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.....................................................................................