british american tobacco p.l.c. sustainability report 2011 - Fighting the black market in tobacco

 
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Sustainability Report 2011

The black market in tobacco is already a widespread problem, but it is made worse by some misguided regulatory policies and particularly by large and sudden increases in excise tax that destabilise the market. The perpetrators in this criminal trade are underground operators and are often gangs that also traffic drugs, arms and people and may have ties to terrorist organisations. We are hopeful that the FCTC draft Protocol to Eliminate Illicit Trade in Tobacco Products, if effectively enforced, will help to tackle the problem.

Fighting the black market in tobaccoOur approach

Our approach to fighting the black market in tobacco includes:

  • Effective internal governance and supply chain security;
     
  • Gathering commercial information on the illegal trade;
     
  • Working with authorities to ensure that appropriate enforcement action is taken;
     
  • Engaging with international bodies like the World Customs Organisation to increase understanding of the issue;
     
  • Informing regulators about the impacts of the illegal tobacco trade; and
     
  • Raising awareness of the issue among employees and the public.

We require our companies and employees to support only legitimate trade in our products. Through our ‘Know Your Customer’ guidelines and procedures, we try to ensure that the volume of tobacco products we supply is consistent with legitimate demand. It is our policy to stop doing business with customers or suppliers that we find to be complicit in illicit trade. In 2011, we ceased supply to one retailer in South Africa in these circumstances.

In 2011, we strengthened these guidelines and procedures as part of our cooperation agreement with the European Commission.

 

ILLEGAL TOBACCO

It is estimated that up to 12 per cent of the global tobacco trade is illegal.

Counterfeit or fake products are unauthorised copies of branded products that have been manufactured without the knowledge or permission of the trade mark owner and using cheap unregulated materials.

Local tax evaded products are manufactured and sold in the same country, but are not declared to the authorities, so excise tax is not paid. These products are manufactured in either legitimate or illegal factories.

Smuggled products (either genuine or counterfeit) are moved from one country to another without payment of taxes or duties, or in breach of laws prohibiting their import or export.

Supply chain security

To help eliminate unauthorised sale, re-sale or smuggling of tobacco products we are working with other international tobacco manufacturers to further secure the supply chain. It is necessary to develop industry-wide security systems to do this.

We have created a proven, automated system for tracking and tracing products as they move through the supply chain. If products are found on the black market, the system can trace them back to their point of departure from the legitimate supply chain. It uses industry standards and meets our obligations under our cooperation agreement with the European Commission, as well as the expected requirements of the FCTC draft Protocol to Eliminate Illicit Trade in Tobacco Products. It has been implemented in Poland and Ukraine and is currently being rolled out elsewhere.

In 2011, we were founding members of the Digital Coding and Tracking Association (DCTA). Working with the DCTA, we advised IBM on a model demonstrating how track and trace systems can be implemented globally based on industry standards. Governments are interested in the security of the tobacco supply chain, because tobacco products sold illegitimately rob them of excise revenue. In the past, cigarette packs have carried paper tax stamps to verify their legitimacy but counterfeiters are getting better at copying these.

With the DCTA, we are promoting the concept of digital tax verification based on an agreed industry-wide approach. This approach uses digital coding printed directly onto packs, which also helps consumers and authorities validate the product’s authenticity. In 2011, we piloted the preferred system at our factory in Mexico. In 2012, we will continue to work with the DCTA to advocate for the introduction of this system in further countries.

International cooperation

In 2011, we continued to engage with other sectors addressing illegitimate trade through international organisations like the International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy, the International Tax and Investment Centre and the Anti-Counterfeiting Group.

In 2010, we signed a cooperation agreement with the European Commission and its member states and, in 2011, we reviewed our progress against it. We are meeting all our obligations, including implementing track and trace technology, introducing enhanced ‘Know Your Customer’ policies and monitoring seizures of our brands. To support the agreement, we will provide US$200 million over the next 20 years, which can be used to fund areas including training for border staff in new security systems.

In the EU and around the world, we also support law enforcement agencies by providing training and intelligence, helping to authenticate seized products and carrying out forensic analyses on illegal goods.

The general public is often unaware of the wider impacts of the illegal cigarette trade. To illustrate these and remind people that illegal tobacco is not a victimless crime, we followed our 2010 short film ‘Who’s in control?’ with a second film, ‘This is the man’. This film is being used by our companies and shared with external stakeholders to help raise awareness. It can be viewed at www.bat.com/theman Opens in new window.

STAKEHOLDER VIEWPOINT

The potential impact of plain packaging on the illicit market has been highlighted by a number of commentators as an area of concern, including the Australian government who recognised that plain packaging, if it made counterfeiting easier and enforcement less effective, could lead to an increase in illicit trade.

‘Tobacco Packaging Regulation: An international assessment of the intended and unintended impacts’ by Deloitte, May 2011.

 

CONTRIBUTING FACTORS TO THE BLACK MARKET IN TOBACCO

Large and sudden excise increases, resulting in price disparities between neighbouring countries, which encourage smuggling across borders. Weak border controls and ineffective sanctions. Packaging regulation that makes counterfeiting easier or increases demand for smuggled branded goods.
 
 

ILLEGAL CIGARETTES AND ORGANISED CRIME

The illegal tobacco trade is not just the work of small operators. More and more, we are seeing the involvement of organised crime. Interpol, the international police organisation, states that criminal gangs that traffic drugs, arms and people are also behind the illegal tobacco and alcohol trades. The US Department of Justice believes some also have ties to terrorist organisations.

A number of in-depth reports on cigarette smuggling, including its links with terrorism, corruption and organised crime, have been published by the International Consortium of Investigative Journalists, part of the US-based Centre for Public Integrity.
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