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The Impact of Plain Packaging on the Illicit Trade in Tobacco Products

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The Impact of Plain Packaging on the Illicit Trade in Tobacco Products The Impact of Plain Packaging on the Illicit Trade in Tobacco Products Professor Peggy Chaudhry Professor Alan Zimmerman June 29, 2012 CONTENTS Page EXECUTIVE SUMMARY ..................................................................................................................... 1 SECTION I. INTRODUCTION........................................................................................................... 4 PROFESSOR PEGGY CHAUDHRY ....................................................................................................... 4 PROFESSOR ALAN ZIMMERMAN ...................................................................................................... 4 OBJECTIVES OF THE REPORT.............................................................................................................. 5 SECTION II. THE ILLICIT TRADE PHENOMENON .................................................................... 8 SECTION OVERVIEW .......................................................................................................................... 8 DEFINITIONS ..................................................................................................................................... 9 SIZE AND MEASUREMENT ............................................................................................................... 10 TYPES OF PRODUCTS TRADED ......................................................................................................... 12 SOURCES OF AND DESTINATIONS FOR ILLICIT PRODUCTS .............................................................. 15 GLOBAL CAUSES OF ILLICIT TRADE................................................................................................. 17 Powerful global brands and iconic packaging .................................................................. 18 High tariffs/taxes and affordability ................................................................................... 19 Low investment and high profits........................................................................................ 20 Geographic characteristics ................................................................................................... 21 Globalization and lower trade barriers .............................................................................. 23 Expansion of distribution channels and markets.............................................................. 25 Continuing consumer complicity........................................................................................ 28 Weak sanctions and enforcement ....................................................................................... 31 ROLE OF PACKAGING IN ILLICIT TRADE.......................................................................................... 32 ANTI-COUNTERFEITING TECHNOLOGIES........................................................................................ 36 THE NEGATIVE SOCIETAL IMPACTS OF ILLICIT TRADE.................................................................... 37 Harm to consumers............................................................................................................... 38 Loss of revenue and other harms to source and destination markets ........................... 39 Harmful impact on society................................................................................................... 40 Harm to those in the legitimate supply chain ................................................................... 42 Harm to IPR owners ............................................................................................................. 42 Profits to OCGs...................................................................................................................... 43 SECTION SUMMARY......................................................................................................................... 44 SECTION III. ILLICIT TRADE IN A TOBACCO CONTEXT....................................................... 45 SECTION OVERVIEW ........................................................................................................................ 45 THE SCALE OF GLOBAL ILLICIT TOBACCO MARKET ........................................................................ 46 WHAT IS THE ILLICIT TRADE IN TOBACCO PRODUCTS?.................................................................. 49 Counterfeit ............................................................................................................................. 49 ‘Illicit whites’.......................................................................................................................... 51 Contraband of genuine product.......................................................................................... 54 THE NATURE AND CHARACTERISTICS OF THE GLOBAL ILLICIT TOBACCO MARKET....................... 56 Recognized source and destination markets ..................................................................... 56 The criminal gangs behind the illicit tobacco trade.......................................................... 62 Packaging as a deterrent to counterfeiters......................................................................... 65 The role of tax stamps........................................................................................................... 68 Use of Internet sites for distribution................................................................................... 71 CONTRIBUTING FACTORS TO THE GLOBAL ILLICIT TOBACCO TRADE............................................. 73 Affordability and illicit trade............................................................................................... 74 Profit incentives for criminals.............................................................................................. 81 Criminal penalties are low and disproportionate to the profit incentive...................... 85 Consumer complicity in the tobacco illicit trade .............................................................. 88 Geographic characteristics ................................................................................................... 91 The “ideal smuggled product”............................................................................................ 94 SECTION SUMMARY......................................................................................................................... 96 SECTION IV. NEGATIVE IMPACTS OF ILLICIT TRADE IN TOBACCO PRODUCTS .......... 98 SECTION OVERVIEW ........................................................................................................................ 98 NEGATIVE IMPACT ON GOVERNMENTS AND TAXPAYERS .............................................................. 98 THE DETRIMENTAL INFLUENCES ON COMMUNITIES AND SOCIETY ............................................... 99 THE COSTS TO LEGITIMATE MANUFACTURERS AND RETAILERS................................................... 101 THE ADDITIONAL HARMFUL EFFECTS ON SMOKERS..................................................................... 102 THE PROFITS MADE BY OCGS ....................................................................................................... 105 SECTION SUMMARY....................................................................................................................... 105 SECTION V. EXISTING FRAMEWORK OF MEASURES TO TACKLE ILLICIT TOBACCO TRADE............................................................................................................. 107 SECTION OVERVIEW ...................................................................................................................... 107 INTERNATIONAL COLLABORATION .............................................................................................. 108 WCO...................................................................................................................................... 108 The WHO Framework Convention on Tobacco Control (FCTC) ................................. 109 REGIONAL COOPERATION ............................................................................................................ 111 The EU Cooperation Agreements with major manufacturers ...................................... 111 Know your customer (KYC) and supply chain monitoring.......................................... 113 Tracking and tracing procedures ...................................................................................... 114 OLAF-led collaboration efforts.......................................................................................... 115 INDUSTRY-NATIONAL GOVERNMENT COOPERATION .................................................................. 116 MOUs.................................................................................................................................... 116 EFFECTIVENESS OF EXISTING COLLABORATIVE MEASURES .......................................................... 117 NEXT STEPS IN THE FIGHT AGAINST ILLICIT TOBACCO TRADE ..................................................... 117 SECTION SUMMARY....................................................................................................................... 119 SECTION VI. ILLICIT TRADE AND PLAIN PACKAGING ..................................................... 120 SECTION OVERVIEW ...................................................................................................................... 120 OVERVIEW OF THE CURRENT SITUATION.....................................................................................
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