiative. The fact that the big players in the tobacco industry do not do so may suggest that the companies themselves would prefer the tobacco supply chain to remain opaque. One can only speculate why that might be so). 

(Instead, the industry’s proposed solution is a simple one: SARS should rather station customs officers at manufacturer’s premises. Anybody who knows anything about best practice when it comes to compliance and risk management can tell you that human interactions are inherently fraught with integrity risks, and no modern tax administration would ever introduce manual processes reliant on human discretions given a choice.) 

The problem, of course, is that public policy tends to follow public opinion. And public opinion has been shaped almost entirely by the very industry that SARS is trying to regulate. 

So, the first part of the challenge, then, lies in bringing more balance to the conversation around the importance of supply chain management and why tobacco supply chains are so inherently risky. It lies in at least bringing a more objective view to “Joe Public” on what tax stamps and secure marks do, how they work, and their importance in better securing the tobacco supply chain. 

What is the ROI?

Something we also touched on at the recent TSF was the importance of being able to tell a compelling story about the return an agency can expect to see if they implement a secure marking solution. 

There certainly are compelling examples of successes, some of which were featured in Budapest. 

In our interactions with agencies this is one of the first questions they ask, and one that we find hardest to answer. It is also one of the key bits of rhetoric that is ultimately often used to get governments to walk away from secure marking programs. The few studies that are available are often old, cover very few countries, and seem to be limited in focus.

Writing captivating, engaging content to better balance the current debate – not just in South Africa, but the world over – would be so much easier if there was a more substantial, comprehensive body of evidence covering a wide range of countries on how solutions indisputably can and do make a difference. 

 Agencies are not traceability or secure marking specialists

The development of a marking solution does not fall within the core competence of the typical tax or customs agency – even an organisation like SARS that has actually developed and implemented other world-class and highly sophisticated IT systems. 

Through something like the most recent Tax Stamp Forum, an agency like SARS would have had the opportunity to interact substantively with the very solutions they are trying to implement. Many of its Southern African neighbours attended and actively engaged – SARS did not. SARS’ failure to attend the TSF represents a real missed opportunity for the agency. 

This highlights the importance of the ITSA initiative to include government agencies as members. It may perhaps come too late for SARS, but for other agencies it may well help to both gain better traction for solutions that work. 

An agency in turmoil: can it be both quick and prudent?

SARS has had a traumatic few years (and quite a bit of it related to the tobacco industry). The new Commissioner, Edward Kieswetter, grapples with depleted capacity, low staff morale, and weakening tax morality. He has inherited an agency that is viewed with scepticism by many, in a country where allegations of state capture and cronyism have become rife. (SARS is actively lobbying to have global powerhouses Gartner and Bain, along with international law firm Hogan Lovells,banned from doing business with any government departments in future for their role in the capture and collapse of the institution.[1]McKinsey has already had to pay the country’s government back around $68million for other tenders that were unduly awarded to it, and is already on the list of companies government won’t touch.) The tender was announced just days before he officially took on his new role. He has to be seen to be both decisive in dealing with illicit tobacco – which is easily the single most visible issue in the media facing the organisation - and transparent in how he does so.  He has to move both quickly and prudently – in an environment that is complex and with many that would be happy to see him fail.

We have long argued that SARS should have moved much faster in better securing the tobacco supply chain, and that secure marks and traceability are key in doing so. Indeed, it should have done so when there was some impetus behind the process some years ago. While we continue to argue for the introduction of these and other sensible policy solutions, we also have some sympathy for SARS in trying to navigate what has become a veritable minefield.

Conclusion

It’s anybody’s guess what SARS’ next move will be. 

We’d like it to move faster because it estimated that illicit trade sits at between30-35 percent of the cigarette market[2]– equating to more than 66,000 policemen’s salaries a year. But we’d also like them to move cautiously, to make sure that their decisions are informed by more than simple anti-regulation rhetoric. In the meantime, we need to do far more in terms of bringing balance to the public narrative – so that we move beyond a very low 13 percent of media coverage actively supporting the introduction of secure marks, to telling a far more compelling story about how supply chain security actively and substantively serve to curb illicit trade. 

[1]https://www.businesslive.co.za/bd/national/2019-09-18-sars-wants-to-ban-state-capture-firms-bain-and-gartner/; https://www.pressreader.com

[2]The calculation depends on whether AMPS or NIDS data is used, and what percentage of under-reporting is used (5, 10, 15 or 20%). See Nicole Vellios, Illicit cigarette trade in South Africa 2011 – 2017, https://tobaccocontrol.bmj.com/content/early/2019/08/05/tobaccocontrol-2018-054798

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.