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Counterfeiting, piracy and illicit trade

4 February 2008

Michael Prideaux addresses the 4th Global Congress on Combating Counterfeiting & Piracy

Speech by Michael Prideaux to the 4th Global Congress on Combating Counterfeiting & Piracy
 

Dubai, 4th February 2008
 

I would like to express my thanks to the World Customs Organisation, Interpol, the World Intellectual Property Organisation and the Dubai Customs for organising an exceptional Global Congress in this vibrant and beautiful city. 

The last two days have been a real eye-opener for me.  It is amazing to see the collective picture and witness how much governments and industry have done all over the world in the last few years to address counterfeiting.  But so much more needs to be done.  As my colleague Neil Withington said two years ago in Lyon:  “We have had much action, now we need traction”. 

I want to talk today about how we can achieve further traction, mainly in relation to capacity-building, and mainly from the perspective of industry.

It may now seem trite to all of you when I say that counterfeiting is increasingly big business and increasingly organised, and that it is a serious crime which will cause immeasurable harm if allowed to progress at its current rate.  Merely talking about this harm, including lost tax revenue for governments, risk to human safety and substantially slower economic and social development is useful in itself, as it raises awareness which can then help to stimulate action. 

However, the reality is that action will not occur without specific plans and greater resources to implement those plans.  Governments and companies all have limited resources to deal with the problem.  None of us has an unlimited pool of time and money to do everything that needs to be done.  And those of us with greater resources will find them wasted if we act alone.

The only solution is to combine resources and coordinate our action plans more effectively.  The Global Congress has provided an excellent platform for this, particularly with respect to collaboration on capacity building.

We have gathered here together representatives of governments, inter-governmental organisations and the multinationals that are best resourced and structured to work together and develop innovative solutions.

I want to take the opportunity today to speak a little about what British American Tobacco has done and what we think still needs to be done with respect to capacity-building.  Before that though, I want to explain how important global counterfeiting problems are to us.

We estimate that the size of the global illicit trade in cigarettes to be approximately 390 billion sticks annually representing 6% of total world cigarette consumption.   This denies governments approximately US$20 billion in annual revenue – just imagine how much infrastructure, education or healthcare that could be bought for that!

In addition, these figures are derived from lost excise tax – but it is more than that – smugglers and counterfeiters don’t declare their earnings for income tax purposes so governments lose that too! 

The temptation of smuggled product in terms of pricing is naturally high, and smugglers themselves make enormous profits by taking advantage of the fact that cigarette duties are high.  The high value to volume ratio of cigarettes, ease of production and movement, low detection rates and penalties, make cigarettes an attractive addition to organised crime’s portfolio of activities.

For example, if they were to buy a 40 foot container of cigarettes in China and sell this in the UK at $6 per pack, they would make a margin of US$2.5 million per container. There is a lot at stake.

The cigarette business is not alone in this regard, as we have seen a wide range of multinationals in the FMCG industry complaining about the same phenomenon to varying degrees.

But what does smuggling have to do with counterfeiting you may ask?  Counterfeit cigarettes are almost always distributed through the same channels that smuggled genuine cigarettes, or cigarettes that evade duty, are distributed.  It is therefore essential to not only address counterfeit production at source but the distribution through the supply chain used by smugglers.

For this reason, we long ago combined our in-house teams dedicated to anti-counterfeiting and anti-smuggling under the single banner of Anti-Illicit Trade or “AIT”.

Our company’s AIT policies are based on a very important starting point:
Our company does not tolerate illicit trade anywhere within our ranks.  We have established stringent controls, such as our ‘Know Your Customer’ policy and ‘Customer Approval’ policies to prevent smuggling.

In addition to the loss to government revenue from counterfeit and smuggled cigarettes, we believe illicit trade bleeds our bottom line by no less than US$ 650 million annually, making us one of the most significant victims of illicit trade in the world.

 We have dedicated tremendous resources to addressing the situation.  This means working particularly closely with governments to devise innovative ways to thwart the criminals that deal in smuggled and counterfeit products in our markets.

Our capacity building efforts have in our view exceeded the levels that would otherwise be dictated by commercial necessity.  We have teams working extensively in training Customs following Memoranda of Understanding which we have entered into with Customs bodies worldwide or otherwise.

In addition, we have teams in-house who spend much time in intelligence-gathering – tracing some of the most dangerous and cunning criminals operating anywhere in the world, and generating innovations in supply chain management and related technologies, particularly tailored for use in developing countries.

We are interested in exploring with governments the viability of track and trace systems to secure the supply chain.  We don't think there's a one-size-fits-all approach to this but stand ready to embrace better systems which make sure that legitimate product gets to legitimate retail outlets. 

As a company with nearly two hundred individual markets, we're aware that what works in one place is not ideal for another but we're constantly exploring ways to make sure we're leading by example in terms of our supply chain management and security.

We are also talking to governments and with our partners in industry to highlight obvious vulnerabilities in the market.  Perhaps one of the biggest examples arises from our experience with Free Trade Zones. We see a lot of illicit product being channelled through such places.  We need to ensure that the rules that apply to those who are running an above-board business apply to everyone who can be reached by law.

British American Tobacco also prides itself on its role in leading industry efforts – together with companies like Unilever – in organising and stimulating a range of industry initiatives, both at the global and local levels.

This includes our continuing leadership in global multi-sectoral organisations such as the International Trademark Association, Business Action to Stop Counterfeiting and Piracy and the Global Business Leaders Against Counterfeit.  BASCAP in particular is doing something which nobody thought was possible a few years ago – building cooperation between brand and copyright industries.

It also includes active support in seeding local industry associations, such as the Brand Enforcement Group in Lebanon, which has distinguished itself through its campaigns to build consumer awareness and the Commission for Africa which is actively engaged in Customs reform in Africa.

Last but not least is the Quality Brands Protection Committee in China, which has embarked on an ambitious array of initiatives over the last decade to promote capacity building, research and enforcement in what is regrettably the vortex of counterfeit production worldwide, China.

With the strong support of the central government, particularly the Ministry of Commerce, the Quality Brands Protection Committee has become a benchmark for local anti-counterfeiting associations worldwide.  It has achieved this success by working with government, not against it, in generating ideas and innovations to promote effective enforcement.

Finally, I would like to make some remarks that underscore the urgency for the tobacco industry in accelerating our efforts in capacity building and stricter enforcement.

Some of you may be aware that the World Health Organisation has begun to develop, through its Framework Convention on Tobacco Control, an international Protocol to create international law to address the illicit trade in tobacco products.

The negotiations between the 152 governments taking part will being in Geneva next week and will be of great interest to delegates here as they will address the core issues that impact on tobacco counterfeiting.

We applaud the efforts of the WHO and the governments taking part in tackling the issue of illicit trade in such a comprehensive manner which will be a precedent for other sectors.  This is, indeed, an excellent example of capacity building and cooperation between governments, civil society and industry on an international scale.

Among the more encouraging proposals on the table are plans to target criminals and their assets more effectively.  The protocol also calls for more deterrent penalties on counterfeiters.

However, we remain particularly concerned by provisions in the FCTC encouraging governments to increase duties on cigarettes.  While the public policy objectives are laudable in theory, in practice, we have found that higher duties directly result in dramatic levels of smuggling which in turn completely undermine these objectives.

There needs to be a balance between health and tax policy to ensure that illicit trade levels remain in check.  With greater smuggling, the cost of cigarettes actually decreases, thereby making cigarettes even more accessible to the public.  We see this in markets all over the world and it's a reality we grapple with every day.

We respect the World Health Organisation and its goals. We do hope, however, that policy makers involved in the talks will appreciate the realities of the market and balance their proposals with stronger support for a substantially greater allocation of resources for enforcement and capacity building at all levels.  This is indeed an area we are happy to help them with.

To conclude, I wish to applaud the efforts of the World Intellectual Property Organisation, the World Customs Organisation and Interpol for their continuing efforts in capacity building.  All three organisations have an extremely wide range of responsibilities and, on behalf of industry, I would like to thank you for all the foresight you have demonstrated by devoting so much of your time and resources to this critical area.

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