The Victims of Illicit Trade are Starting to Better Coordinate Their Defenses, But There''s Still a Long Way to Go

Source from:  Tobacco Reporter  08/06/2013

The fourth Tax Stamp Forum, hosted by Reconnaissance International, took place in Vienna, Austria, June 3–5, 2013. While the forum is ostensibly about tax stamps and the use of high-security revenue verification, it has become one of the leading conferences to discuss issues of tracking and tracing, product authentication and tax verification in relation to tobacco products. It is a truly global conference, attracting speakers and delegates from all over the world, with an appropriate balance between contributions from the United States and Europe.

I have spoken at the forum four times, twice as a representative of British American Tobacco and twice on behalf of my consul-tancy firm, JCIC. Each time, my topic has been about the policy contained in the Framework Convention on Tobacco Control's (FCTC) developing Protocol on Illicit Trade and its tracking and tracing requirements. This year, I broadened the topic to cover the emerging convergence in these key areas due to the increasing global problem of illicit trade in all sectors and the greater need for enhanced supply-chain security. As illicit trade is a problem of international dimension, I outlined also what some of the relevant international organizations were doing to address it, and the need for enhanced public-private partnerships.

Hard to capture

Moises Naim, editor of Foreign Policy, estimated the global value of illicit trade at $3 trillion in April 2008. Some believe it represents 10 percent of world trade. "Could illicit trade—involving every-thing from handbags to humans to counterfeit pharmaceuticals to weapons-grade uranium—be an even greater threat to our way of life than terrorism?" he asked. "Governments are failing because they don't work effectively with other governments; they don't move as swiftly as the traffickers, [and] they're trapped inside their borders." Naim made these comments five years ago, and the problem has only gotten worse, according to most sources.

The size and nature of illicit trade is difficult to quantify, and obtaining reliable data is problematic because each industry uses different measurement methodologies. The list in the box on page 28 shows the magnitude of the problem across the most affected areas, according to various sources. This is where a significant part of the problem lies—how can policymakers address an issue that cannot or has not been quantified? How can policymakers address an issue where the affected industries are reluctant to speak about the extent of the problem due to the understandable fears that consumers will find out the extent to which their products are counterfeited and smuggled?

The pharmaceutical industry is among the most severely affected by illicit trade. Between 5 and 8 percent of medicines sold worldwide may be counterfeits, resulting in 2,000 deaths each day, according to the World Health Organization. The illicit  pharmaceutical industry is worth an estimated $205 billion—and it's growing.

The tobacco industry, too, is a prominent victim of illicit trade. With taxation accounting for 60 to 80 percent of the pack price, there is great incentive for criminals to evade it. Legitimate tobacco companies pay significant amounts of excise tax, but governments are missing out on $20 billion to $40 billion a year in tobacco taxes. Some 330 billion to 660 billion cigarettes consumed each year are illicit—that is, either smuggled, counterfeit or locally tax evaded. Illicit cigarettes are equivalent to 10–15 percent of the global market—a share almost as large as that held by the largest publicly listed tobacco company.

Both the pharmaceutical industry and the tobacco industry are putting great emphasis on securing their supply chains, but the driver for each is quite different, as indeed it is for all sectors being impacted by illicit trade. For the tobacco industry, the policy driver is protection of government excise tax, as it is for alcohol and petroleum. For the pharmaceutical industry, the primary policy driver is not tax but public safety, as it is for food, toiletries and cos-metics. Corporate responsibility is a significant driver of the need to ensure a secure supply chain for most industries, as is consumer confidence. The food industry has specific needs, such as to ensure a secure supply chain for religious reasons or to ensure a product is what it claims to be—"organic," for example. Increasingly, labels on certain clothes claim to be made from textiles fabricated or grown in a particular way. Government supply chains aim to protect state resources in the environment, timber, fishing and wildlife areas, or to protect humans and migration channels. So, while the rationales for action are quite different among the vari-ous stakeholders, there is a convergence of need to secure global supply chains against global criminal elements.

Coming together

While this convergence of need exists, there is no agreed inter-national methodology or international standards by which to measure it, and there is no international leadership or organization to collectively address it. The World Trade Organization (WTO) considers TRIPS (Trade Related Intellectual Policy) aspects. The World Customs Organization (WCO) considers border security and enforcement policy, Interpol addresses criminal networks, and the Organisation for Economic Co-operation and Development (OECD) considers the economic and social policy. But which international organization considers the issue collectively and pulls together all the various elements or areas of focus? There is none. Similarly, while there are a slew of technology providers with excellent solutions to meet various supply-chain security needs, there are no agreed international standards for security method-ology, and there is a limited ability for law enforcement to know which devices an industry or a company or even a brand is using.

For example, if a customs enforcement agent seizes what he believes are fake medicines, how does he know? How does he know whether the manufacturer has used a hologram— and, if it has, what kind? There have been cases in which the legitimate manufacturer had not applied a hologram or security stamp, but the counterfeiter had done so—and the customs officer believed the product with the security device to be the authentic one. These issues are gaining in frequency. Enforcement agencies and their front-line representatives need to have more information from manufacturers about what security devices they are using in their supply chains. Now, more than ever, there is a need for the private sector and the public sector to work together to address the problem. And because the issue is international, it needs an international response. Multinational companies in most sec-tors are securing their supply chains and using overt and covert authentication or verification devices as necessary. Increasingly, they are also making the investment to track and trace their products throughout their supply chains. In the past 10 years, the international organizations have also been considering the issue in their respective areas of remit, and a lot is going on.

The WCO has implemented a tool in the fight against coun-terfeiting known as IPM (Interface Public-Members).  IPM is an online and mobile application enabling right holders to provide customs officers with real-time data on their products. Customs officers can access this information anywhere in the world via a simple and secure interface available in their national language. IPM can also be considered a permanent training tool as customs officers can log on to its e-learning facility at any time and learn about a variety of products and brands as well as the distinguishing features between counterfeit and genuine products. IPM Version 1 was launched in June 2010 during the annual council of the WCO in Brussels, Belgium. IPM Version 2, which enables IPM on mobile devices via the searching of a product, scanning of a bar code, and a link to track-and-trace technologies, was launched in April 2013 during the agency's Global Congress in Istanbul, Turkey. Currently, 56 customs administrations, representing 3,500 officers, have access to the tool. The goal is to have 80 cus-toms administrations by the end of 2013, which will represent 8,000 customs officers connected. Seventy brand owners repre-senting approximately 600 brands are also members of IPM.

Interpol launched its global register (now known as I-Checkit) of products at the Google Ideas INFO Summit in July 2012 as a pioneering solution for combating the trafficking of illicit goods by verifying products. The tool will actively engage and empower the public, rights holders and law enforcement officials by enabling anyone with a mobile phone or Internet-connected device to verify a product's legitimacy by screening these features. The public will be able to consult this informa-tion in real time and from anywhere in the world by scanning a product's bar code or entering product identifiers on a Web or mobile application. Each product check will generate industry-wide reports for private industry partners and analytical reports for law enforcement to support follow-up investigations. In addition, Interpol announced a cooperation agreement with Philip Morris International in June 2012 to tackle illicit trade, and in May 2013, Interpol was named by the Global Anti-Counterfeiting Group (GACG) as the winner of its International Public Body award for its "exceptional" work toward combating the trafficking in illicit goods and counterfeiting.

The WHO completed its FCTC Protocol to Eliminate Illicit Trade in Tobacco Products in November 2012, and the treaty is now open for signature and ratification. It has three substantive areas, including supply-chain control, offenses and enforcement, and international cooperation. Parties to the protocol will be required to establish a track-and-trace system nationally within five years of ratification, and together these will make up a global track-and-trace regime. To date, 17 countries have signed the protocol, which means they have the option to ratify it. Most are considering how they will implement the protocol and which tracking and tracing and tax verification solutions they will select to meet their obligations.

The protocol is the first international agreement of its kind to address all three forms of illicit trade—smuggling, counterfeit, and evasion of tax and duties. Other international agreements tend to cover only one part of the illicit trade problem—most commonly relating to counterfeit and intellectual property crime. Or they cover law enforcement aspects, especially in relation to customs offenses. Agreements on taxation tend to cover income tax and corporation tax crime, but not indirect or excise tax  evasion. For these reasons, the protocol to eliminate the illicit trade in tobacco products breaks new ground, and while it spe-cifically relates to tobacco products, it is likely the protocol will become a benchmark for other international agreements for other industries.

The World Economic Forum (WEF) established a network of Global Agenda Councils in 2008, including an organized crime council and an illicit trade council. It also launched a supply-chain risk initiative to bring together a range of leading experts from across the WEF's diverse communities to explore the most critical threats facing supply-chain networks, and to apply new risk-response tools that can promote efficient risk management, security and resiliency in the complex global trading environment.

The OECD is considering the issue from an economic and social perspective. In 2007, it published  The Economic Impact of Counterfeiting & Piracy. In 2012, its financial action taskforce issued a report on the illicit trade in tobacco, and in 2012, it initi-ated the OECD Taskforce on Charting Illicit Trade to consider the evolving global risk of illicit trade. The taskforce aims to improve understanding amongst policymakers of the magnitude, flow and nature of illicit trade and how it undermines legitimate economic activities.

The only way forward in the fight against the growing global scourge of illicit trade is through effective partnerships between the public sector and the private sector. There is a lot going on. The Tax Stamp Forum is a yearly conference that will continue to focus on this issue, and it is definitely one to watch. Enditem