Fighting Illicit Trade in Tobacco Products

September 2018 Visit pmi.com | stopillegal.com Fighting Illicit Tobacco Trade

Contents

Overview...... 3

Understanding illicit tobacco trade...... 4

Combatting illicit tobacco trade...... 7

Conclusion...... 16

2 Fighting Illicit Tobacco Trade

Overview

Philip Morris International (PMI) is committed to combatting the illicit trade in tobacco products; from the criminal networks that smuggle cigarettes across borders, to illegal operations in poorly monitored free trade zones. These activities have severe consequences for governments, legitimate businesses, and people around the world.

We aim to eradicate the illicit tobacco effective licensing regimes, enhanced trade by collaborating on a comprehensive tracking and tracing systems, strong strategy that channels all of our efforts. know-your-customer guidelines, and strict Meaningful partnerships are required, labelling requirements. We also illustrate and bring together the knowledge and the ways stakeholders can unite efforts. experiences of all relevant key stakeholders, For the campaign against illicit tobacco including policymakers at the national trade to be effective, the rules cannot be level, international organizations, law just theoretical. They require enforcement. enforcement authorities, and the legitimate National governments should sign up to tobacco industry. international agreements and treaties, and As a responsible corporate citizen, rigorously and meaningfully implement PMI supports public, private and non- their requirements. governmental initiatives to combat illegal As a business, we have long led the fight tobacco operations and other related against the illicit tobacco trade. No industry, crimes. We hope to work with as many allies however, can win this fight on its own; we as possible to implement impactful solutions need to harmonize and enhance efforts. to jointly stamp out these activities. By working together, we can accelerate progress on protecting society from illegal In this document, we outline several tobacco products, and related crimes. strategies for tackling the illicit tobacco problem. These include tougher enforcement To find out more about how to fight illicit of laws in Free Trade Zones (FTZs), trade, visit https://www.stopillegal.com/

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Understanding Illicit Tobacco Trade

Illicit tobacco trade is among today’s greatest global challenges, affecting not only our industry but also governments and ordinary people. It misleads consumers, deprives public authorities of tax revenue and funds organized crime and terrorism. 1 in 10 The International Criminal Police Organization (INTERPOL) estimates cigarettes that illicit cigarette trade accounts for 11.6% of global cigarette is illegal consumption. That amounts to 657 billion cigarettes per year.1

A Worldwide Scourge The problem is truly global in scope, sparing no region or country.

Latin America and Canada

On average, 15.6% of cigarettes consumed in Latin America and Canada are illicit, representing a volume of almost 40 billion cigarettes. If legally purchased, these cigarettes would mean $4.6 billion in additional tax revenue each year. Most of these illicit cigarettes are Illicit Whites – cigarettes made for smuggling.2

1 INTERPOL, Countering Illicit Trade in Tobacco Products, Legal Handbook Series, 2014, p.9. These statistics are derived from 84 countries around the world. 2 KPMG, Project EOS 2016, A study of illicit cigarette consumption in Latin America and Canada, pg. 8.

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Europe

Europe also suffers from the illegal trade of tobacco products. About 9% of total consumption of cigarettes in Europe is illicit, according to annual research by KPMG. That Asia represents 48 billion cigarettes a year and $12 billion in lost tax revenues.3 In Asian markets such as Brunei, Hong Kong, Macao, Malaysia and Pakistan, at least one in every four cigarettes consumed is the product of illegal trade. In Indonesia, Pakistan and the Philippines, more than half of all illegal cigarettes are domestically produced.4

Eastern Europe, Middle East and Africa.

In North Africa, illicit tobacco trade accounts for 20% of cigarette consumption. That equals

13 billion cigarettes and an annual loss in tax 3 KPMG, Project SUN: A study of the illicit cigarette market in the revenues of USD $565 million. More than half European Union, Norway and Switzerland, 2016, p.7. 4 Oxford Economics, Asia Illicit Tobacco Indicator 2015, p.10. of these illegal cigarettes come from Free Trade 5 KPMG, Illicit cigarette trade in the Maghreb region (excluding Zones in the United Arab Emirates.5 Mauritania), 2017, p.3.

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The Impact of Illicit Trade

Various authorities and experts, including the U.S. Department of State, describe illicit tobacco as a low-risk, high-reward criminal activity that fosters a culture of corruption and bad governance.

Evidence suggests that not only criminal organizations, but even terrorist groups exploit the black market for tobacco as a lucrative source of income. In the new global reality, illicit tobacco trade can even finance acts of terror.

We all must do more to combat illicit trade. That includes governments passing the necessary laws, and rigorously enforcing them, legitimate tobacco companies ensuring they do business only with trustworthy partners that will not divert their products, and consumers being aware of direct and indirect consequences of them purchasing illicit products.

7 US State Department, The Global Illicit Trade in Tobacco: A Threat to National Security, p.3 8 Idem.

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Combatting Illict Tobacco Trade

PMI has fought long and hard to combat illegal tobacco trade. We have helped establish high supply chain compliance standards throughout the world, and have closely collaborated with governments and key stakeholders in the fight against illicit trade.

In this paper, we outline what we believe to be effective strategies for tackling the illicit tobacco trade, in each of the below key pillars.

Effective Licensing Product Meaningful Enhanced Application control and regimes tracking and due diligence international of deterrent monitoring that focus tracing based and record- cooperation sanctions to of Free Trade on tackling on open and keeping among law illicit traders. Zones. illicit trade, recognized requirements. enforcement not adding international authorities. cumbersome standards, regulation encouraging for law- broader abiding legal application operators. beyond tobacco products.

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FREE TRADE ZONES (FTZS)

The absence of widely applied tracking and tracing systems makes it easier for criminals to engage in illicit tobacco trade.

Any company dealing with tobacco products in an FTZ should adhere to the following standards:

• Introduce a meaningful licensing scheme.

• Require tracking and tracing solutions that apply to all tobacco products, even if they are manufactured in, or transit through the FTZ, and involve unique, secure and non-removable identification markings on all unit packets of tobacco products.

• Due diligence and record-keeping practices that attest proper business relationships, accurate inventory controls, and sales practices in line with the requirements in destination markets.

• Product labelling that complies with the regulations in destination markets.

Much of the world’s illicit tobacco trade products incurs the same sanctions in takes place in Free Trade Zones (FTZs). FTZs their respective countries, regardless of are areas of economic activity that are not whether the offense takes place outside or confined within a given customs territory. inside an FTZ, and that these sanctions are By their nature, FTZs facilitate trade and consequently applied. remove administrative burden. Cooperation between the authorities at the These territories can serve as areas national and international level, as well as where criminals re-package and re-label collaboration with the private sector, must shipments, free of meaningful oversight. be prioritized to comprehensively tackle illicit trade. The objective should be to achieve National customs authorities should be a level playing field, where all legitimate empowered to control and supervise daily participants in the tobacco supply chain are activities in FTZs, allowing them to audit empowered and expected to operate in line books and records, and validate that goods with high compliance standards. comply with all necessary requirements at local and international levels, including For a more detailed understanding of with the requirements of their country of PMI’s view on Free Trade Zones please ultimate destination. Authorities should click here for link to our position paper ensure that trafficking in illicit tobacco ‘Fighting Illicit Trade: Free Trade Zones’

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LICENSING

The adoption of national licensing schemes for cigarette manufacturers and manufacturing equipment is a critical component of an effective strategy to fight illicit tobacco production and trade.

Licensing requirements should be Authorities should seize and destroy proportionate and practical, allowing law- tobacco manufacturing machines without abiding entities to readily adopt them. a valid license. Above all, the requirements should be We believe it is unnecessary to require meaningful and focus on the core issue of licenses for machines that make labels or illicit tobacco trade. They should ensure that only legitimate actors are involved in the are used for packaging. Such machines manufacture, import and export of tobacco can be used for any type of goods, with products and manufacturing equipment. little adjustment. As a result, a licensing requirement for these machines would have We believe that licensing systems should to span across hundreds of different types of expand to cover not only manufacturers, products, and would likely prove ineffective. but also machinery directly involved in cigarette manufacturing. Illegal We are ready to share our technical expertise manufacturers can too easily purchase to help formulate a balanced approach that machinery that no legitimate manufacturer enhances existing controls for stopping the would ever consider using. manufacture of illicit tobacco products, and avoids over-regulation and the duplication A sense of proportionality is important. of efforts. As tobacco manufacturing machines can have up to 20,000 parts; it would be For a more detailed understanding on unreasonable to require separate licenses PMI’s position on Licensing please click for each part. Licensing for machinery here for a link to our position paper should be restricted to key components ‘Fighting Illicit Trade: Licensing’ that are fundamental to the manufacture of tobacco products.

“Licensing systems should expand to cover

not only manufacturers, but also machinery directly involved in cigarette manufacturing“

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TRACKING AND TRACING

The absence of widely applied tracking and tracing systems makes it easier for criminals to engage in illicit tobacco trade.

Tracking and tracing is the ability to record an independent third party that fulfills all the forward movement of products and requirements as defined by relevant national trace backwards their history along the or regional authorities. This is already supply chain. We mark all our products with the case with the EU Tobacco Products unique identification markings that we use Directive (2014/40/EU), which requires to track and trace them. This way we retain unique codes for tracking and tracing each superior oversight of our supply chain to pack of cigarettes. help prevent diversion. For a more detailed understanding of We have extensive experience in PMI’s view on tracking and tracing, please implementing national and regional tracking click here for a link to our white paper and tracing solutions. This includes in the “Fighting Illicit Trade: Tracking and Tracing” European Union, where we have been tracking and tracing our products for well over a decade. These efforts began as part Open Standards of the Cooperation Agreement with the Any successful tracking and tracing European Union and all EU Member States, system must start with open standards and now continue voluntarily to ensure strict that allow for competing technologies supply chain controls. and solution providers to constantly innovate and develop ways to tackle Globally, we track more than 600 billion illicit trade. Criminals work continually cigarettes every year, in every market we to defeat current solutions, putting operate in. pressure on authorities and law- Strict oversight of any tracking and tracing abiding industry participants to adapt solution is important. Authorities are likewise. That means requirements that are standardized and interoperable responsible for establishing, controlling, across geographies and products. and supervising the system, while the private sector performs daily operations to We look forward to a free market implement solutions in factories and across for solution providers governed by the supply chain. We believe in tracking and technical guidelines and standards, not tracing solutions that ensure interoperability, a one-size-fits-all solution. We accept are independently controlled, and do not that such flexibility will help drive impact the manufacturing and distributing permanent innovation and keep costs environment. proportionate to the benefits of any tracking and tracing system. For example, we support the generation of a unique identifier—the product identity—by

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DUE DILIGENCE

As a responsible corporate citizen, we conduct robust due diligence on every potential business partner.

Our comprehensive know-your-customer Such payments should be limited to: policy helps us meet our goal of only doing • Wire transfer or cheque, in both business with entities that share our high cases from a bank account in the standards of integrity and ethical business customer’s name; and practices. We also work with our customers to seek that they are equally thorough when • Cashier’s cheque or bank draft they transact with their business partners. issued by a bank in the country in which the customer is located. Authorities should demand no less. They should require adequate information from Other important principles of effective tobacco companies about their customers. due diligence include: Authorities should document and periodically repeat their controls, and always • Ensuring the payment currency be on the lookout for potential fraud. This matches the invoice; includes when customers change. • Allowing cash payments only in One common criminal scheme involves exceptional and justified cases; and routing payments to non-existent third • Prohibiting third-party payment parties to mask the identity of criminal transactions. actors. We propose a set of principles designed to stop such schemes, centered on PMI has long fulfilled these controlling the acceptable forms of payment requirements. They are undoubtedly in tobacco transactions. effective in helping prevent fraud.

“ we also work with our customers to ensure that they are equally thorough when they“ transact with their business partners

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INTERNATIONAL COOPERATION

Cooperation is key to designing effective anti-illicit trade strategies. The private and public sectors need to come together to pool experience and expertise.

Manufacturers, supply chain partners, Over the years, we have worked with governments, police and customs many governments and international authorities need to share information on organizations. These partnerships have seizures of tobacco products, discoveries been invaluable in promoting an effective of tax evasion, production quantities and framework to dismantle organized values, and other evidence about illicit trade criminal groups. that can lead to successful enforcement of existing laws. Partnerships have been

Such information could include licensing “ invaluable in promoting records, investigative and prosecution an effective framework records, payment receipts for import, export “ or duty-free sales, and details of seizures. to dismantle organized criminal groups

SANCTIONS

Any meaningful regulatory framework should focus on enforcement of the law. After all, illicit traders abuse volatile systems; the ones that are prone to corruption, have ineffective enforcement, or low sanctions.

We propose that sanctions for non- Any meaningful

compliance with anti-illicit tobacco laws regulatory framework should be severe, and include both “ financial and non-financial elements. These should focus on “ sanctions should vary, depending on the enforcement of type of offense, from, for example, license the law withdrawal, fines, to sanctions as severe as imprisonment.

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A MILESTONE IN THE FIGHT AGAINST ILLICIT TOBACCO TRADE:

WHO FCTC PROTOCOL

The FCTC Protocol to Eliminate Illicit Trade in Tobacco Products (The Protocol) was drafted as an international treaty aligned with the 2003 WHO Framework Convention on Tobacco Control (FCTC).

Parties to the FCTC created the Protocol practical transposition into their local laws. with the objective of eliminating all forms of Consisting of 47 Articles overall, the illicit trade in tobacco products, expanding Protocol is divided into three substantive on the existing Article 15 of the FCTC. WHO sections relating to (i) Supply Chain refers to the Protocol as a ‘global solution to Controls; (ii) Offences; and (iii) International a global problem’. 9 Cooperation. The Protocol will enter into force on The first (Supply Chain Controls), requires September 25th, 2018, i.e., 90 days after the implementation of measures to the 40th ratification which took place on preserve the integrity of the tobacco June 27th, 2018. A link to the current list of supply chain. These measures seek to countries that are Parties to the Protocol prevent the diversion of tobacco products, can be found here. key components of tobacco products, and The FCTC will then convene the first Meeting manufacturing equipment used to produce of the Parties—the Protocol’s governing tobacco products, into illicit trade channels. body—In Geneva from October 8th to 10th. The measures addressed in this section The meeting will bring together Parties to the include among others the implementation of Protocol to discuss the practical applications licensing systems, due diligence processes, of the treaty. The expected outcome of this record-keeping obligations, provisions for meeting is that the Parties to the Protocol a global tracking and tracing regime, and become well-equipped for the Protocol’s controls within free trade zones.

9 See: http://www.who.int/fctc/Protocol_summary_3Jul18-en.pdf

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Section two of the Protocol, covering section encourages Parties to share general Offences (Articles 14-19) must be information regarding seizures of tobacco properly implemented at the national products and information on whether levels to enable the Protocol to meet its taxes have been evaded, the quantity objectives. These Articles of the Protocol or value of the production of tobacco provide guidelines for Parties on how to products, and methods used in illicit trade. address unlawful conduct. There are also Illicit trade damages society, resulting in provisions regarding search and seizure and lost tax revenues, increased criminality, and confiscation of assets. Standards are set for enhanced access to cigarettes by youth. what actions should ideally be considered PMI is very encouraged by the prospect of as unlawful conduct under the Protocol. joining forces with relevant stakeholders Importantly, the destruction of illicit and other legitimate tobacco manufacturers products is also highlighted, addressing to fight the illicit tobacco trade. Successful this very relevant and recurring topic, and public-private partnership is the most related threat of the seized illicit products effective way to fight the issue. reappearing on the market. This is why we support and welcome the The final substantive section of the entry into force of the Protocol. With Protocol outlines ways in which parties international scope and a broad remit to can cooperate among themselves and with address the multiple drivers of illicit trade, competent international organizations to, we believe that the Protocol has a key among others, share best practices, provide role to play in helping to defeat the black trainings and technical assistance. This market in tobacco.

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Conclusion

Illicit tobacco trade has a broad impact beyond our business. The damage it causes is not often immediately apparent to the general public, even if the societal consequences can prove enduring.

We know that illicit tobacco trade is a and civil society working together to fight significant revenue stream for organized illicit tobacco trade together. criminal actors. It is a global and dynamic In addition to this collaboration, the role problem, requiring a global and dynamic of information and research is critical. response. We are ready to work with all We invest significantly in research to committed partners, in the public and determine the factors driving illicit trade. private sectors across the globe, to help We also want to identify the forms of illicit eradicate illicit tobacco trade. cigarettes on the black market in different The World Health Organization’s FCTC countries around the world. We support Protocol to Eliminate Illicit Trade in education campaigns to raise awareness Tobacco Products brings together of the problem. As a business, we have championed such efforts, including countries against the scourge of illicit through our digital campaigns on our tobacco trade. This treaty will become an dedicated website stopillegal.com. effective regulatory framework once it is globally adopted. Its success, however, We believe in encouraging an effective will rely upon collaboration: national and uniform approach for fighting illicit governments, international organizations tobacco trade.

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Fighting Illicit Trade in Tobacco Products September 2018