The Solution

Effective policy

Effective policy

Regulation of the supply chain

As new legal frameworks emerge around the world to tackle the issue of illicit trade in tobacco, it is imperative that they assist in identifying where products are being manufactured, sold, or distributed outside of the legitimate supply chain. 

Alvise Giustiniani, PMI’s Head of the Anti-Illicit Trade Department, August 2016.


According to INTERPOL

It is in the interest of all governments to establish due diligence frameworks and ‘know your customer’ programs such as those required for banks, and to demand track and trace systems for key component manufacturers to help combat the illicit trade in tobacco products and avoid millions being siphoned out of the public purse.

The following regulatory measures should be part of any tobacco policy framework to combat illicit trade and apply equally to all participants regardless of the size of their business:

  • “Know your customer”: Legal tobacco manufacturers, wholesalers, distributors and transporters should be required to conduct due diligence with respect to their customers. This due diligence should include:
    • Verification of a customer’s legal right to trade in or purchase tobacco products;
    • An assessment of whether or not the volumes being purchased are consistent with the customer’s demand or sales;
    • A process for reporting suspicious transactions; and
    • A policy requiring the termination of business relationships when laws have been broken
  • Tracking and tracing: Effective track and trace processes and protocols are an essential part of maintaining supply chain integrity. The term “track” can be defined as the ability to monitor the movement of products through specified stages of the extended supply chain and the term “trace” the ability to recreate the movements, application or location of the product which is under consideration back up the supply chain to a certain point (Source: GS1, Business Process and System Requirements for Full Supply Chain Traceability, November 2012).
  • Security features: Tobacco products require anti-counterfeit features enabling the authentication of a product by industry, investigators, and ideally the wider public. A layered approach to security features is optimal, with a variety of different features all working in conjunction with each other, thus presenting the most insurmountable obstacle to criminals.
  • Record keeping: The legal tobacco supply chain should be required to maintain complete and accurate records of all relevant transactions for five years and to make records available to relevant authorities.
  • Licensing: Combined with strong enforcement and deterrent penalties, a licensing or equivalent approval system that ensures only legitimate and law-abiding businesses can engage in the manufacture, import and export of tobacco products, manufacturing equipment and key components of cigarette manufacturing, especially cigarette paper and filters.
  • Enforcement in Free Trade Zones: These tax-free locations were originally developed to enhance global trade and the free flow of goods. Recently however, they have become a preferred place of doing business for smugglers and illicit whites manufacturers. Therefore, the measures highlighted above should be implemented and enforced in these zones.

In 2016, Philip Morris International published a position paper that outlines solutions for tackling the illicit trade in tobacco within the EU. The Position paper calls for a dialogue to create a strategic framework for open standards, a competitive environment for technology solutions and independent auditing.

 

Control of key components

Cigarettes are made of three main components: tobacco, paper, and filter. Without any of these components cigarettes, legal or illegal, can’t be produced. Implementing strict controls over the production and supply of each of these key components can therefore be one way to make the production of illegal cigarettes more difficult for criminals.

 

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Tough penalties and strong enforcement

There are numerous ways of tackling the problem of the illegal cigarette trade, but little can be achieved without tough penalties and strong enforcement. If not punished adequately, illicit tobacco trade is a low risk, high profit crime.

In addition to the huge profits derived from cigarette smuggling, in most countries the penalties for those convicted of smuggling tobacco are much less significant than for those convicted, for example, of smuggling drugs or weapons. This encourages criminals to shift from the latter to the former.

In Germany, for example, convicted drug smugglers regularly face a minimum prison term of two years, whereas convicted cigarette smugglers may get away with only a monetary fine. Similarly, in France, convicted drug smugglers face up to 30 years in prison, while convicted cigarette smugglers face a maximum prison term of ten years.

There are several ways governments can make illegal tobacco trade less attractive to criminals, including by:

  • Implementing rules such as zero-tolerance for anyone in possession of counterfeit tobacco products;
  • Routinely destroying seized products and manufacturing machineries;
  • Forfeiting assets of convicted tobacco traffickers; or
  • Entering into agreements with the legal industry to share resources and information

 

Zero-tolerance of counterfeit

In many countries it is not an offense to possess a small quantity of counterfeit goods if they are for personal use. This means there is no deterrent for travelers to bring back small quantities of counterfeit cigarettes.

Countries like Switzerland, however, apply a zero-tolerance approach to the importation of counterfeit goods and law enforcement authorities are empowered to seize any quantity of counterfeit goods and apply severe penalties. Even though it is not subject to penalties, private import is also forbidden and any counterfeit goods imported privately are seized as well.

 

Seize and destroy

Enforcement authorities should be empowered to destroy confiscated manufacturing equipment, materials used to make cigarettes, and illegal tobacco products themselves. This is essential in order to prevent these items from finding their way back into the illicit trade or being used to produce more illicit products.

In some instances, this is happening already. In March 2014, approximately 90 million counterfeit cigarettes were destroyed by the Antwerp Customs in Belgium. In October 2014, two tons of raw tobacco and 250 thousand illicit cigarettes that had been seized in an illicit cigarette factory in Stryków (Poland) were also destroyed.

Another good example took place in February 2011, when 45 machines that had been confiscated by German customs authorities during raids at illegal cigarette manufacturing facilities in Cologne and Koblenz in 2005, were destroyed. It is believed that the machinery had been used to produce approximately 400 million counterfeit cigarettes before it was confiscated.

During 2016, in Poland 34 illicit cigarettes factories with a potential production capacity of approximately 4 billion cigarettes, including counterfeit product, were raided by local law enforcement authorities. In addition, 28 tobacco processing facilities with a production capacity of approximately 2,000 tons of tobacco were also raided. Following these raids, 3 big contraband networks involved in the contraband of at least 0.5 billion cigarettes were dismantled and over 350 members of organized crime groups were arrested. 
Unfortunately, this isn't standard practice. Some countries actually hold public auctions for seized cigarettes and machinery at which illicit traders purchase the goods that should have been destroyed and kept out of their hands and the cycle continues.

 

Asset forfeiture

Many countries, including those where illicit trade is flourishing, do not have laws that allow law enforcement authorities to seize the assets of those involved in the illegal cigarette supply chain. However, some countries have adopted a tough stance. Hong Kong and the UK, for example, allow for the seizure of property purchased with money earned through criminal activity. The confiscated assets can then be sold and the proceeds can be used by enforcement.

 

Public & Private sector cooperation

Policy targeting illicit trade can be complemented by joint activity and cooperation agreements between law enforcement, the legal industry, and others who have a role to play in tackling this problem.

During 2016, PMI cooperated on many levels with authorities worldwide, including inspecting 392 seizures in 31 countries and delivering training programmes to over 2,400 law enforcement officers on anti-illicit trade across all PMI regions.

In many countries, we signed Memoranda of Understanding (MoU) agreements with the local law enforcement authorities to fight against the illicit trade of our tobacco products. Those MoUs provide a framework for the sharing of information about the seizures and the results obtained during onsite inspections.

Currently, PMI has more than 50 MoUs in force in 40 countries. In some countries we have multiple MoUs, given the various departments within a single country that could—and many times do—contribute to this fight. Our agreements tend to be bilateral agreements such as the latest ones signed in June 2017 in Czech Republic and Dominican Republic.  However, MoUs can also be multilateral agreements such as the one signed with the Southeast European Law Enforcement Center (SELEC) in December 2016, which included 12 countries.

In July 2016, a joint agreement between the European Commission and PMI to tackle illicit trade in the EU expired. Although the agreement was not extended, the supply chain control measures outlined in the agreement remain an integral part of how we do business in the European Union and around the world. With or without the agreement, our commitment to fight illegal trade around the world remains intact and stronger than ever.

 

European Commission Vice-President Georgieva said on 6th July 2016:

This agreement has served its purpose, reducing PMI contraband on the illicit tobacco market and providing public revenues of around USD1 billion to Member States and the EU budget. In a changing legal and market environment, we will redeploy our resources and continue to fight illegal tobacco trade by focusing on cheap whites, strict law enforcement and strengthened international cooperation.

The head of the EU anti-fraud office (OLAF), Giovanni Kessler, has been reported to confirm that PMI has shown "the same commitment" in continuing the fight against tobacco smuggling since the agreement ended. Despite the expiration of the EC Agreement we continue to be committed to the same anti-diversion practices, because we want to see the figures for diversion of our products further decrease.

We know we cannot act alone. To prevent and act upon incidents of diversion we need eyes and ears greater than our reach. If we are not informed about a seizure of our product, we are simply unable to react.