Fighting Illicit Trade in Tobacco with Technology: Does it Work?

Governments, the WHO, the FCTC, OLAF and the tobacco industry are making the biggest concerted effort ever to control and reduce the practice of illicit trade in tobacco, which covers cigarette smuggling and counterfeiting. The campaign covers tightening border controls, improving detection procedures and a raft of technology-based ‘know your customer’ measures which attempt to track and trace legitimately manufactured products and enable the retailer and the customer to distinguish between a duty paid pack, a smuggled pack, a cheap white, and a counterfeit. But do these measures stand any chance of even slowing the growth of the world’s second-oldest profession, the global illicit market, which traditionally demonstrates the ability of the flu virus to counter each new vaccine with a new strain?

FCTC adopts protocol for ‘global track and trace’ system

In early November 2012, the 140 Parties to the WHO Framework Convention on Tobacco Control (FCTC) adopted a protocol for combating illicit trade through, among other measures, a global tracking and tracing system. The main source of illicit product is legally manufactured and exported cigarettes which end up being sold duty not-paid somewhere else, sometimes in the market they were exported from. Tracking and tracing means monitoring the route taken by such products through their supply chains by means of technology such as tax stamps (either paper or digital), bar codes and radio-frequency identification (RFID).

The other main types of cigarette illicitly trafficked are counterfeits and ‘cheap whites’. Counterfeits are fakes made to look like leading brands whilst ‘cheap whites’ are illegally manufactured brands like Jin Ling, designed only for illicit sale. Of course, tracking and tracing technology does not apply to this part of the illicit market, although identifications of a duty paid pack, such as a tax stamp does enable a retailer (or a customer) to distinguish the legal from the illegal product, should s/he be interested in so doing.

Technology to beat the illicit trader

One major element of fighting illicit trade then is keeping one jump ahead of the smugglers in terms of technology. According to the Framework Convention Alliance (FCA) new digital tax stamps, using invisible ink and featuring a unique, covert (hidden) code with data for each cigarette pack, make it harder for criminals to manufacture fakes (and are preferable to paper tax stamps). The digital stamps contain encrypted information which can be read using a portable scanner. This allows enforcement officials “to distinguish real tax stamps from even the most sophisticated fakes”.

Does it work and how much does it cost? California implemented a high-tech tax-stamping system in 2005 where the data for each cigarette pack can be uploaded to a central Data Management System via barcodes. The cost was high at US$9 million per year but it enabled an additional US$75 million to be collected between January 2004 and March 2006 as a result of the tax stamps (in tandem with a new state law that required licensing of all entities engaged in selling tobacco products). So the system would seem easily to have to paid for itself.

A more costly technology than barcodes or invisible ink is radio-frequency identification (RFID). Such systems can be used for identification of a product and for tracking using ‘smart tags’ (microchips attached to antenna) and readers using microwaves. When a smart tag nears a reader, the tag broadcasts information stored in its chip. The benefit is that smart tags can be scanned automatically when pallets with products bearing the tags pass along conveyor belts and through loading bays.

This sounds like a sophisticated system but certainly does not come cheap, so who pays? In fact this does not appear to be a problem: the major companies appear to be willing to meet technology costs as part of wider anti-illicit protocols because they are beneficiaries from ‘know your customer’ initiatives which help to stop organised crime damaging brand integrity and sales. Regional efforts also include the legally binding agreements between the EU’s anti-fraud agency, OLAF, and all four leading tobacco manufacturers (PMI, BAT, JTI and Imperial) which have pledged a combined total of just under €2 billion to the EU and participating countries to address illicit trade.

Does the new technology work?

Crucially, use of technology for tracking and tracing is not widespread. According to a 2012 report titled ‘Tax Stamps – A Technical Study and Market Report’ published by Reconnaissance International, although the number of tax stamps used for cigarettes grew by around 5% worldwide between 2007-2012 to 130bn units, under half of the world’s countries actually used some form of cigarette tax-stamping.

However, there are examples which lend themselves to some qualified extrapolation concerning the efficacy of technology systems to reduce illicit trade. A digital tax stamp system is in place in Brazil, by far the biggest illicit market in Latin America, part of a national monitoring system including equipment to automatically count all cigarettes manufactured. The tax stamps, produced in the Brazilian Mint, have a unique bar code for each cigarette pack which is uploaded to a Data Manager Server controlled by the Ministry of Finance. A similar tax-stamp system was introduced in 2007 in Turkey (the Brazilian system applies only to domestically manufactured products) which applies both to cigarettes made in Turkey and to legally imported cigarettes.

Since October 2007, all cigarette packs made for the United Kingdom duty paid market have carried a covert security feature that allows authorities to instantly verify the authenticity of a product on retailers’ shelves though actual details of the technology are not being disclosed and are the result of a voluntary agreement between industry and government. In Malaysia, a security mark with a visible feature and an invisible feature has been applied since 2004 on each cigarette pack bound for the domestic market, and for duty-free sales

So are these measures the answer? They could certainly be part of the answer as three out of four of the countries mentioned recorded falls in illicit trade 2006-11. However it must be said that track and trace technology is only one of a raft of measures being used to fight illicit trade and in addition, the fall in illicit trade in the countries below must be seen in the context of falling cigarette prevalence in all four markets and, where duty paid cigarette sales actually increased – in Brazil in 2010-11, this was entirely due to the fall in illicit trade.

Chart showing illicit trade volume percent growth vs. duty paid growth

Source: Euromonitor International

Note: Cigarettes only

What the companies are doing – the future

The above examples represent a small part of what the companies are doing in terms of anti-illicit technology. In Germany and Peru Philip Morris International is experimenting with a system applying unique codes, based on a ‘Code Verification System’ (CVS), on each cigarette pack. CVS is a 2D barcode scheme; it makes use of an encrypted, serialized 12-character number to identify and authenticate every single cigarette pack. Japan Tobacco has also installed a tracking and tracing system using a ‘World Wide Unique Identifying Number’ (WWUIN), while, since 2009, British American Tobacco products have carried a ‘taggant’ on the self-adhesive teartape, a ‘taggant’ being a chemical element added to the ink which can be recognized by a scanner.

At the recent international anti-counterfeiting forum held in Moscow, the Digital Coding & Tracking Association (DCTA), which represents the four main tobacco manufacturers, showcased ‘Codentify’ technology which enables tracking and tracing, product authentication and digital tax verification and there are pilot projects being run in Italy and Slovakia. Where a stamp or banderole on a pack indicates a legal, tax paid product, both smuggled genuine brands, counterfeits and ‘cheap whites’ may be identified, (provided of course that the smuggler/trafficker has not also counterfeited the stamp or banderole).

Coding technology offers opportunities for governments to control the tobacco trade and for companies to find out where their products really end up. The challenge posed for the tobacco industry is that cigarettes are a mass consumer product and universal coding needs to be applied in as many markets as possible to translate local into global progress as tax stamp usage still varies by region and country. It will be a challenge for the WHO’s FCTC protocol to translate local into global and, as those involved in the combating of illicit trade (including the WHO) agree, technological measures such as digital stamps are only part of the solution which must also include effective enforcement and (as the protocol itself suggests) “control of the supply chain and international cooperation”. To that end, any effects on illicit trade at a global level will likely be seen only in the long term.

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