british american tobacco p.l.c. sustainability report 2010 - Tackling illicit trade

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Sustainability Report 2010

When cigarettes are smuggled across borders or counterfeited, governments and legitimate operators lose revenue and the market is destabilised. Since this trade is unregulated, cigarettes are also more easily available to the underage.

Tackling illicit tradeThe global illicit trade in tobacco products – smuggled, counterfeit and tax evaded – is vast and growing. It negatively impacts governments, retailers, consumers, tobacco companies and society as a whole. Illicit trade is dominated by highly sophisticated and organised international criminals.

By reducing illicit trade, we can reduce the negative impact on society while increasing our market share. The challenge we face is that this will require cooperation between the industry, regulators and enforcement authorities and some parties are cynical about our involvement.

Some stakeholders believe we encourage smuggling. We do not. It harms our business and we are committed to doing as much as we can to tackle smuggling, counterfeiting and tax evasion.

The principal drivers of illicit trade are economic – cheaper cigarettes for consumers and profits for the smugglers and counterfeiters. Contributory factors include weak border controls and ineffective sanctions. By providing information and training, we support governments’ establishment of appropriate tax policies, appropriate regulation and effective enforcement to address these issues.

Our approach to tackling illicit trade includes:

  • Effective internal governance and supply chain security;
  • Gathering commercial information relating to illicit trade;
  • Working with enforcement authorities to ensure that appropriate action is taken;
  • Engagement with international bodies such as the World Customs Organisation to increase understanding of the issue;
  • Informing regulators about the impacts of illicit trade; and
  • Internal awareness raising.

It is Group policy that our companies and employees support only legitimate trade in our products. Through our ‘Know your Customer’ guidelines and procedures we aim to ensure that the volume of tobacco products we supply is consistent with legitimate demand. It is our policy to cease business with customers or suppliers believed to be complicit in illicit trade.

Illicit trade – our view 

  • It is estimated that up to some 660 billion illegal cigarettes are smoked every year – this is around 12 per cent of global consumption.
  • Governments are losing up to an estimated US$40 billion a year in taxes.
  • Legitimate tobacco companies lose up to US$10 billion a year in revenue.
  • Cigarettes are among the most commonly traded products on the black market due to high profit margins, relative ease of production and movement and low detection rates and penalties.
  • Tobacco products are more easily accessible to underage smokers on the black market.

Supply chain security

We have developed a system, using industry-agreed standards, for tracking and tracing the movement of our products. This was successfully piloted in 2009, with accuracy above 99 per cent. This meets the requirement of the FCTC draft Protocol on Illicit Trade for all manufacturers to conform to an international track and trace standard. We support this draft Protocol and hope to see it finalised in 2012.

Digital tax verification uses digital coding technology printed directly onto packs to help governments ensure all taxes and duties are paid. We worked with other tobacco companies to establish an industry-wide approach and, having all agreed on a preferred system, we are now piloting this in our factory in Mexico.

Raising awareness

We have sought to raise awareness of the social and economic impacts of illicit trade and of how this trade can be increased by the introduction of some tobacco regulation. For example, regulation stipulating that only plain packaging be used for tobacco products would make counterfeit products easier to produce. Some law enforcers say that the criminals involved in illicit trade are also traffickers of people, weapons and drugs or have terrorist links. To illustrate these complex issues in an engaging way, we have produced a brief film which can be viewed at Opens in new window.

We have also worked with international think tanks and the industry to further our understanding of how large and sudden excise increases, resulting in price disparities between neighbouring countries, can increase illicit trade across borders.

We also communicated our views on illicit trade through articles in relevant magazines and forums such as at the Organisation for Economic Cooperation and Development and the G20 Finance Ministers’ meeting.

Cooperating with others

We have entered into a cooperation agreement with the European Commission and are working with the law enforcement authorities of its Member States to tackle illicit trade in tobacco. We will provide funding of €134 million over the next 20 years to support the agreement.

We also continued to work with law enforcement bodies by providing training and intelligence, as well as helping to authenticate seized product and carrying out forensic analysis on illicit goods.

Tackling illicit trade: what's next?

In 2011, we will help governments to implement the track and trace system we have developed. Our pilot of the industry-wide approach to digital verification will be completed at our factory in Mexico. We will also continue to raise awareness of the negative impacts of illicit trade on economies and society.