TSTN Volume 2019

VOLUME 11 – NO 01 / JANUARY 2019

Welcome to a New and Expanded Tax Stamp News!

ITSA Becomes Code Issuing Agency Under EU TPD The International Tax Stamp Association (ITSA) – which has now grown to 23 members, from its original 10 founding members in 2015 – has been granted the authority to issue unique ID codes for tobacco product traceability under the EU Tobacco Products Directive (TPD).

A very happy 2019 to all our readers!

Examples of such programmes are:

With this new year comes a new and expanded title and scope for Tax Stamp News™, which has now been renamed to… wait for it…

• Fuel marking schemes;

Tax Stamp & Traceability News . ™

This expansion into the traceability realm reflects the fact that national tax stamp programmes are becoming more and more integrated into systems which are able to trace an individual item back to its origin and, in some cases, securely track that item’s journey through each stage of the supply chain, right up to the final retail outlet, so that its whereabouts are known at all times. The reason for such an integration is that tax stamps have proven to be ideal carriers of the unique identifying code required for track and trace. So with Tax Stamp & Traceability News (TSTN) we want to embrace this marriage between tax stamps (as tools for product authentication and proof of tax paid) and secure track and trace systems (as a means of monitoring the production and movement of legal products in order to identify illicit practices). But our intention is also to go further afield, by addressing subjects related to product protection and monitoring programmes that are usually governmentmandated but that don’t necessarily involve tax stamps or excise products.

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• Government-issued authentication labels and unique marks on products ranging from coffee to TV sets to antifreeze… to you name it! • Authentication and traceability systems (without the tax element) for high-end alcohol products; • Systems that are purely track and trace based, but that could potentially be applied to tax stamps (such as pharma and food systems). To kick off this new-look newsletter, we thought it would be interesting to do two things: first, go back to basics with an overview of what track and trace actually is and actually does; and second, give a quick rundown of what’s going on in the domain of pharmaceutical track and trace, which was the first family of consumer products to introduce an almost global requirement for traceability at individual pack level. So, here we go! Do let me know what you think of this new, broader focus and whether there is something specific within that focus that you would like us to cover in future issues. Email me at nicola@ reconnaissance-intl.com to share your thoughts.

But why would ITSA apply for such authority? Couldn’t its members just acquire their own individual authority to issue codes in their own right? Well no, they couldn’t. Because only ‘umbrella’ organisations such as ITSA are now able to become issuing agencies. This wasn’t always the case, though, which is why some individual companies (such as IBM and Siemens) do have code issuing rights. But this practice was stopped when the agency responsible for assigning companies with the Issuing Agency Code (IAC) needed to be ID issuers under the TPD realised that it couldn’t grant IACs to all companies bidding in all 28 EU member states, as it would risk running out of codes available for IACs. Hence the decision to award IACs to umbrella organisations that will in turn assign each of its members a unique company identification number, based on the IAC, for them to use when generating and supplying codes.

Governments Need Holistic Solutions, Not Just Tax Stamps By Telita Snyckers and Michael Eads, Sovereign Border Solutions As we discussed in our previous article in the November 2018 issue of Tax Stamp News™, with at least 117 countries being unable to meet, in the foreseeable future, the requirements of either the WHO Framework Convention on Tobacco Control (FCTC) or its Protocol to Eliminate Illicit Trade in Tobacco Products, what should be an undeniably enticing opportunity for potential solution providers may prove to be a challenging and complex environment to navigate. Of the 117 countries that potentially need the help of solution providers, any number of them probably don’t even know it, and many likely can’t afford it. The long-standing history and prevalence of tax stamps make them an ideal platform for FCTC implementation, but with two possible distractions:

Inside this Issue 1 Welcome to a New and

Expanded Tax Stamp News!

1 ITSA Becomes Code Issuing Agency Under EU TPD

2 Governments Need Holistic

Solutions, Not Just Tax Stamps

4 Medicines Traceability – a

Global Overview of a Chaotic Situation

6 What is This Thing Called Traceability?

1. Tax stamps are often thought of as simple tax collection structures, belying their potential value as a platform around which broader excise modernisation strategies can be developed; 2. The existence of cheaper, lesssophisticated, less effective stamps and marks potentially dilute the value proposition around their use as platforms to implement the FCTC.

The same intractable challenges

While the 117 countries certainly present an opportunity, experience suggests that at least some level of scepticism is warranted. The tax stamp and secure printing industry appears to face the same intractable challenges time and again: solutions are pitched that never go to tender; tenders are issued but are never awarded; awarded tenders are challenged both in court and in the media; tenders are awarded for solutions that are never implemented; intentions to expand to other products never materialise; implementations are criticised as being ineffective; contracts are not renewed; and the tax stamp and secure printing industry ends up expending a considerable amount of resources on programmes that never materialise.

Four key reasons for low implementation rates

There are arguably four key drivers that explain why tax stamp and secure marking programmes meet with less success than they could (or should): absolute inertia on the part of tax and customs agencies; agencies being at the mercy of industrydriven rhetoric around illicit trade and potential solutions; failure to leverage potential allies in the public health fraternity and academia; and a myopic focus that concentrates simply on pre-existing solution models that may not necessarily meet agencies’ overall needs.

Agency inertia

As we saw in our previous article, only 35% of agencies with obligations under the FCTC Protocol have or are considering implementing track and trace solutions. Only 52% of these collect data on crossborder trade in tobacco products; and only 18% keep data related to the smuggling of tobacco products. Agency inertia – when it comes to managing the risks around excisable products like tobacco – is understandable. For many agencies, excise duties constitute

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a very small part of their revenue (in some countries it is as low as 2% of total tax revenues), and with nothing to suggest otherwise, large manufacturers are assumed to be compliant and are treated as strategically important taxpayers. There tends to be a limited understanding at agency level of the different faces of illicit trade in excisable products, and little appreciation of how they are often intricately interwoven with organised crime more broadly. Little effort has likely gone into assessing the revenue losses from illicit trade or developing a comprehensive strategy to counter illicit trade. Even assuming agencies clear these hurdles, they tend to be fundamentally unschooled in terms of technology in general or the role a secure marking solution could play in curbing illicit trade in particular. Furthermore, they tend to have a limited understanding of the revenue optimisation potential, or succumb to the pressure of what are often undeniably some of their biggest employers and taxpayers (as a result of capture, corruption or simple political pressure). There is no burning platform jolting agencies out of their state of lethargy. Or if there is, it may well be driven by an industry agenda focused on eliminating smaller competitors, with information, rhetoric and agendas largely being driven by big tobacco or their proxies (see for instance the series of events now playing out in South Africa, with a controversial illicit trade survey funded by big tobacco being used to lobby for the targeting of smaller local manufacturers). The tax stamp industry tends to be in the business of selling what often boils down to ‘ink and paper’, and not holistic solutions, and therefore not crafting a strong enough business case to jolt agencies out of their torpour.

Industry controlling the rhetoric

By far the majority of the rhetoric and arguments around illicit trade and the curbing thereof comes from the well-oiled machinery of the tobacco industry and its proxies and intermediaries (although the industries relating to alcohol, sugar and other excise products are also becoming more vocal), with industry rhetoric drowning out the voices of more independent academics and NGOs.

This means that the public and policy makers most likely – but wrongly – believe that: • Illicit trade is solely attributable to smaller local manufacturers and crime syndicates; • Tax stamp programmes are expensive and ineffective; • All tax stamps are easy to counterfeit; • Additional regulation simply increases levels of illicit trade as legitimate manufacturers struggle to compete; • The increase in illicit trade will likely result in plant closures and job losses. With little to balance this out in the media, this is the rhetoric that pervades, and the rhetoric that very often drives policy decisions. And as the tax stamp initiative traces its way through conceptualisation to the drafting of tender documents, the awarding of the tender, implementation and operationalisation, the attacks follow a fairly predictable course – one that could easily be countered with the right data points and factoids, but too often isn’t. Instead of pre-emptively empowering agencies with the relevant data and research and factoids that consolidate the best of academic research on what arguments to expect from industry, and how to respond when industry pushes back (either through capture, corruption, political pressure or aggressive media campaigns), much of this data is relegated to the chronicles of academia, and hardly ever dusted off and given the prominence it deserves. The tax stamp and secure printing industry has an opportunity to fundamentally shift the paradigm of considerations that shape public opinion and policy makers’ decisions. The result can only be more informed decision-making, with more tax stamp programmes being implemented.

Failing to leverage potential allies

We remain astonished at the relative disregard the public health community has for the tax stamp industry. What should be an obvious partnership is instead characterised by distrust and almost no interaction. Where the tax stamp industry should have a seat at the table when it comes to developing and implementing secure marking solutions for cigarettes as part of something like the FCTC Protocol, it does not, and is instead pertinently excluded. Such exclusion even extends to the FCTC’s 2018 MOP1 and COP8 meetings (made all the more shocking because the tobacco industry is known to have had a voice through proxies, as is evidenced by, for example, the Dirty Ashtray Awards handed out to some countries for parroting industry rhetoric).

The tax stamp and secure printing industries are undoubtedly the single best and most uniquely positioned industries to deliver on some of the Protocol’s most fundamental objectives. Instead, there is poor if any communications and no formal structures for two parties who should be allies to come together.

This is not necessarily always immediately apparent to client agencies, who may well naively implement a secure marking and traceability solution believing it to be a panacea that does not require additional investment or capacity on the part of the agency. This dilutes the effectiveness of tax stamps, secure marks and traceability programmes across the board: how do you superimpose a generic solution if you don’t know what problem you are trying to solve? If your service offering only focuses on the secure track and trace component, but little else, how does that substantively translate into value for money for cashstrapped agencies? How does it actually improve not just production control for local manufacturers, but contribute to actually reducing the prevalence of illicit trade? And how does it help to mitigate rhetoric (very often planted by the industry) that tax stamp programmes are ineffective?

The consequence of this may well be the tobacco industry’s solution paradigm (largely based on Codentify/Inexto) being implemented as a track and trace solution for governments. (There are already indications of this happening with the EC approving related entities as data service providers under the EC’s weak criteria for independence set out in the Commission’s Implementing Regulation (EU) 2018/574.) If the collective aim is to eliminate the illicit trade in excisable products like tobacco (or even if only driven by a profit motive that seeks simply to increase the number of tax stamp programmes implemented), the enmity and scepticism on the part of the global health fraternity needs to be far better managed.

Focusing on broader outcomes

Arguably the best way to mitigate the risks of illicit trade would be by creating a network of allies working towards the same goal: reducing the illicit trade in cigarettes, through the use of proven technologies and strategies. In that sense, a partnership between organisations like the International Tax Stamp Association (ITSA) and other trade associations, illicit trade experts, and something like the FCTC Secretariat seems like a natural fit. Unfortunately, the Protocol’s track and trace regime is largely developing without the inputs of subject-matter experts who have real-world experience in implementing tax stamp or secure marking programmes, or more broadly in curbing illicit trade, thereby playing into the hands of the very industry it was meant to control.

Solutions that only partially solve the problem

Tax stamps and secure marks are an inordinately important part of the ecosystem of solutions that help ensure better production control, traceability and overall compliance in respect of excisable products across the supply chain. But secure track and trace is only one element in an agency’s illicit trade strategy. In order to be fully effective, and provide a comprehensive service offering, track and trace needs to be augmented by strong business intelligence, data analytics, enforcement capabilities and oftentimes additional cargo tracking and container security initiatives.

There is nothing wrong with being driven by a profit motive. There is nothing wrong with touting cost-effective solutions that maximise a company’s return on investment. But until the tax stamp/secure printing industry begins to develop holistic solutions that actually speak to illicit trade in very real terms it will continue to face the challenges it now does, and will continue to limit its potential success. Never forget why we have tax stamps, secure marks and traceability programmes: to ensure that taxes are paid on excisable products, rooting out illicit traders who benefit from not paying taxes and duties. The challenge in 2019? Do more than just sell stamps. Instead, empower agencies to make informed decisions, and sell holistic solutions that have a quantifiable impact on illicit trade and transform the way in which agencies administer their excise portfolios. Our next article explores just how this can be done by: • Helping customer agencies better understand the problems they are facing; • Tailoring solutions to fit the problem, taking agency capacity into consideration; • Helping agencies position marking regimes within the context of a broader illicit trade strategy; • Using tax stamp and fiscal marking programmes as a platform to more broadly transform customs and excise administration.

SPECIAL FEATURE| VOLUME 11 – NO 01|JANUARY 2019

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Medicines Traceability – a Global Overview of a Chaotic Situation By Ian Lancaster

On Saturday 9 February the future becomes the present for the pharmaceutical market in the EU! That is the date when the Falsified Medicines Directive’s requirements for the marking of most prescription medicines in the EU with a unique identification number (UI) have to be implemented – a change that many organisations affected still perceive as happening sometime in the future. That UI is intended to make it possible to track, trace, and identify every prescription unit of medicine in the EU (plus the EEA and Switzerland). So it’s an appropriate moment to give an overview of the requirements for medicines’ traceability around the world. Starting with the FMD… Directive 2011/62/ EU, the Falsified Medicines Directive (FMD for short), was adopted by the EU on 8 June 2011 after several years of consultation. The Directive requires most prescription medicines to have a ‘security feature’ in the form of a unique identifier (UI) and an anti-tamper device. Setting aside the question of whether a UI is a security feature rather than a traceability feature, almost five years after the FMD was formally adopted, the Commission Delegated Regulation (EU 2016/161 – DR) was published on 9 February 2016. This gave the specification of the UI and gave the industry three years to implement these requirements. So 9 February 2019 is the key date, almost eight years after the adoption of the FMD. The DR describes what must be in the UI and how it can be represented on the pharma package. A whole new infrastructure has been set up to manage this system, which is an indication of its impact on the medicines production and distribution system in the EU. That infrastructure includes the nonprofit European Medicines Verification Organisation (EMVO), based in Brussels, which is a grouping of stakeholders in the supply chain established to set up then manage the European Medicines Verification System (EMVS), which ‘should guarantee medicines’ authenticity by an end-to-end verification’ (with ‘should’ being a very significant conditional word). Under the EMVS, manufacturers must upload the UI for each package to the new European Hub, which is a gateway to databases (‘repositories’ in the DR’s terminology) held in each EU member country or group of countries. So every member state has also had to establish a new National Medicines Verification

4 TAX STAMP & TRACEABILITY NEWS | PHARMACEUTICALS

Organisation (NMVO), and supply chain participants have to sign up to the Hub – a process known as ‘on-boarding’. The DR specifies that the UI must be a number or alphanumeric sequence of up to 20 characters ‘that is unique to a given pack of a medicinal product’, and that includes encoded forms of the product name, strength, pack size and pack type, batch number, expiry date and – where required by the national health system – the reimbursement code for the medicine. The UI is to be encoded in a 2D barcode printed clearly on a low-reflectance surface. A human-readable version of the product code, the serial and reimbursement numbers (as required) is also to be printed on the pack. This code is to be scanned and verified through the repositories when the medicine is dispensed. The above is a brief summary of several pages of the Regulation, which also covers requirements for decommissioning the code, verification and much more.

Meanwhile, in the USA

The US has similarly responded to the danger of fake medicines, enacting the Drug Supply Chain Security Act (DSCSA) in November 2013, which also requires traceability of ‘certain prescription drugs’ (defined in detail in the Act) through an electronic, interoperable system, although the full implementation of the Act with this electronic system won’t be until 2023. More accurately, the Act requires all ‘transactions’ that involve a change of ownership of the drug to be recorded. The Food and Drug Administration (FDA) and the Drug Enforcement Agency are charged with implementing the DSCSA, but our concern is with the FDA, which has established three phases for its implementation: • Phase I, implemented in 2015, required FDA licensing of wholesalers and third party logistics providers and lot level management of medicines. (Note that in the US three companies account for 85% of drug distribution: AmerisourceBergen, Cardinal Health and McKesson, with many regional or local logistics providers); • Phase II required the serialisation of each unit of sale or dispensing, printed as a 2D barcode on the pack and shipping carton;

• Phase III will see the implementation of the complete traceability system to enable the mining, analysis and evaluation of data about the movement of medicines throughout the supply chain. Phase II was due for implementation in 2017, although the FDA announced that it would extend its regulation deadline for this to November 2018, and Phase III will be implemented by the end of 2023. Until then, the FDA’s guidance notes that paper or electronic means can be used for the transfer of transaction data between parties. The DSCSA defines a ‘product identifier’, which includes the product’s standardised numerical identifier, lot number, and expiration date (where a product is a prescription drug in a finished dosage form). This must be printed on each pack and ‘homogeneous case’ of product in a human-readable and machine-readable form, that latter form to be in a data carrier that conforms to standards from a ‘widely recognised international standards development organisation.’

Other countries are ahead

The US is the single most valuable market for pharmaceuticals, with the EU not far behind, but some other countries are more advanced in their implementation of traceability requirements for medicines. Globally, some 80% of medicines’ distribution apparatus now require some form of serialisation and traceability, with large countries such as China and Brazil having launched systems several years ago, while numerous smaller countries have also had systems in place for some time.

Turkey’s datamatrix code.

Turkey’s Ilaç Takip Sistemi (ITS – Pharmaceutical Track and Trace System) was established in 2012 and is claimed as the world’s first successful pharma track and trace system. This requires all drug products that are reimbursed by the Ministry of Health to be serialised and tracked, using the GS1 DataMatrix standard as its carrier method. This extends to aggregation of the codes in the shipping packages. As in the EU and the USA, this code must include a unique product serial

number, lot number and expiry date. The manufacturer or importer (depending on who generates and prints the code on the pack) posts this code to a central database operated by TechNarts, a commercial company, with each stage along the supply chain – 10 on average – also recorded to the database. ITS records around 2.5 billion drug units annually. In 2013, China, the world’s third largest pharmaceutical market by value, introduced pharma track and trace requirements for medicines on its Essential Drugs List, gradually extending coverage so that by the end of 2015 all pharma and traditional medicine products were required to have serialisation and traceability processes. Unlike most other jurisdictions, this is a government-issued 20-digit number (the Electronic Drug Monitoring Code – EDMC) and manufacturers and importers must register their products on the China Drug Identification, Authentication and Tracking System to initiate the number’s issuance to then print the code on to the pack. The Chinese FDA is considering extending the system to drug ingredients – the country is one of the largest suppliers of active ingredients for medicines. The CFDA has also considered adopting GS1 standards, but for the time being seems to prefer its own unique codes. This article could give a similar summary of the system in many other countries (but that would fill this newsletter), but one which has a significantly chequered history is Brazil. The country published its first National Drug Control System (SNCM) traceability requirements in 2013, to be fully implemented by the end of 2016, which required supply chain participants to report their transactions to the Marketing Authorisation Holder (MAH, usually the manufacturer or importer) which then had to report them in real-time to the Agencia Nacional de Vigilancia Sanitariar (ANVISA). However, one drug company rebelled at this requirement, launching a court case claiming that it placed too much burden on the MAH. In 2015 ANVISA announced that it was suspending the new requirements, and a new law was passed in 2016, requiring serialisation at the single item level, aggregation to shipping cases, pallets and containers, and tracking and government reporting, but with reporting at each stage of the supply chain by the appropriate stakeholder. This is one of the most comprehensive systems, but the suspension and new law mean its full implementation has been delayed to the end of 2021 from the original date of December 2013.

The role of GS1

GS1, headquartered in Brussels, is the non-profit membership organisation which develops standards for supply chain and inventory management – everyone will be

familiar with its product barcodes scanned at the supermarket checkout. GS1 has developed a set of standards for more sophisticated 2D or datamatrix codes, able to hold more information. Its healthcare division has developed protocols for the issuance, allocation and use of its datamatrix codes on medicines and several countries use, these as the core of their serialisation requirements. Similarly, some countries accept codes that comply with ISO standards, but as GS1 actually issues codes (rather than just specifying them), these are directly applicable to pharmaceuticals. One outcome of the spread of coding requirements for medicines has been the rise in the number of companies specialising in coding generation and printing systems designed to meet the many regulations. Nonetheless, even though GS1 provides some commonality, meeting all the regulations in different countries means that manufacturers have to ensure that the correct coding system is applied to their packages, wherever they are destined for.

Lessons to learn

Pharmaceuticals has been the first family of consumer products to introduce – over a period of seven years – an almost global requirement for traceability at the individual pack level, as governments and regulators became concerned at the increase in illicit medicines. Because this has been done without much co-ordination between jurisdictions, the result is that there are a number of different marking protocols and reporting systems. They all aim to enable the tracking of each unit pack through the supply chain, but use different systems with different reporting requirements to achieve this. There may be good reasons why different countries and trading blocs have particular requirements, making it impossible to have a globally common system no matter how desirable that might be. GS1’s codes do, though, offer an underlying approach that can be adapted to meet specific requirements. As the trailblazer (despite the initial reluctance of most manufacturers and supply chain participants), pharmaceuticals provides lessons for other sectors which are considering, or being mandated for, individual pack traceability. Not only have pharma manufacturers had to comply with different serialisation systems, but in some cases this has required new pack designs to accommodate the required space; this is just one example of the unforeseen impact of these requirements which other sectors can learn from. As Tax Stamp & Traceability News™ (TSTN) readers know, this particularly applies to tobacco products, where new national or

trading bloc regulations, such as the EU Tobacco Products Directive, are being implemented at the same time as more countries are signing up to the WHO’s Framework Convention on Tobacco Control and the associated Protocol to Eliminate Illicit Trade in Tobacco Products, which has global reach. The Protocol requires traceability to be implemented at the national level, which theoretically could result in every signature country using a different system. Compatibility between systems becomes a challenge when there is more than one system, while the exchange of data between systems and databases may be necessary. This also raises the question of who owns this data: is it proprietary to the manufacturer, because it is the supply chain history of each product, or is it publicly held, because the intent is for regulators to have control of the supply chain? If the latter, who has access to it? The costs of these systems are considerable: it’s been estimated that implementing the EU’s FMD will cost at least €5 billion, including €500,000 per packaging line and almost €100 million to set up the EMVS; and the annual cost will also be measured in hundreds of millions. This is an investment without an obvious direct commercial return, because the return is in saved lives and improved public health, at least in the pharma and tobacco sectors – but what of other sectors which are not thought to be detrimental to health? And might there be commercial benefit in the reduction of counterfeits on the market with a commensurate increase in sales of the genuine item?

Traceability does not authenticate

Which leads us to consider the relationship between traceability and authentication, an issue raised previously in TSTN. The ability to know where a product has been, should be and where it actually is in the supply chain undoubtedly helps manufacturers and regulators to keep control of that chain, while making it more difficult for criminals to infiltrate illicit product. But this doesn’t combat those criminals who are well-enough organised and resourced to have their own, alternative, supply chains and ‘verification’ websites or databases. Such criminals get product from their production plants to street markets, bazaars and naïve or crooked retailers, where there is no barcode reader or if there is it connects to a fake database to give a false ‘genuine’ response. Dependence on traceability to provide authentication – or ‘verification’ in the language of some of the pharmaceutical regulations – of a product leads to a false sense of security because of these comprehensive parallel and illicit supply chains.

PHARMACEUTICALS|VOLUME 11 – NO 01|JANUARY 2019

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What is This Thing Called Traceability? It’s one of those buzzwords, along with ‘blockchain’, ‘internet of things’ and ‘big data’, that we are hearing more and more about these days, but when it comes down to it, do we really know what traceability – or track and trace – actually means, and how it can help us counter acts of fraud and illicit trade in different markets? With this inaugural issue of Tax Stamp & Traceability News™, we thought it opportune to kick things off with a quick refresher on the basics of track and trace, as it pertains to product supply chain monitoring. First of all, let’s look at what track and trace actually means in a more general, logistical sense, since tracking is often considered to have the same meaning as tracing – which is not in fact the case. The term ‘track’ refers to the concept of marking an individual item with a serialisation code (or unique identifier) so it can be monitored from the point of production up to the point of sale to the customer, including each step in between, thereby creating a complete time and location history for that item. The term ‘trace’ refers to the ability to identify the past or current location of an individual item. If the item is intercepted somewhere in the supply chain, tracing allows for the verification of its route back to its origin, as well as retrieval of its time and location history. These two concepts combine to enable what is also frequently referred to as traceability. GS1 defines traceability as ‘the ability to track forward the movement through specified stage(s) of the extended supply chain and trace backward the history, application or location of that which is under consideration.’ As an example, consider a traceability solution provided by a courier service for logistical purposes: • Each parcel is assigned a unique number that is applied on the label attached to the parcel; • As the parcel moves through the transport network to its destination, important events are recorded by the logistics system at each stage, such as when the parcel arrives at a postal sorting centre, or is dispatched on an aircraft; • The customer is able to track the location of the parcel at any stage and see how close it is to reaching its destination; • The courier service can trace the route and time taken to deliver the parcel and identify any anomalies.

With the advent of digital reproduction technology, accompanied by major breakthroughs in data processing capability and mobile communications, the same principle can now be applied to the track and trace of different products for supply chain control and anti-illicit trade purposes. Products can today be marked in-line with their own unique identifying codes that are recorded in a database. The codes can then be used to verify the product in remote locations and provide key data on source, destination and authenticity. This ability to monitor and record complex supply chain data in real time is something that could only have been dreamt of a few decades ago.

Added security ingredient

One significant difference, however, between commercial parcel-tracking systems and systems used for governmentregulated products such as cigarettes, is one of security. Parcel-tracking systems are at less risk of being manipulated by parties within the distribution chain than systems used to track cigarettes – as well as other products exposed to illicit trade. To increase the security of track and trace systems, additional features (both physical and digital) can be integrated into the system to ensure that illicit traders are not able to, for instance, generate their own, functioning, unique codes, nor copy existing codes, nor access confidential information contained in or linked to those codes.

Different types of illicit trade

Illicit trade comes in a number of different forms, and track and trace systems (and their accompanying security features) need to be designed in accordance with the forms they are applicable to.

Genuine Production

• Domestic production overruns and misdeclarations – this involves the implementation of production controls for monitoring genuine products distributed domestically, in order to identify deliberate production overruns (which go undeclared), or production which has been mis-declared in a lower tax category. In this case, track and trace systems need to include a form of logical serialisation with a production counting feature. Ultimately, the goal is one of reconciliation with tax returns submitted by manufacturers, distributors and retailers; • Genuine products diverted crossborder – this refers to illicit practices such as ‘roundtripping’ (where products are exported in order to avoid domestic taxes, and subsequently smuggled back into their original jurisdiction), or the trafficking of genuine domestic goods within the same country across local jurisdictions, in order to avoid paying state taxes. In these cases, track and trace systems are able to follow the products along the legal supply chain in order to identify at which point they are diverted into the illicit distribution chain, as well as to aid in the investigative process; • Illegal merchandise entering the legal supply chain (such as counterfeits, contraband goods, and goods produced by unlicensed manufacturers) – in this case, it would be the absence of a unique identifier, or the presence of a fake one, that would help inspectors with authentication tools to identify products as illicit. But it must be recognised that traceability systems have already been criminally cloned (to give a false genuine response), so track and trace codes need to be accompanied by a physical security feature such as a taggant if they are to fill an authentication role as well as a traceability role.

Legal Distribution

Authorised Retailer

End User

Counterfeit / Unauthorised Production

Genuine Product / Legal Distribution

Unauthorised Distribution

Genuine Product / Grey / Smuggled

Flow of different types of illicit trade

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These include:

Illegal Product

Unauthorised Reseller

As explained, track and trace systems are designed to monitor the movement of goods in the legal distribution chain. Track and trace, in itself, offers no benefits for products that originate and are distributed outside of the legal distribution chain. For example, a track and trace system cannot identify counterfeit goods that were illegally manufactured, sold on a website and mailed to consumers. The overall utility and robustness of a track and trace system increases with the number of created and stored events (ie. aggregation and shipping events). In general, the ability of track and trace to be useful depends on how much illicit trade flows through legitimate versus illegitimate distribution (see flow chart on page 6).

Three fundamental components

Track and trace systems consist of three fundamental components: a unique identifier, a data capture and storage system, and a data sharing and exchange system. • The unique identifier (UID) is generally composed of two elements: an alphanumeric code that can be read by the human eye (but that can be cumbersome to use in the field), and a corresponding machine-readable (usually 2D) barcode. Unlike 1D, linear barcodes, 2D barcodes can carry a large quantity of information in a small space. The most popular 2D codes used for product track and trace are open standard matrix codes – in particular QR and datamatrix codes. Datamatrix codes, for instance, have been specified by the EU Falsified Medicines Directive as the unique identifier for pharmaceutical products sold in the EU. And the QR (or ‘Quick Response’) code has, in many applications, become the most prominent barcode technology, especially with regard to mobile phone scanning apps.

• Data capture and storage – as a product moves through the supply chain, a track and trace ‘event’ is captured at each stage that includes, among other information, the location, date and time of the event. The event can consist of both physical movements and commercial transactions. The event is captured using several kinds of reading devices that include hand-held devices for reading the unique identifier, and fixed-mount scanners which read passing items (such as items on a production line conveyor belt, or RFID tags passing through a gate). A central repository stores and records these track and trace events as they occur in the supply chain, from the time the goods are marked (which is usually on the production line), up to the point they are no longer monitored (which could extend as far as the final retailer – or even the consumer – but which is more likely to end with the distributor/agent). For some industries, a single central data repository is used to store all the events related to a particular product. However, for others a more decentralised model may be required or optimal. A track and trace system for packaged goods will usually need to accommodate the marked item being bundled and placed in outer packages – a concept known as aggregation. Aggregation allows the identification of each item within an outer package to be recorded, and associated with a unique identifier applied to that package. The identifier on the outer package can then be used to record its movement (together with the movement of its contents) through the distribution chain. In the case of cigarettes, this parent-child relationship can record the hierarchy between packs and cartons, cartons and mastercases, and mastercases and pallets. This logical hierarchy of grouping items within an outer package means logistics events can be recorded at the highest level. It also avoids the need for inspectors or customs officials to break open pallets in order to know what numbers are contained within. In addition, aggregation relieves supply chain operators of the onerous task of scanning each individual pack for track and trace purposes. • Data sharing and exchange – recording track and trace events across an entire distribution chain means events have to be captured by different organisations using different systems.

To achieve its objective, a traceability solution therefore needs to include a way for all this event information to be accumulated to support tracing queries and supply chain oversight. Pioneered by the RFID industry, several standards have evolved on the marking methods used for traceability, as well as the capture, storage and sharing of events. Because of these standards, it is possible for an organisation that acknowledges receipt of goods to publish a track and trace event that can be stored in the host organisation’s central repository. Of particular interest in the domain of data reporting and sharing for traceability solutions is the Electronic Product Code Information Service (EPCIS), a technical standard maintained and promoted by the non-profit industry organisation GS1. EPCIS provides a data model and interface specification for product movement events of uniquely identified objects in general, and has now become a de facto industry standard for recording supply chain events and sharing information.

Where does the tax stamp come in?

Tax stamps provide a way for governments to monitor excise tax paid on certain goods, currently mainly tobacco and alcohol manufacturing. As such, existing tax stamp programmes are an important consideration for governments looking to implement track and trace systems – such as those required under the EU Tobacco Products Directive (TPD) and WHO FCTC Protocol. As far as the EU is concerned, the majority of tobacco products already carry a tobacco tax stamp, or other fiscal marking. And most of these stamps already incorporate the multilevel security features (as well as a unique code) required by the TPD. Furthermore, the combination or integration of a track and trace system with an existing tax stamp programme will create a synergy that leverages the same label applicators and related systems and infrastructure already used for fiscal marking. One example of a potential foundation for a track and trace system is the SCORPIOS system in Brazil, designed to monitor the cigarette supply chain in the country. SCORPIOS was implemented in 2008 for the Brazilian revenue authority (Receita Federal do Brasil) by SICPA, in conjunction with the Casa da Moeda do Brasil (CMB). The system is installed and in operation on all cigarette manufacturing lines in Brazil. Continued on page 8 >

TRACEABILITY | VOLUME 11 – NO 01|JANUARY 2019

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What is This Thing Called Traceability? (continued) The system consists of an encrypted, standard 2D datamatrix code, printed with security inks carrying specific covert properties. The codes for domestic products are printed in invisible inkjet ink and applied via a tax stamp. The SCORPIOS system flow looks like this: • The stamps are printed, coded, validated and distributed to the manufacturers by CMB; • The manufacturers apply the stamps to the individual cigarette packs activated on the production line, at which point the code is scanned, thereby linking it to the item on which it is affixed; • The code can be scanned and read by inspectors equipped with proprietary hand-held devices, at any point in the distribution chain. The information that can be accessed through the code includes production date and location, name of manufacturer, product description and tax collection status; • Each action – coding, validation, distribution, activation – is uploaded to the central data management server;

• Furthermore, the details of each subsequent field inspection, once the product is in the market, can be uploaded to the central server, including information on seizures. So far, most of the countries with automated excise recovery systems (including Brazil) use these systems for tax verification, manufacturer compliance monitoring, and authentication purposes, and are yet to fully benefit from the systems’ track and trace capabilities. This means that once the excise tax has been paid and the product has left the factory, it falls ‘off the radar’, until it is eventually picked up again through field inspections and police investigations (one exception to this, however, is Russia, which already has a full-blown track and trace system in place on alcohol products – see TSN December 2018).

distributor). That movement would be recorded in the central data management system so that the physical whereabouts of the product would be known at all times. The requirement for a ‘comprehensive’ system has now been mandated by the EU TPD and FCTC Protocol (although the FCTC only requires tracking to the point of tax paid, which may not always entail a comprehensive system). Under these two regulations, frameworks are being created around which governments and industries can work towards the global standardisation of product tracking and tracing, either with or without tax stamps.

A comprehensive track and trace system needs to include aggregation and tracking of movement – or ‘life events’ – along the distribution chain (eg. from the licensed manufacturer, to the wholesaler, to the

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VOLUME 11 – NO 02 / FEBRUARY 2019

World Bank Recommends Tax Stamps and Track and Trace for Confronting Illicit Tobacco Hence this rather long, but very important review, which uses empirical data and analyses from the experiences of different countries to identify what has worked, what hasn’t worked, and why, culminating in a set of recommended actions for reducing illicit tobacco trade. These actions include the use of secure excise tax stamps and effective track and trace solutions. Let’s take a look at each of these actions in more detail.

Strategic actions

The World Bank has released an extensive, 700-page tome, entitled Confronting Illicit Tobacco Trade: a Global Review of Country Experiences. It has been produced in response to demand from government officials and other stakeholders for a tool to connect the normative guidance of the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products, with specific actions to bring this Protocol to life. The review states that, while confronting illicit trade in tobacco products is critical to effective tobacco control, addressing this issue poses complex political, legal, and technological challenges. As such, illicit trade is one of the topics for which policymakers and programme implementers most frequently request information and technical collaboration from international organisations.

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The review identifies the following strategic steps that governments are recommended to take: • Diagnose the different forms of illicit trade: tobacco illicit trade takes a variety of forms, varying in type and severity by country. These include: smuggling across borders; declaring products for export (and thus not subject to domestic tax) and then selling them on the domestic market; selling undeclared production (eg. an undisclosed third production shift); producing counterfeits of legitimate brands; producing low-cost unbranded cigarettes destined for illicit markets (socalled ‘illicit whites’); using free zones to leak cigarettes to the domestic market; and selling tobacco products via the internet. Each form of tax evasion has somewhat different implications for tax administration and enforcement, advises the review. Continued on page 4 >

Three Months to Go… Where are we on TPD Implementation? By 20 May 2019 – ie. in less than three months’ time – 28 EU member states must be ready to go live with 28 national traceability and security feature systems, as required under the EU Tobacco Products Directive (TPD). This means that any cigarettes or rollyour-own tobacco manufactured or imported into the Union after 20 May must be marked with a unit level unique identifier for track and trace, as well as with five different security features. So what is the status with all this? How is the implementation progressing, what are some of the concerns, and are member states likely to be ready in time? Well, to answer the last question, some may be ready in time for the 20 May deadline but it is unlikely that they will all be. Ironically, one of the member states that is most likely to be ready will probably have ceased to be a member state by then – and that is the UK. On the other hand, we have learned that another member state, which is one of the biggest in terms of share of EU GDP, is nowhere near to launching its system – and that is France. Let’s look a bit more in detail at where the different states are in regard to implementation, including which contracts have already been publicly announced.

Continued on page 6 >

FDA Looks to Pilot Projects to Enhance Pharma Track and Trace By Sven Bergmann – Managing Partner, Venture Global Consulting The US Food and Drug Administration (FDA) is taking a critical step to further enhance its nascent electronic track and trace system for prescription drugs, which was established as part of the Drug Supply Chain Security Act (DSCSA) of 2013. The DSCSA authorised the FDA to build an electronic, interoperable track and trace system by 2023 to reduce drug diversion and the introduction of counterfeit products into the US drug supply chain. As part of the Act, the FDA was required to establish pilot projects with manufacturers, re-packagers, distributors, and dispensers to explore and evaluate methods to enhance the safety and security of the pharmaceutical distribution supply chain. The FDA has now opened a Federal Register to solicit proposals for such pilot programmes. The FDA’s goal is to enhance the agency’s ability to protect consumers from exposure to drugs that may be counterfeit, stolen, contaminated, or otherwise harmful. To achieve meaningful advances in their technology, the agency is taking a collaborative approach and has requested a proposal for pilot programmes from all members of the distribution chain, including

Inside this Issue 1 World Bank Recommends Tax Stamps and Track and Trace

1 Three Months to go… and

where are we on TPD Track and Trace Implementation?

2 FDA Looks to Pilot Projects to Enhance Pharma Track and Trace

3 PragmatIC Announces First

Products in ConnectIC Family of Flexible Circuits

3 The Latest from Ghana – Textiles and Fertiliser

3 Ashton Potter Releases

ProLinc Traceability Solution

7 Conference Feedback –

Emerging Print Technologies

2 TAX STAMP & TRACEABILITY NEWS | PHARMACEUTICALS

brand owners, packaging companies, wholesalers and technology companies. By using this collaborative approach, the FDA is leveraging the diversity of its supply chain, including large and small entities from all industry sectors.

New technology needed to meet continued illicit drug threat

This pilot programme is coming at a pivotal moment for the FDA. The agency continues to battle the opioid epidemic in the US and, as part of its strategy, the agency is focused on stopping the spread of illicit opioids and further securing the legitimate supply chain. Illicit and counterfeit drugs, including counterfeit opioids, continue to reach US consumers through international mail facilities (IMFs). While the agency continues to increase its enforcement and interdiction activities at IMFs, the task of intercepting illegal, unapproved, counterfeit and potentially dangerous products is truly monumental. According to FDA commissioner Scott Gottlieb, an astonishing 86% of packages with FDA regulated products screened at IMFs over the last couple of years contained illegal products, including counterfeit and potentially dangerous prescription drugs. Considering that the US Postal Service processed nearly half a billion international parcels in 2017 alone, the potential threat is significant. And mail volume continues to grow at roughly 50% annually. Another part of the threat is illegal online sales of opioids. Over the last year, the FDA has sent a series of warning letters to illegal networks operating at least 70 websites, illegally marketing potentially dangerous, unapproved and misbranded versions of opioid medications. Most importantly, however, the FDA is focused on increasing accountability throughout the supply chain to ensure that every entity within the chain is complying with the law. As a result of its focus to secure the drug supply chain, the FDA, on 12 February 2019, issued its first warning letter under the DSCSA to pharmaceuticals distribution company McKesson for violations of tampering with opioid medication shipments. In addition, the FDA noted other incidents involving medications for several serious illnesses, including HIV, seizures, bipolar disorder and high blood pressure. The FDA highlighted some serious violations by McKesson, including one instance when McKesson was notified by a pharmacy that several shipments for potent opioid pills

did not contain the correct medications, and the opioid pills were missing, having been replaced with other non-opioid medications. Such a lapse in the track and trace system by the largest US distributor is truly concerning, and highlights the need to further tighten the supply chain by making its track and trace system more robust.

Pilot programme details

The FDA is accepting applications for the pilot programme until 11 March 2019, from any and all entities within the pharma distribution supply chain. The agency is looking for new and emerging technologies to further enhance its nascent track and trace system. Amongst the key considerations for pilot projects will be the ability to work within the interoperable electronic track and trace system the FDA is working to establish by 2023. The goal of the pilot projects for the FDA is to: • Enhance package-level product tracing and verification; • Better identify, manage and prevent the distribution of illegitimate product; and • Identify efficient ways to electronically exchange interoperable data across the supply chain. The agency has stated that it is open to accepting multiple pilot projects that meet the established criteria. The agency will accept as many pilot-project proposals as it can manage. However, it is important to note that the FDA will not pay for any aspects of the accepted pilot programmes, but rather participants will be responsible for the funding and resources necessary to conduct the project. Pilot programme timelines will vary based on the technologies proposed, but companies will be required to start their programmes within four months of receiving an acceptance letter, expected to arrive by early to midApril. This pilot programme by the FDA could be truly ground-breaking, as the FDA is open to considering all viable technologies and methods to be included in pilot projects, including cutting-edge technologies such as blockchain. The agency has stated that it will look for technologies in various categories, including product identification, barcoding, interoperability and aggregation. Detailed information on the programme can be found at www.federalregister. gov/documents/2019/02/08/2019-01561/ pilot-project-program-under-the-drugsupply-chain-security-act-programannouncement

The Latest from Ghana – Textiles and Fertiliser

PragmatIC Announces First Products in ConnectIC Family of Flexible Circuits

On the one hand we are hearing from Ghana’s president that the country has ‘put in place a tax stamp regime for both locally manufactured and imported textiles to address the challenge of pirated designs and logos in the textile trade’. Yet, on the other hand, the ministry of finance’s head of tax policy is telling us that implementation of this regime has been suspended until such time as certain modalities can be addressed, including those pertaining to additional security features that are needed on the stamp.

PragmatIC, a provider of ultra-low-cost flexible electronics, has announced the first products in its ConnectIC® family: the PR1101 and PR1102 flexible integrated circuits (FlexICs), designed for use in closed high-frequency RFID systems. According to the company, the ConnectIC family will be pivotal in the acceleration of the smart packaging market and will bring cost-effective digital traceability and interactivity to everyday objects.

These somewhat conflicting stories emanate from different local news sources, but what is clear is that the government does intend, sooner or later, to extend its tax stamp policy beyond Ghana’s existing tobacco and drinks stamp programmes to the struggling textile industry, in accordance with its Excise Tax Stamp Act of 2013. In the meantime, President Akufo-Addo has announced a stimulus package to revamp the industry, in the form of: zero-rated VAT, the designation of Tema Port as a single point of entry for textile print imports, a textile taskforce to ensure effective compliance, and a ‘one-district-one-factory’ policy (which has already taken off with 79 factories on board). In another development in Ghana, www. ghanaweb.com has reported that the Ministry of Agriculture has introduced a traceability system on subsidised fertiliser, in order to eliminate fertiliser smuggling into the country – a move which has been commended by international development organisations. The new system requires every farmer wishing to benefit from the subsidy to be biometrically registered, and only registered farmers can purchase the fertiliser. Before any purchase is made, an agent at each retail outlet takes the farmer’s fingerprint and matches it against a special, scannable barcode which is applied by the retailer to the bags of fertiliser assigned to that farmer. The code identifies region, district, fertiliser type, source, distributor and details of the retailer. It will be able to track all fertiliser bags, from the supplier all the way to the end-user – which is the farmer. The Ministry is currently deploying about 2,600 agents to all fertiliser retail outlets in the country to register farmers biometrically.

Developed using PragmatIC’s platform of patented technologies, the FlexICs are ultra-thin (thinner than a human hair, in fact) and flexible. They are suitable for embedding into a wide range of substrates (including paper and plastic), and reduce the complexity of multiple inlays by using single-layer antennae. The FlexICs are extremely attractive for high-volume fast-moving consumer goods (FMCGs) and other mass-market applications, with electronic connectivity no longer limited to high-value, luxury items, claims the company. The PR1100 product series facilitates rapid detection of objects when one or more low-cost custom readers are integrated into the system. Designed for

proximity identification applications, these FlexICs are ideal for applications including hierarchical inventory management, item identification and tracking, supply chain assurance and brand authentication. They are targeted at market segments such as food and beverage, personal and home care, pharmaceutical and healthcare. They also support the introduction of digital interactivity into physical toys and games, advises PragmatIC. ‘The ConnectIC family is set to bring connectivity to items we buy every day,’ said Scott White, CEO of PragmatIC. ‘We have already started shipping to our partners and we anticipate rapid expansion based on clear opportunities for global customers with extensive brand portfolios who wish to add traceability and interactivity to their products.’ PragmatIC says it is looking forward to a very exciting 2019 as production continues to ramp up, supported by a further investment of over £13 million. The latest funding has come from existing shareholders Cambridge Innovation Capital, Arm and Avery Dennison, as well as new investors who share PragmatIC’s vision for digitally connecting everyday objects.

Ashton Potter Releases ProLinc Traceability Solution Ashton Potter, a leading provider of high-security printing and advanced technology for governments and manufacturers, has announced the newest release of its ProLinc™ software security solution for global serialisation, authentication, and compliance. The SaaS-based offering provides universal traceability at the component, product, and batch level, for the purposes of product authentication, manufacturing system insight, and regulatory and tax compliance throughout the product lifecycle. ProLinc works in partnership with Ashton Potter’s secure tamper-proof labeling solutions to offer manufacturers and

governments precise authentication and traceability at every stage of the supply chain – from raw material to production, distribution, retail, and end user. By enabling stakeholders to scan items at key points in the product lifecycle, ProLinc builds what the company calls an incorruptible genealogy for every product in circulation. This data can then be securely accessed via a blockchainenabled database by approved stakeholders across the supply chain, including the consumer. ProLinc is uniquely qualified to serve organisations in complex or highlyregulated industries and rapidly scales to accommodate operations of any size, claims Ashton Potter.

TECHNOLOGY NEWS| VOLUME 11 – NO 02|FEBRUARY 2019

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World Bank Recommends Tax Stamps and Track and Trace for Confronting Illicit Tobacco (continued) • Understand the causes and drivers: tobacco illicit trade stems from a wide range of causes, including: weaknesses in governance and the regulatory framework; corruption; insufficient capacity of enforcement and judiciary systems; the existence of informal distribution and organised crime networks; having a border with another country suffering from similar problems; and expected profitability of tobacco illicit trade. The country cases strongly confirm that the most important determinant in illicit tobacco trade is tax administration. The review states that countries as different in levels of economic and institutional development as the UK, Kenya, and Georgia have all successfully improved the effectiveness of their tobacco tax administration and, by doing so, have reduced tobacco illicit trade while increasing tobacco taxes and tobacco tax revenues. Addressing illicit trade and raising tobacco taxes should therefore be viewed as mutually reinforcing and complementary actions. • Strengthen country data, analysis, planning, and implementation processes: the UK, Australia, and Ireland case studies visibly demonstrate the importance of reliable data, analysis, planning, and implementation oversight, explains the review. This process should start with the mapping of: the supply and demand for tobacco products; what is known about illicit tobacco trade; the modus operandi of actors involved in illicit trade; the capacity, commitment, and accountability of government agencies and resultant effectiveness of tax/customs administration. Illicit trade activities, as well as industry activities, require intensive monitoring. In addition, having access to high-quality local market data, including smoking prevalence and intensity, is critical. However, not having data regarding the size of the illicit market is not an excuse for inaction, warns the review. The absence of such data has not stopped Kenya, Georgia, or the Philippines, for example, from moving ahead in controlling illicit trade in tobacco products. Country strategies to reduce illicit trade should establish policies, legislation, and regulations appropriate for specific country contexts. It is critical to note that having a strong strategy on paper is important but not sufficient, unless such plans can be operationalised. Additionally, strategies should integrate the strengthening of capacity, incentives, and accountability needed for effective implementation (including enforcement measures).

4 TAX STAMP & TRACEABILITY NEWS | REVIEW

• Avoid reliance on the tobacco industry: the role of the tobacco industry poses a challenge to countries seeking to address illicit trade, since it is often itself linked to illicit tobacco trade, either directly or indirectly. The UK and Ireland case studies emphasise the need to fulfil obligations under the FCTC to prevent the industry from influencing public policy. The case studies, including Colombia, Australia, Georgia, and Malaysia, also confirm prior findings that the tobacco industry regularly overstates levels and changes in tobacco illicit trade to oppose tobacco tax reforms. And the Georgia and Uruguay case studies show that when the government responds to industry pressure and reduces taxes due to fears regarding tobacco illicit trade, the result is a decline in revenues and an increase in consumption, while the true drivers of illicit trade in tobacco products remain unaddressed. • Build inclusive, political coalitions against illicit trade in tobacco products: strong and successfully implemented country strategies require enlisting support and finding champions at top levels of ministries and governments, as demonstrated in Georgia, the Philippines and the UK, observes the review. Another crucial element of gaining political support is to build alliances with key stakeholders in civil society, including NGOs, think tanks, and the media, as emphasised by Kenya, UK, Georgia, Colombia, and Bangladesh. Involving the public in addressing illicit trade both supports enforcement and reduces the demand for illegal products. Issues of political economy also affect enforcement – the Mexico and Kenya case studies highlight the importance of the electoral cycle and the overall national security context on the effectiveness of tax administration and enforcement. • Work across sectoral silos: Colombia, Chile and Kenya identified lack of integration across sectors at the national and subnational levels as the major obstacle in controlling illicit tobacco. These analyses, in conjunction with the Bangladesh, Australia and Mexico case studies, emphasise that success in adopting and implementing strong programmes to combat illicit trade and implement tobacco tax reform requires active and coordinated support from numerous ministries/government agencies. Coordination is particularly important in integrating tobacco illicit trade control into strategies for tobacco tax reform and overall tobacco control programmes.

• Address illicit trade as an integral part of tobacco tax reform and overall tobacco control: the country cases, including those of the Philippines, the UK and Ireland clearly demonstrate the complementary nature of addressing tobacco illicit trade and implementing tobacco tax reform. Confronting illicit trade should be an integral part of a country’s overall approach to tobacco control, advises the review. The key elements of tobacco tax reform have recently been summarised in the World Bank publication Tobacco Tax Reform: At the Crossroads of Health and Development. • Encourage and draw on regional and global cooperation/partnerships: as recommended in the Protocol, countries should support and draw on regional, sub-regional and global partnership arrangements to address illicit trade and implement tobacco tax reform. This can help, for example, in reducing substantial disparities in tobacco taxes in neighbouring countries by pulling countries up to a common higher tax level, as well as in coordinating cross-border/regional efforts to reduce tobacco illicit trade. At the global level, the most effective way a country can benefit from and contribute to promoting international collaboration is to join the FCTC Protocol. Ratifying the Protocol has advantages that go beyond knowledge sharing and coordination of enforcement efforts, including access to technical assistance in implementing the Protocol and establishing track and trace systems.

Specific actions

In addition to the broad, strategic directions described above, the World Bank review highlights specific actions that decision makers should use to rapidly achieve gains. These include: • Require licensing for the full tobacco supply chain: at present there is licensing at least for all manufacturers, importers, exporters, and distributors in almost all country cases in the review. What is needed is for each country to assess its capacity to require the licensing of the rest of the supply chain, particularly retail. As noted in the Canada case study, the best example of using licensing to control the supply chain is in the province of Quebec, where the entire supply chain is licensed, including tobacco growers, transporters, manufacturers, those who store raw tobacco and/or final products, importers, wholesalers, retailers, as well as those in possession of manufacturing equipment.

Tobacco importers are licensed in Malaysia, and the Philippines requires suppliers of raw materials for the production process, including those providing tobacco papers and filter components, to be licensed. • Require use of secure excise tax stamps and other product markings to facilitate enforcement and tax collection, as required by Article 8 of the Protocol: these markings should possess multiple layers of security (as implemented in Kenya, Georgia, and the Philippines, for example); they should not be removable and they should be destroyed when the pack is opened (also to prevent reuse). The absence of secure excise marking in Southern African Customs Union countries, Chile, and Mexico weakens the ability of the tax authorities to collect taxes, as noted in the case studies. • Establish effective track and trace systems to follow tobacco products through the supply chain from production or import to sale to consumers (Article 8 of the Protocol): secure excise stamps are crucial but not sufficient to prevent tax evasion if there is no downstream verification that cigarettes have tax stamps and that they are authentic. A track and trace system would help address the challenge posed by underdeclared domestic cigarette production or production declared for export but then sold on the domestic market. Georgia, Kenya and the Philippines, for example, already have systems in place for the tight monitoring of domestic production and imports, using unique identifiers combined with excise stamps. And Ecuador’s track and trace system for domestically produced cigarettes, alcoholic beverages, and beer, implemented by its Internal Revenue Service in 2017, is the first track and trace system to comply with the Protocol, advises the review. The review similarly identifies the absence of a track and trace system as the major obstacle to controlling illicit tobacco trade in several countries. For example, in Botswana, Lesotho, Namibia, South Africa, Eswatini and Zambia, the review advises that the most impactful investment governments can make is to adopt secure fiscal marks on tobacco products, as this would allow administrations to monitor production volumes, track excisable goods through the supply chain, authenticate genuine products, identify whether all duties and taxes have been paid, and trace goods that are found on the market back to specific manufacturers. Without these controls, administrations have no means of distinguishing illicit from licit.

In Mexico, meanwhile (where tax stamps are used on alcoholic beverages but not on cigarettes), one of the main weaknesses of this country’s strategy to combat illicit tobacco had been the absence of a system for monitoring and tracking products manufactured in the country. With the implementation of a new fiscal mark in late 2017, however, it is now possible for Mexico to obtain data on producers and importers, as well as production data. Yet, because of the lack of transparency regarding the generation of the mark (which consists of an alphanumeric code and 2D barcode based on the tobacco industry’s own Codentify technology), it is unclear if this process is independent and free of conflict of interest. As stipulated in the Mexican tax regulations, it is critical that the tax authority publishes a list of code service providers and periodically supply information about how the data are used. It is also important to consider that the security features of the code are relatively basic and should be reinforced with physical security elements. Other successful tracking and tracing systems, such as the one implemented in Brazil, combine visible and non-visible elements to improve efficacy. • Establish effective enforcement teams equipped with automated reporting devices, to reduce human discretion in tobacco tax administration: this action has played a major role in improving the level of enforcement in Kenya and Georgia. However, the Kenya case also underlines the importance of enforcement agents with the power to carry out inspections at any time and at any point in the supply chain, to seize illicit products on the spot, and to bring immediate charges against offenders. • Obtain detection equipment and use it effectively at customs posts: most countries already have access to detection equipment, although not necessarily in adequate quantity. Potential governance challenges, with respect to the use of this equipment, can be further reduced by separating the roles of generating and interpreting scans (as noted in the Kenya case study). • Develop a risk profile to target inspections: the Chile case highlights the use of a risk analysis tool for targeting suspicious cargo and generating customs alerts. • Set relatively low duty-free allowances for tobacco product purchases, both in terms of amounts (eg. only two packs, as in Australia) and frequency (eg. only once every 30 days as in Georgia). Chile shows how the lack of restrictions on frequency has led to substantial but legal small-scale tax avoidance.

• Regulate or ban trade in tobacco products in free trade and other special economic zones: the Chile case study illustrates how the relative freedom from regulation in these zones can make them gateways for domestic sale of untaxed tobacco products. In contrast, Colombia and Malaysia have both established a strict regulatory framework for free trade zones to prevent this issue. • Set and enforce significant financial penalties and penal provisions for illicit trade: seizures, financial penalties, and other punishment severe enough to be a deterrent (unlike some of those reported in the Kenya case study) are important. Criminal prosecutions are particularly important as deterrents, as indicated in both the UK and Colombia. • Provide for secure destruction of seized cigarettes, carried out by the regulatory authorities and not by the tobacco industry: in Mexico, customs officials destroy seized cigarettes, while in the Philippines the approval and presence of a Bureau of Internal Revenue representative is required. In contrast to this guidance, in South Africa an industryrepresentative body is responsible for the destruction of illicit goods. • Educate the public on the impact of tobacco illicit trade: getting the public involved supports enforcement and reduces the demand for illegal products. The Philippines and Kenya introduced apps for the public to verify the authenticity of cigarette packs, while the UK ran a public awareness campaign explaining how purchasing illegal cigarettes harms the country and local communities. Complementing and supporting the WHO FCTC Protocol, the case studies presented in the review demonstrate that countries can and do contain or reduce illicit trade while advancing other effective tobacco control strategies, including tax increases. Indeed, the opportunities for success are greater now than ever, for those countries prepared to take bold action, concludes the review. Over the next few months, Tax Stamp & Traceability News™ will take a more indepth look into some of the key case studies included in this important review. In the meantime, the full book is available at documents.worldbank.org/curated/ en/677451548260528135/pdf/133959REPL-PUBLIC-6-2-2019-19-59-24WBGTobaccoIllicitTradeFINALvweb.pdf.

REVIEW|VOLUME 11 – NO 02|FEBRUARY 2019

5

Three Months to go… (continued) UK appoints De La Rue

Starting with the UK, Her Majesty’s Revenue & Customs (HMRC) has appointed De La Rue as the issuer of the unique identifier (UID) required for track and trace. The company will be responsible for generating and issuing UIDs for approximately 1.7 billion cigarette and rollyour-own tobacco packs sold in the UK each year. In addition to the UID, HMRC (which does not apply tax stamps to tobacco products) has selected its five required security features for cigarette and roll-your-own packs, namely a guilloche pattern, colour changing ink, microprinting, anti-Stokes ink and a molecular taggant. While the guilloche pattern will be provided by HMRC as a feature that is independent from the tobacco industry, the TPD allows the other four features to be sourced – and even produced – by the industry, as long as they match the specifications issued by the HMRC (or other member state authorities). It has not been publicly announced yet who the providers of the five security features will actually be.

France calls on Imprimerie Nationale

Moving to France, which also doesn’t use tobacco tax stamps, this country was one of the first to publish its five selected security features (namely optically variable ink, UV dull paper, UV ink, microprinting and molecular taggant). However, since then, it has apparently not moved on much further. According to www.ekonomico.fr, France has yet to issue a tender to appoint a UID issuer or prepare specifications with regard to the UID and security features. The minister in charge of this project, Gérald Darmanin, Minister of Public Action and Accounts, has directed IN Groupe (formerly Imprimerie Nationale) – the national security printing works – to find a solution to this issue, although the printer will presumably not have enough time to implement a UID system with less than three months to go.

What are the other states doing?

And what of the 26 other member states? Well, we know that at least Bulgaria, Czech Republic, Germany, Italy, Lithuania, Poland, Portugal, Romania and Spain (who all use tax stamps) have appointed either their state printing works or national tax revenue authorities as UID issuers, and that some of these authorities have in turn subcontracted this job to private IT companies such as Atos. On the other hand, member states such as Belgium, Croatia, Luxembourg, Malta and the Netherlands have contracted directly with private companies, including INCERT, AKD, OpSec Security and Atos (again).

6 TAX STAMP & TRACEABILITY NEWS | REGULATIONS

In general, member states that currently have tobacco tax stamp programmes in place are using the stamps (upgraded as necessary) to comply with the security feature requirements of the TPD. The methods of appointment of UID issuers range from government decree to a public procurement process (see ec.europa.eu/ health/sites/health/files/tobacco/docs/ ev_20190117_sr_en.pdf for a full update of member state appointments as at mid-January 2019, following a European Commission meeting of the expert subgroup on traceability and security features). In addition to these national appointments, an overarching appointment by the European Commission is that of Dentsu Aegis Network, which was hired in December 2018 as the provider of the secondary data repository required for the traceability provisions of the TPD. The secondary repository has the job of grouping together the product and UID data stored in the primary repositories of individual manufacturers and importers (who are responsible for establishing their own contracts with independent third-party providers of these primary repositories). Dentsu’s appointment has earned it the title of ‘gendarme’ (or ‘policeman’) by the French press, given that it will be responsible for integrating all the individual primary repositories into a single, central repository – through the establishment of data exchange specifications and a common data dictionary. This will give the European Commission and member states full data access and oversight and enable them to conduct queries into certain data.

Independence and fragmentation concerns

There’s a concern though with the appointment of Dentsu to such a key role, as highlighted by various European press services. According to www.eureporter. co, for instance, the EU might be ‘falling into the manufacturers’ trap’, in that Dentsu is intrinsically linked to the tobacco industry through its 2017 acquisition of Blue Infinity, a digital transformation specialist whose own track and trace solution, AIT Central, is based on the Codentify system originally developed by Philip Morris. In addition, Blue Infinity says it has worked with three of tobacco’s ‘big four’ – Philip Morris, Imperial and JTI – on the integration of traceability solutions. To activists, it will doubtless seem that Codentify is sneaking in by the back door, warned eureporter, adding that if EU officials are serious about building a truly independent traceability system, and curbing Big Tobacco’s worst excesses, they must reverse the decision to appoint Dentsu and reconsider their approach to

the tobacco industry. There are other concerns, too with the way in which the provisions of the TPD are being transformed into concrete contracts between the various players in the secure tobacco traceability ecosystem. One concern, expressed by the International Tax Stamp Association (ITSA), has to do with the fragmented and limited roles available to independent suppliers. As an ITSA spokesperson put it: ‘UID issuing alone does not equal track and trace, it’s just one small part of a complete system’. Specifically, the act of issuing a UID (which essentially involves generating the UID and then distributing it) does not equal track and trace because: • The UID issuers lose all track of the issued codes once these codes have been transmitted to the economic operators; • No logistics events are communicated to UID issuers, not even the action of applying/printing the unique codes; • The issuers do not have access to any repositories, either primary or secondary – used UIDs are transmitted between these repositories without any intervention or oversight by the issuer. The ITSA spokesperson added that the mixed model adopted under the TPD seems easy and cheap to implement, but there are numerous issues with a system that is unnecessarily fragmented. These include: • There are effectively no national databases under this model. There are just primary repositories, which are private systems not accessible to member states, and there is a single EUwide secondary repository. Therefore, member states do not and cannot obtain a full, accurate and up-to-date national view of tobacco product production, movement and trade. It could be said, therefore that member states barely exist within the architecture of the overall system; • Roles and responsibilities are divided between too many different parties, including economic operators, independent providers, industryappointed independent providers, member states, and suppliers of fiscal marks. ITSA warns that such fragmentation will lead to the neglecting of aspects related to accountability, transparency, oversight, and the sovereignty of member states, ultimately resulting in an unstable system that opens the door to fraud, and that falls short of the levels of control required under the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products.

Conference Feedback – Emerging Print Technologies By Dr Alan Hodgson, Printing and Imaging Consultant The last few months have seen a number of conferences from outside our industry where topics of relevance have been presented. This year has also seen a number of releases of market information aiming to put these into context. The aim of this article is to identify and summarise the print content of interest and identity the opportunities that could come from this.

The relevant conferences

The IS&T Printing for Fabrication conference is an annual meeting that often features printing technologies of interest to our community. The 2018 meeting took place in Dresden, Germany and included a session specific to security printing, sponsored by the new Reconnaissance International conference Digital Document Security™. But even outside of this session there were technologies featured that could impact on the production of, and market for, tax stamps. The title ‘Printing for Fabrication’ denotes this as a conference that is likely to feature technologies relevant to our needs. Perhaps less intuitive is the relevance of a further IS&T conference Color and Imaging. However, the 2018 meeting that was held in Vancouver, Canada also featured some presentations of relevance to emerging print technologies and these are also summarised here.

Offset printing

Offset printing is a mature technology that you may not expect to find at technical conferences. However, we should continue to monitor progress in this area as it is a well proven technique used with other technologies for tax stamp production. New application areas are stimulating some advances in offset printing that could be deployed for novel tax stamp features. As an example, offset printing is being deployed in the field of printed electronics, using printing technologies to produce features with electrical functionalisation. Often containing metallic features, these innovations can also be used to produce metallic-looking print at high speed. Novel ink technologies and the use of reverse offset printing are all technologies that feature in this area. We should continue to monitor developments in printed metals for electronics and not just for their electrical properties. Some of these metallic features can have substantial mirror-like reflectivity,

making them applicable to the reflective security features which were shown at The Holography Conference™ in 2017. I presented an update on this technology as a joint paper with an equipment supplier as this capability is now production-ready through a number of printing techniques.

This is a particularly active area and serves to illustrate how the colour gamut available to production printers is expanding. This theme was taken up and expanded further at the Color and Imaging conference which presented a good summary of the state of the art. One key point to remember is that some of the highly capable inkjet printers are small, relatively low cost and thus available to the illicit supply chain too.

Packaging printing is one area to see recent developments in offset press technology and these were discussed at an event at Color and Imaging. Commercial offset printing has now extended beyond additional spot colours into the availability of 7-colour inksets, typically CMYK plus orange, green and blue/biolet. There are now mature software tools, a FOGRA Multicolor Forum on this topic and a Pantone® extended gamut swatch book, all of which are applicable to tax stamp production.

Functional inks for barcodes

Features such as 2D barcodes can have their function and security enhanced through the use of functional formulations such as thermochromic and photochromic inks or light-emitting fluorescent and phosphorescent compounds. Work continues in this area and each year new concepts and formulations are shown at Printing for Fabrication. This year there were two areas of particular interest. Thermochromic and photochromic inks change colour and/or visibility with changes in temperature or light levels. As such they can produce effects that can be produced and seen without the use of special tools. A presentation from VTT of Finland illustrated some inkjet-printable formulations that allow the printing of part or all of 2D barcodes that are rendered visible only under certain lighting and temperature conditions.

“There are now hybrid print engines that combine offset and inkjet to allow us to add variable data as a single pass with offset print” During the conference, a representative from Komori Corporation discussed recent innovations that could also be deployed for tax stamp production. For example, there are now hybrid print engines available that combine both offset and inkjet, a development that could enable us to add variable data in precise registration and at a single pass with offset print. But inkjet alone could produce some interesting solutions and challenges.

Packaging printing by inkjet

One other area we should remain aware of is the advances being made in inkjet packaging printing. As these systems are being designed for printing onto cardboard, they use aqueous inkjet inks that are also applicable to paper tax stamps. A good example of advances in this area was given in a presentation from Heidelberger Druckmaschinen, which illustrated a commercial 7-colour inkjet press that added green, violet and orange to the traditional CMYK inkset.

In terms of fluorescent inks, upconverting nanoparticle formulations are currently a growth technology. Most groups concentrate on near-IR to visible conversion, but some are looking into phosphors that produce near-IR to (shorter wavelength) near-IR effects. The South Dakota Centre for Security Printing and Anti-Counterfeiting Technology (SPACT) appears to have significant capabilities in this area and formulations such as these could provide additional features for tax stamps on higher value items.

Additive manufacturing (3D printing)

Additive manufacturing is an emerging technology that could have some impact on the use of tax stamps. The direction this technology is taking was outlined in a presentation from HP Inc on their new HP Jet FusionTM process. This is an open platform for the printing of a variety of plastic powders which could produce some interesting capabilities. Continued on page 8 >

CONFERENCES | VOLUME 11 – NO 02|FEBRUARY 2019

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Emerging Print Technologies (continued) In essence, Jet Fusion allows for full colour control of each individual volume element (voxel) that makes up the 3D print. As it is an open platform this is now extending outside of traditional printing colours into fluorescent dyes, quantum dot fluorescents and up-converting fluorescent nanoparticles. The technology also allows for the modification of surface feel and roughness.

Jet Fusion is a good illustration of the direction in which additive manufacturing technologies will take and the potential effects on product labelling. Coloured print, security features and barcodes could be embedded as a part of objects such as bottle caps, initially on smaller volume premium products. The additive manufacturing industry is building capability to replace applied labels on products, a long-term trend that we should be aware of. There is also a wider commercial effect apparent here. Technology pundits such as Lux Research view additive manufacturing as one of the major technologies of commercial significance for 2019. There is substantial investment going into this field from a wide range of industries and, as a

result, new capability on an industrial scale will be emerging in the near term that may produce both opportunities and threats to existing applied label markets.

“Authentication can now extend into printed 3D objects embedded with coloured print, security features and 2D barcodes” One interesting aspect of this is that print authentication now extends into printed 3D objects such as high-value parts being used in critical applications, eg. as automotive and aerospace. Here authenticity could be a significant safety issue. As a result, the ability to maintain copyright, detect counterfeits and trace failed parts and batches will become a necessary capability.

This is an area of interest as it has the potential to extend authentication to the object as well as the label or tax stamp. Embedding features such as 2D barcodes into the printed object would be one solution but, as the parts are made through a printing process, they already possess intrinsic 3D physical signatures that provide alternatives. HP Labs presented a number of papers on this topic at Printing for Fabrication and look to be aiming to establish some leadership in this area.

In conclusion

Technical conferences such as Printing for Fabrication and Color and Imaging serve as a showcase for the continued evolution of the printing technologies that underpin much of the tax stamp industry. Having an understanding of the future developments of printing and fabrication technologies will allow us to plan for the security features of the future. With offset, inkjet and additive manufacturing printing being further adopted by wider industries it will remain important to keep up to date on these developments.

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VOLUME 11 – NO 03 / MARCH 2019

De La Rue Wins New Contracts in Middle East and Europe

Spectra Systems’ 1st Order for Smartphone Taggant Signature Spectra Systems has received the first of two expected production orders for its smartphone-authenticated TruBrand™ solution, from Chinese tobacco manufacturer Zhejiang Tobacco Co. The solution will be used on Zhejiang’s upmarket Liquan Yunduan Series brand, of which 6-8 million packs per year are sold in China, report various news sites.

De La Rue has recently won a number of new contracts for tax stamps, track and trace and authentication solutions for tobacco products, moving the group closer to its objective of doubling its Product Authentication & Traceability business within the next three years. Firstly, in Europe, the company has secured multiple contracts to supply 3.5 billion authentication labels per year to the six out of 28 EU member states that don’t use tax stamps: UK, France, Austria, Sweden, Finland and Cyprus. The labels will allow these member states to comply with the security feature provisions of the EU Tobacco Products Directive (TPD), which require both visible and invisible features on item-level packs of cigarettes and roll-your-own products. The contracts follow on from another award for De La Rue in the EU region, when the company was appointed, in February, by Her Majesty’s Revenue & Customs as issuer of the unique identifier required by the TPD for track and trace purposes. The company will

www.taxstampnews.com

be responsible for generating and issuing identifiers for approximately 1.7 billion cigarette and roll-your-own packs sold in the UK each year. Moving to the Middle East, De La Rue has just signed a five-year contract with Saudi Arabia’s General Authority of Zakat and Tax (zakat is an obligatory annual payment made under Islamic law for charitable and religious purposes) to implement and operate a tax stamp and track and trace solution for all tobacco products and soft drinks sold in the Kingdom. Under the agreement, De La Rue will implement its DLR Certify™ software platform for tracking and tracing excisable products, starting with cigarettes. This solution will ensure that the country has a robust excise tax scheme in place and is tackling illicit trade directly. In parallel, advises the company, the system will ensure that Saudi Arabia complies with the World Health Organisation’s Framework Convention for Tobacco Control and its Protocol to Eliminate Illicit Trade in Tobacco Products (which Saudi Arabia is party to). Continued on page 2 >

‘We are optimistic that this first launch with one of the highest value cigarette brands in China will lead to the adoption of TruBrand across larger volume product lines, that could downstream result in over a billion units annually from this supplier alone,’ said Spectra Systems Chief Executive Nabil Lawandy. TruBrand consists of a covert taggant signature, which is embedded into printed and holographic labels such as tax stamps, and which can be detected and authenticated with a smartphone. The taggant coating is easily applied during the hologram or printed label manufacturing process, and is also compatible with thermal application or the sewing of labels onto products, claims the company. The TruBrand app allows labels and holograms with the taggant signature to be authenticated using iPhone and Android smartphones. The smartphone captures the signature and transmits it via the Internet to a secure server, which runs a number of authentication algorithms and reports back to the phone on whether the item is authentic or suspect. TruBrand QR code capture is also supported for cloud-based track and trace software for a complete end-to-end solution using Spectra Systems’ TruTrack™ cloud software.

What Exactly is a Blockchain-Based Excise Stamp Replacement System? When we at Tax Stamp & Traceability News™ come across articles asking us to ‘click here to learn more about a blockchain-based excise stamp replacement’ system, or telling us that ‘using QR codes as a replacement for excise stamps… would eliminate the possibility for fraud… as well as increase tax revenues,’ we feel we must respond. Such was the content of an article posted on www.dzone.com, which describes itself as one of the world’s largest online communities and leading publisher of knowledge resources for software developers. The article claims that it is easy to detect a cloned QR code on a non-compliant product because the scanning of such a code would reveal its genuine counterpart to be already in use elsewhere. But the problem with this theory is that it is not that easy to actually come across fraudulent codes in the market. And if you

Inside this Issue 1 De La Rue Wins New

Contracts in Middle East and Europe

do happen to discover two products carrying identical codes, it is also not easy to distinguish the genuine code from the clone? This issue was raised in a 2018 study by Hana Ross of the University of Cape Town, and Michael Eads and Michael Yates of Sovereign Border Solutions. The study states that the problem with standalone digital codes which are devoid of any material-based security is that if a code is stolen from a server or cloned from products already in the distribution chain, and then applied to an illicit product, the code would pass a basic verification test because it would be authenticated as legitimate – even though the product it is applied to may not be. On the other hand, if the code is integrated with material-based, multilayered highsecurity solutions, such as those found on a tax stamp, the problem of authentication goes away, given that these solutions allow different stakeholders to readily identify non-compliant codes (and, by association, the products they are attached to) said the study (see TSN April/May 2018). And while many people will agree that blockchain technology can do amazing things (such as provide an immutable, decentralised, digital audit trail of transactions throughout the supply chain), what it currently can’t do is bridge the gap

between the digital record pertaining to a physical object, and the object itself (see TSN July 2018). In other words, blockchain cannot help us ensure that the digital record, however immutable and verifiable it may be, is linked to the right object. In order to create that link, a unique identifier (such as a QR code) needs to be attached to that object – and, as stated above, that unique identifier needs to carry physical security features that allow it to be authenticated as genuine. So the bottom line is that all this modern, revolutionary digital technology that is starting to be used for track and trace solutions still needs (at least for now) to be partnered with flesh-and-blood human beings who can accurately and honestly match physical objects to their digital records, as well as with physical security features that allow these human beings to distinguish genuine unique identifiers from clones. So let’s not be too hasty to discard the physical side of things in favour of the shiny new digital solutions just yet. The Seeing is Not Believing article on page 5 explains the importance of human senses in authentication, while the deaths from ‘hooch’ in Uttar Pradesh, India – reported on page 4 – show the potential tragic consequences of tax stamps without authentication features.

1 Spectra Systems Receives

First Order for SmartphoneAuthenticated Taggant Signature

2 What Exactly is a BlockchainBased Excise Stamp Replacement System?

3 News in Brief 4 The State of Illicit Cigarettes in Sri Lanka

4 India’s Recent Hooch Tragedy Confirms TSTN’s Concerns

5 Seeing is Not Believing 6 Conference Feedback – Emerging Smartphone Technologies

7 News from East Africa: Kenya Wins Praise, Tanzania Rolls Out New Programme… and Uganda is Next

2 TAX STAMP & TRACEABILITY NEWS | EDITORIAL

De La Rue Wins New Contracts (continued) The system will be delivered in May 2019, with marked cigarette products arriving in the Kingdom from August 2019 onwards; other tobacco products and soft drinks will follow suit by early 2020. This is the second tax stamp contract awarded to De La Rue in this region, with the first one having been awarded by the UAE in 2018 and going live in January 2019. The UAE was the first Gulf Cooperation Council (GCC) state to introduce excise tax on soft drinks and cigarettes in 2017, in a bid to curb consumption and introduce new sources of state income in the wake of rapidly declining oil prices. Other GCC nations that have implemented excise taxes for the first time are Saudi Arabia, Bahrain

and Qatar – and Oman will soon follow suit. Commenting on the Saudi Arabian award, Martin Sutherland, Chief Executive Officer of De La Rue, said: ‘we are honoured and delighted to have been chosen by GAZT to provide this track and trace service and to partner with them on this important initiative. In the past few years, we have been investing heavily in our authentication and traceability capability and product offerings. This award is both an endorsement of our capability and an excellent reference for De La Rue.’ The heavy investments to which Mr Sutherland alludes include the installation of a new, £10 million production line in Malta in 2018 to increase capacity and flexibility for tax stamps and secure labels.

News in Brief Nepal Signs MoU with France to Set Up State Printing Works In Tax Stamp News™ December 2018, we reported that Nepal was planning to establish its own state security printing works in order to address the issue of outflowing funds for security printing – including the funds used to produce the country’s tobacco and alcohol tax stamps, which are currently being printed by Perum Peruri of Indonesia. We have now learnt, from www. nepalforeignaffairs.com and United News of India, that the French state printing works, IN Groupe, will be helping Nepal to establish this facility, under an MoU signed with the French government in March. The MoU will be followed by a final agreement due to be signed in June. The financial modality and technical details of the agreement have yet to be negotiated but according to Bikal Poudel, Head of the Security Printing division within Nepal’s Ministry of Information and Communications, the cost to set up the new facility is estimated at $300 million.

Indian Government to Work on Seed Traceability Mechanism With spurious and low-quality seeds swarming the markets and causing extensive damage to farmers’ incomes, the Indian government has decided to bring in a mechanism to ensure traceability of seeds, reports the government’s agricultural trading website APEDA Agri Exchange. The government will discuss the issue with stakeholders, including seed producers, to come up with a technology-based solution that will help farmers to trace the origin of the seed that they have purchased. ‘When a farmer buys a seed, he should know its origin up to the foundation seed,’ said Sanjay Agarwal, Secretary of Agriculture for the federal Indian government, adding that the government will involve state governments and the industry to create a mechanism for traceability.

Nigeria Becomes 51st Party to Protocol as West Africa Gears up for Track and Trace Nations from the African continent (along with European nations) continue to dominate the list of ratifiers of the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products, now that Nigeria has become the 51st ratifier. The other African parties are: Benin, Burkina Faso, Chad, Comoros, Congo, Côte d’Ivoire, Eswatini, Gabon, Gambia, Guinea, Madagascar, Mali, Mauritius, Niger, Senegal and Togo, bringing the total to 17 – or one third of all parties. Another third is taken up by European nations and the remainder by states from Latin America, Middle East and Asia (large nations such as the USA, Canada, China and Australia are notably absent from the list of parties). And further news from Africa with regard to the Protocol involves the West African Economic and Monetary Union (WAEMU), which is composed of eight states, out of which seven are parties to the Protocol. Conscious of the fact that they only have until 2023 to implement secure track and trace systems at national or regional level, as well as ensure that these systems will be able to link into a global information-sharing focal point, WAEMU is looking to establish a cabinet of track and trace experts. Specifically, the objectives of the cabinet include: defining the legal and technical aspects of a system to monitor the movement of domestic and imported tobacco products; defining the appropriate means of financing such a scheme; and proposing technological choices adapted to the realities faced by WAEMU states. The deadline for responding to an Expression of Interest, released by the WAEMU Commission in Burkina Faso, was set at 28 March 2019, and only Frenchspeaking experts need apply.

ITSA to Host Tax Stamp and Traceability Seminar in Costa Rica Following the success of its tax stamp and traceability seminar at the High Security Printing™ (HSP) Asia conference in Hanoi, Vietnam last December, the International Tax Stamp Association (ITSA) will be hosting a second, ‘Latin American’ version of the seminar on the morning of Monday 3 June at the HSP in San Jose, Costa Rica. The seminar, which will be conducted in Spanish and English with simultaneous translation, will essentially address the latest regulatory, normative and best-practice developments around excise tax stamp and secure track and trace systems. The regulatory landscape for tobacco is heating up, with the WHO FCTC Protocol obliging parties to implement, by 2023, a secure track and trace system – and it will most likely be national revenue authorities that have to drive this system, possibly through the use of tax stamps. ITSA’s position is that tax stamp programmes provide a secure and independent way of implementing combined tax collection and track and trace systems, and ITSA representatives will discuss the best practices around such implementation, as well as describe how these systems can counter the illicit trade of tobacco products in order to deliver on the public health mandate that is at the foundation of the Protocol. Specifically, the seminar will cover the following topics: • Introduction to ITSA; • Evolution in excise tax stamps and secure traceability systems; • Back to basics: the principles of secure track and trace – what exactly does it mean? • Relevant international standards, including ISO 22382 for tax stamps – theory and practice; • The FCTC Protocol and how revenue authorities should be preparing themselves; • Revenue authority experience-sharing – case studies and key learnings.

Stating that there are about 130 seed testing and certification centres in the country, he said all these labs needed to be linked.

Nigerian officials at COP8 meeting on WHO FCTC in Geneva, Switzerland.

All regional revenue and customs authorities have received invitations to attend the seminar, as well as the ensuing HSP conference itself. However attendance remains at the discretion of ITSA and all attendance requests and enquiries should be addressed to Helen@reconnaissanceintl.com.

NEWS IN BRIEF| VOLUME 11 – NO 03|MARCH 2019

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The State of Illicit Cigarettes in Sri Lanka By Chander S Jeena, Secretary, Authentication Solution Providers Association According to an academic report released in January, the Sri Lankan exchequer lost revenues amounting to LKR 18 billion ($102 million) in 2017, as a result of the illicit cigarette trade. The report states that 583 million illegal cigarettes, amounting to 15.57% of the total tobacco market, made their way into the Sri Lankan market in 2017 compared to just 4 million in 2016 – which is a massive leap. The report, titled A Baseline Study on the Illicit Cigarette Market, and the Resulting Tax Implications for Sri Lanka, was conducted by Dr S N Morais and Prof S S Colombage of the Open University of Sri Lanka Department of Social Studies, and Dr C N Wickramasinghe of the Department of Commerce and Financial Management of the University of Kelaniya. During the launch event for the report the question was raised as to whether it had been backed by local cigarette manufacturing interests, to which one of the professors enigmatically replied that a ‘private consulting company’ had funded the research. According to Sri Lanka Customs (SLC) Director Mahendra Arthanayake, the number of illicit cigarettes detected by SLC increased by around 21% year-on-year in 2018. Prof Colombage pointed out that the lower than projected revenue from cigarette

taxes is an indicator of the existence of a massive illicit market. According to him, the realised budget revenue from cigarette taxes was 3.3% lower than the forecast, during most of the years between 2009 and 2017. ‘It is noteworthy that the actual value was lower than the forecast value in six out of nine years, indicating the existence of illicit trade,’ he said. He emphasised that tax increases alone wouldn’t bring down cigarette consumption in Sri Lanka.

government to adopt measures in line with the WHO FCTC Protocol, which Sri Lanka ratified in February 2016. The country does not currently have a tax stamp system in place.

Interestingly, the report findings are in sync with those of the Ceylon Tobacco Company’s (CTC) 2017 annual report, which estimates similar numbers. Sri Lanka’s tobacco industry consists of CTC – the only legal manufacturer of cigarettes – as well as the under-regulated beedi market (a beedi is a type of cheap cigarette made of unprocessed tobacco wrapped in leaves), and the illegal cigarette market. CTC’s market share has continued to decrease over the past decade or so as tax and other tobacco regulations have primarily targeted the legal industry, creating an unfair playing field. According to its authors, the research report is intended to provide independent observations on the prevalence and consequences of the illicit cigarette trade in the country. The report calls on the

Source: Ceylon Tobacco Company PLC Annual Report 2017.

India’s Recent Hooch Tragedy Confirms TSTN’s Concerns By Chander S Jeena, Secretary, Authentication Solution Providers Association The recent tragedy involving the death of over 100 people from consuming poisonous bootleg alcohol (hooch) in the Indian state of Uttar Pradesh (UP) and its neighbour Uttarakhand – has confirmed the concerns of Tax Stamp & Traceability News™ (TSTN) over the absence of physical anti-counterfeiting security features on the tax stamps used by UP. As part of a move to implement track and trace technology in accordance with its 2018-19 excise policy, UP’s Department of Excise replaced secured holographic liquor tax stamps with plain barcoded stamps devoid of any physical security. It is ironic that a state which was one of the first in India to adopt full-faced holographic tax

4 TAX STAMP & TRACEABILITY NEWS | IN THE NEWS

stamps almost 17 years ago should also be one of the first to drop these stamps in favour of simple barcode labels. Indeed, TSTN already raised its concerns over these labels when the territory of Delhi adopted them a few years before UP, with negative consequences. One would have thought that UP would have learned from Delhi’s experience, but apparently not (see also TSTN July 2018).

wasting the major investments that are being made in track and trace.

The lesson that should have been learned here was this: physical authentication features are still needed, in order to secure track and trace systems. If we do not integrate both digital and non-digital (ie. physical and sensory) authentication methods into our approach, then we risk

Now is the time for governments to change their approach towards this issue. Tax stamps – just like banknotes – require the highest levels of security that aid different stakeholders in authenticating the product, as well as the stamp.

Tax stamps are often thought of as simple tax collection structures, belying their potential value as a platform around which broader excise modernisation strategies can be developed. The existence of cheaper, less sophisticated, less effective stamps and marks potentially dilute their value proposition.

Seeing is Not Believing

By Ian Lancaster, Associate Director, Reconnaissance International Suppose you’re in a shop buying some prescription-free medicine, or cosmetics, or any consumer product sold in a printed pack. To be on the safe side, knowing that these products are targets for counterfeiters, you scan the QR or datamatrix code printed on the pack with your smartphone, and you get a message back which greenlights your purchase – the item is genuine and it’s where it should be in the supply chain. Or the person serving you scans the product and gets the greenlight that it’s genuine. Or is it? How do you know where that response came from? You assume that when you scanned the code your smartphone connected to a legitimate data repository, either managed by the brand owner or by a national or regional collaborative authority – but is this assumption correct? You intrinsically trust your smartphone, your network and the code on the pack (or perhaps it was a code on a tax stamp), so you probably don’t doubt the greenlight response shown on your phone. But how do you know that the code directed your phone to the correct data repository? What if it was a fake code which connected you to a criminallymanaged response website? Or perhaps it didn’t even prompt your phone to connect to a network; perhaps the code simply instructed your phone to show the connection display without actually connecting to a network, and then to show the greenlight response. Your senses have no way of tracking what is happening between the code, your phone and the network. This operation is beyond the perception of human senses (at least until we evolve to sense and read radio waves!).

Importance of perception

Perception is a very important physiological function which allows us to interpret the information from one or more of our senses: sight, touch, hearing, smell and taste. So we cannot perceive what we can’t sense – an omission that leaves a hole that criminals are beginning to occupy. The use of datamatrix and QR codes to provide traceability of goods may be relatively recent, but criminals are already finding ways to circumvent them. As I’ve already hinted, despite the efforts of code and system providers to make these secure, there have been cases where codes have been copied or cloned, and even cases where a whole ‘code-connectrespond’ ecosystem has been created.

A copied or cloned code on a fake or diverted product links to the legitimate website, and the criminals work on the assumption that their distribution chain is more direct than the legitimate chain, so in a ‘first pass the post’ race to connect to the database, the code on their product is read and checked before that on the genuine product. In each case the consumer is falsely reassured that the product is genuine. The cases I’m referring to are confidential and don’t make the headlines, but recent revelations about hacking and identity theft reveal how vulnerable our digital and networked systems are. According to itgovernance.co.uk (one of many entities monitoring data breaches) in January this year – just one month – almost one billion people had their online records hacked or stolen in 63 separate cases. And that’s just those that have been publicised. The use of networked digital devices is opening the door to criminality, so, as traceability of goods becomes more common, often mandated by governments or regulators (eg. the EU Falsified Medicines Directive, the WHO FCTC Protocol), it behoves us to be vigilant. We need to recognise the pincer squeeze of our trust in our devices and the rapid growth in use of those devices.

Develop a healthy scepticism

In her book, How to Be Human in the Age of the Machine (ISBN 978-0-857-525246 published 2018), Hannah Fry writes: ‘our reluctance to question the power of an algorithm has opened the door to people who wish to exploit us.’ This is one sentence that succinctly states the concerns I have expressed in this article; after all, what is the system that allows us to scan a code in order to learn the authenticity of a product but a series of algorithms? What can we do about this? To borrow and adapt a phrase from theatre, we need to suspend our belief. We need to approach the use of codes, smartphones and online systems with a healthy scepticism. Such scepticism points to the need to use other ways to authenticate products.

this need to engage our brain remains a fundamental truth, paraphrased by Simon Grondin only three years ago in Psychology of Perception (published Springer 2016, ISBN 978-3-319-31791-5); he devotes a whole section to The role of attention in perception.

Engage our senses

We can see, then, that there is a danger in taking our smartphones for granted, and that in order to check that something is authentic we need to pay attention and engage our brains. To do that we need to examine parts of the product or the packaging with one or more of our senses, which means they need to be accessible to our senses. This is why physical security features are needed to complement the traceability codes. Those physical features may be integrated into the product or its packaging (such as the pattern of stitching on Levi’s jeans or particular components of the package design) or added to the product or packaging as a specific authentication feature. These features should, of course, carry both overt and covert levels, because experience shows that a trained and equipped examiner, familiar with the product and its authentication features, can spot a suspect from the overt features and then confirm this (or otherwise) using the covert features. This is more reliable in differentiating genuine and fake product than reading a code with a smartphone, but this is a specialist examiner function, not a consumer function. Product (and document) protection specialists should be taking these cautions on board as traceability becomes de rigeur for many consumer products. It is often said that the human is the weakest link in the authentication process, yet between Vernon, Grondin and Fry we can see the value of human perception and the concerns raised by implicitly trusting our digital systems.

40 years before Hannah Fry was writing, Magdelen D Vernon wrote in The Psychology of Perception (published Pelican 1973) that ‘seeing is not the same as perceiving; there’s a need to engage the mind to see then perceive.’ Neuroscientists, psychologists and physiologists have done much work since then on how our brains function, using modern equipment such as CT scanners, but

VIEWPOINT|VOLUME 11 – NO 03|MARCH 2019

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Emerging Smartphone Technologies Dr Alan Hodgson, Printing and Imaging Consultant The last few months have seen a number of conferences from outside our industry where topics of relevance to us have been presented. A previous article summarised some of the print technologies relevant to tax stamps and building on this we will look at some emerging smartphone innovations. The aim of this article is to identify and summarise the relevant smartphone content and the opportunities that could come from this.

The relevant conferences

The IS&T Color and Imaging conference is an annual meeting that often features technologies pertinent to those who have an interest in the use of smartphone cameras for feature authentication. The 2018 meeting took place in Vancouver, Canada and in addition to the content on smartphone imaging it featured some thoughts on areas where this technology may go in the future. This is of particular relevance to those planning future programmes and especially those interested in hologram verification. Printing for Fabrication is a conference that was summarised in the previous article that focussed on printing. However, the 2018 meeting that was held in Dresden, Germany also featured some presentations of relevance to emerging smartphone technologies and these are also summarised here. As this meeting is developing a community that is looking at the traceability of 3D printed objects this is a conference we may visit again in the future. Each year Printing for Fabrication features a session devoted specifically to Security Printing. In the recent past this has been sponsored by Reconnaissance International and this year it was supported by the new Digital Document Security™ conference. It was a good fit for this year’s session as a number of the papers explored the interface between digital and physical documents with the use of smartphones within the authentication and traceability workflow.

Smartphone authentication of print

It was my task at Printing for Fabrication to present a joint paper with HP Labs on the use of smartphone imaging for document examination. The work consisted of an investigation into the use of periodic print features (overt and covert) to register both the distance and orientation of the smartphone with respect to the document, all at full video frame rates. This has a number of benefits to bring to feature authentication using mobile imaging.

6 TAX STAMP & TRACEABILITY NEWS | CONFERENCES

First, it has the potential to aid and guide a smartphone app in the recognition of specific security features, removing the reliance on the user to acquire and maintain the placement and orientation of the smartphone camera. Second, it provides a tool to facilitate the locking of features such as holograms into the surrounding print, providing an additional level of tamper-deterrence. This presentation served to illustrate the opportunities for a combined approach between print and electronic imaging communities to bring forward a new generation of features. However, it also showed that the different rates of secure document and smartphone product development cycles bring tensions that have yet to be resolved. These are both topics that will feature at the Digital Document Security conference in May 2019. Conferences like Printing for Fabrication serve to demonstrate that interest in smartphone authentication extends much further than secure documents. As this conference attracted the smart packaging community, there was also attention given to smartphone interaction with pharmaceutical packaging. We should watch these developments with interest as this work could influence the future of items such as tax stamps and product labelling – there could be pressures to extend these into the packaging itself in some markets. HP Labs also presented further work on the use of smartphones with their progressive barcode concept, reviewed last in Tax Stamp News™ December 2016. Progressive barcodes are an extension of datamatrix codes where coloured elements are progressively added through the manufacturing or supply chain, facilitating traceability with the aim of better identifying the location of illicit intervention. One interesting innovation in this work was the use of a smartphone app to facilitate a wireless link to a PC, extending capability in areas without cellular phone coverage.

Smartphone imaging technology

The IS&T Color and Imaging conference had a large smartphone imaging content. In particular, a short course on camera colour characterisation revealed some of the issues with the camera systems incorporated into mobile devices. I attended this year and picked up some key points of relevance for those considering smartphones for print feature authentication. One issue is that these camera systems are optimised to produce pleasing and not accurate images. The internal processing makes changes to both the colour accuracy and the geometry of the final image. This needs to be kept in mind when using such devices for print feature authentication. There is also the issue of camera calibration, now applied to most cameras during production to compensate for variations in camera characteristics caused by production tolerances. These are getting more significant in mobile imaging driven by marketing drivers of lower cost and smaller, thinner camera modules. This could become a growing issue in our use of these images for authentication, as the images become more synthetic and there is the potential for more camera-to-camera variation. Two of the colleague connection events focussed on smartphone applications. One considered the need for some form of international standard framework to define the minimum feature set for mobile ID. Again, I was invited to lead this session and the feedback gained will be presented at Digital Document Security in May 2019.

Interest in our community

In late 2018, I was privileged to conduct an interesting experiment – teaching smartphone imaging for secure applications across multiple communities. Through Reconnaissance International we had already conducted courses at Optical Document Security™ and the Tax Stamp Forum™ in Nairobi. This provided good background to take our requirements out into external communities. The course then ran at Printing for Fabrication and gained the attention of those working in areas such as pharmaceutical packaging and academics. The questions brought an interesting perspective and served to focus subsequent presentations. However, probably the most relevant input came from the Color and Imaging community. I was invited to teach a course on the implications of applying smartphones to secure document applications, to the

colour science community and take their feedback on secure applications. We noted the transition between physical document like passports and digital documents on mobile devices like smartphones. This was a particularly interesting topic to debate with an audience in Silicon Valley, California. We explored where we are, where we are going and how we can get there. We examined the drivers and the opportunities that this brings to the various communities represented, not least of which were the major smartphone brands. And we considered options on some form of international standard framework to define the minimum feature set for mobile ID. The input from these various meetings will be brought together and summarised as a part of the content of the short course Digital and Physical: Does One Plus One Equal Three? at the Digital Document Security conference.

Exploring this further

Engagement with these external communities could provide us with additional perspectives, ideas and solutions and in 2020 there will be some interesting opportunities to take this further. For those looking to travel to California for Optical Document Security in January 2020, there will be some interesting options in January. And for those looking to meetings in Europe, March 2020 may provide opportunities – more on this to follow in future months. Optical Document Security 2020 is timed to take place within a cluster of photonics events in the San Francisco area. Out of these my selection is the IS&T Electronic Imaging meeting where I once more plan to take the smartphone and secure document agenda for consideration by the mobile camera community. Consider this as an additional justification to take in two events in one trip.

In conclusion

Technical conferences such as Color and Imaging and Printing for Fabrication are exploring the issues around the physical and digital interface of printed features, particularly around the use of the smartphone platform for verification. Reconnaissance will be taking this one step further with their new Digital Document Security conference. The first of these meetings will be held in Berlin, Germany, in May 2019 and the preliminary programme is now available. We look forward to exploring these issues further – registration is now open. www.digitaldocumentsecurity.com

News from East Africa: Kenya Wins Praise, Tanzania Rolls Out New Programme… and Uganda is Next The European Union is not the only region where member states are implementing similar tobacco traceability solutions. The three biggest members of the East African Community (Kenya, Tanzania and Uganda) are also at various stages of introducing, or expanding on, similar tax stamp and traceability programmes for tobacco, alcohol and other excise goods. Let’s take Kenya first. This country can be considered as a pioneer for such programmes on the African continent, given that its Excisable Goods Management System (EGMS) has been successfully operating for six years now. Indeed, Kenya has recently been recognised by the World Bank for its antiillicit tobacco trade measures, in a review released in January called Confronting Illicit Tobacco Trade: A Global Review of Country Experiences. The review includes 20 case studies encompassing more than 30 countries worldwide (see TSTN February 2019) and identifies Kenya as one of those countries to have made the greatest strides in controlling illicit tobacco, by implementing measures such as product traceability systems. The review states that the EGMS, which was introduced in 2013-14, has proven both more effective and less expensive than Kenya’s previous, disjointed systems, which relied on tax stamps without any track and trace capabilities. In fact, the original total cost of printing and delivering the EGMS stamp was more than 40% cheaper than that of the previous stamp. Furthermore, the system was completely self-funding, with the tobacco industry being responsible for any upfront costs. The review lauds Kenya for strengthening both its excise management system and its enforcement measures, and adds that its approach for building consensus through key stakeholder participation has proven to be much more beneficial than piecemeal measures with only short-term effect.

‘The latest intervention, based on the modern data-driven technology in track and trace systems, combined with electronic cargo monitoring of exports, seems to be the most effective, as it is more resistant to tampering and reduces reliance on human capacity,’ says the review. Following its introduction in 2013, the EGMS rapidly led to an increase in the size of the legitimate cigarette market, with the largest increase coming from imported cigarettes, which rose by an incredible 4,728% in 2014. At the same time, the newly installed Kenya Revenue Authority (KRA) enforcement units seized more than 300,000 illegal products from about 900 outlets and prosecuted more than 150 offenders between February-June 2014 alone. Overall, the KRA reported seizures of 20 million cigarettes in 2014. Furthermore, the Kenya National Bureau of Statistics reported a 76% increase in legitimate cigarette and cigar sales from 2013-2016, which is clearly a result of improved tax administration, given the declining trend in smoking prevalence, the limited population growth, and the relatively modest per capita growth in GDP (3.2% per year during this period), states the review. In fiscal year 2016-17, excise tax revenue on beer and tobacco grew 13.3%, while revenue on spirits grew by 22.7%. The KRA attributes this growth to enhanced compliance arising from the EGMS. Given this favourable performance, the EGMS was expanded in November 2017, from tobacco, wine, beer, and spirits to bottled water, juices, soda in PET containers, energy drinks, other nonalcoholic beverages, food supplements, and cosmetics. Continued on page 8 >

IN THE NEWS | VOLUME 11 – NO 03|MARCH 2019

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News from East Africa: Kenya Wins Praise, Tanzania Rolls Out New Programme… and Uganda is Next (continued) Spillover into neighbouring countries

This ‘spillover’ of EGMS into other products could also be said to apply to a similar spillover of the system into neighbouring countries, namely the members of the East African Community (which, in addition to Kenya, comprise Tanzania, Uganda, South Sudan, Rwanda and Burundi). The review advises that Kenya and its neighbours would clearly benefit from a region-wide solution, and Tanzania and Uganda, in particular, appear to agree with this advice. At the beginning of the year, Tanzania rolled out a new tax stamp, traceability and production counting programme for cigarettes, spirits, wine and beer, which, while clearly still a national programme, is based on the same technology as that used in Kenya, and emanates from the same solution provider — SICPA. Tanzania had previously used a more traditional kind of tax stamp (ie. without

a unique identifier) on a wide range of products that also included music and film products (such as CDs and DVDs) and we understand that the new system will also eventually extend to these and other products.

Ratify the Protocol!

As for Uganda, the country’s revenue authority has also announced that it will be launching a similar system, in April 2019, on tobacco products, followed by beer in May, and soda, bottled water, spirits and wine in June. It will use paper-based stamps with a unique identifier on the tobacco, wine and spirits, but has opted for direct marking on the beer, water and soda.

‘Traceability systems such as the one adopted in Kenya are the key requirement of the Protocol, and Kenya’s experience demonstrates that even a lower-middleincome country has the capacity to implement such a system successfully,’ says the review. ‘This can encourage other countries to sign and ratify it. The presence of product traceability systems in more countries will only enhance the effectiveness of such systems.’

It remains to be seen what the other members of the East African Community will do with regard to their tax stamp requirements. Rwanda, for instance, has been using tax stamps for some time now but without any associated traceability and production monitoring system. Burundi doesn’t use stamps at all yet, and South Sudan, as an independent state, has only been in existence for eight years.

As a final remark, the World Bank advises Kenya to ratify the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products (the country signed the Protocol in 2013, as did Tanzania, but neither have ratified it yet).

Rousing words, indeed.

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VOLUME 11 – NO 04 / APRIL 2019

Concerns Raised Over EU Traceability System Missing Deadline

SICPA Awarded New Contract for Massachusetts SICPA has been awarded a new contract to provide its SICPATRACE® solution to protect cigarette excise tax collections in the Commonwealth of Massachusetts. The new contract builds on the successful partnership between the Commonwealth’s Department of Revenue (DOR) and SICPA, which has been providing encrypted tax stamps, a traceability system, MSA fund protection and enforcement management, and related services, to Massachusetts since 2009.

As at mid-April, it was reported (by EURACTIV) that some EU member states had not yet taken the necessary steps to implement a traceability system under the EU Tobacco Products Directive (TPD), even though the deadline for implementation is looming. The traceability system is composed of individual components which will be implemented by different actors, with the key components consisting of primary repositories, a secondary repository, and national ID issuers. While each manufacturer and importer is responsible for contracting directly with an independent data storage provider to set up a primary repository, it is up to each EU member state to appoint a national ID issuer to generate the unique identifiers for application onto each cigarette pack, and to register economic operators, facilities and machines in the system. As for the secondary repository, it is up to the European Commission itself to appoint the provider, which it did at the end of last year, when it selected Dentsu Aegis Network.

www.taxstampnews.com

The deadline for manufacturers and importers to send a draft contract with their proposed primary repository provider to the Commission for approval was already set at one year ago, in May 2018 – so it is to be hoped that all contracts are now in place. On the other hand, the deadline to appoint the ID issuers is 6 May, which is just a few weeks before the traceability system is due to launch – on 20 May. However, EURACTIV was informed that several member states have not yet appointed an ID issuer and therefore risk missing the 6 May deadline, which has led critics to suggest that the Commission’s timeframe has been too tight. A Commission spokesperson, Anca Paduraru, assured EURACTIV that ‘member states and the Commission are working very hard to launch the EU tobacco traceability system in time. Excellent progress has been achieved for most parts of the system, including the system’s router and the repositories system.’ Continued on page 2 >

The SICPATRACE solution gives regulators in Massachusetts the tools to accurately trace cigarette sales and collect close to $600 million in excise revenue and more than $240 million in associated MSA (Master Settlement Agreement) payments. As part of the new contract, SICPA will introduce enhanced field authentication tools that allow for greater data capture and verification capability, as well as the SICPA HORIZON® inspection platform – which allows inspectors to access information on licensees and record data in real time – and expanded data visibility that enables regulators to more easily draw actionable insight from collected data.

WHO Addresses Lack of Global Guidance on Healthcare Track and Trace The World Health Organisation has decided to work on a policy position to advise its member states on the governance of track and trace technologies for healthcare products.

position is needed to advise member states on the multiple systems and standards used, the handling of product data and the interoperability between national and regional systems.

No proper global guidance has up to now been provided to member states on how to address the numerous questions raised by the implementation of these technologies within the supply chain of healthcare products. WHO’s opinion is that a policy

In this respect, WHO welcomes the initiative of the International Coalition of Medicines Regulatory Authorities for a project on the interoperability of track and trace systems for medicines, which was launched at the end of 2018, and which WHO will contribute to as an observer.

The WHO plans to convene an ad hoc expert group to discuss these issues and assist in issuing a normative guidance on the establishment of traceability systems and the policies needed at national and regional level. WHO will invite national regulatory authorities and stakeholders to the discussions which will take place before the WHO policy position is issued. The target for the publication of the policy is the fourth quarter of 2019.

Concerns Raised Over EU Traceability System (continued) She added that several ID issuers are participating in ongoing technical tests with the repositories system, particularly with regard to the submission of information to the secondary repository. And the Commission has since announced that the repositories system should go live on 10 May 2019, ie. 10 days before the legal deadline.

Croatia at forefront and Germany in deadlock

It is assumed that one of the ID issuers that is participating in the technical tests is Agencija za komercijalnu djelatnost (AKD) of Croatia, given that AKD claims to be the first EU ID issuer to have put its solution into production before the 20 May deadline (ie.

Inside this Issue 1 Concerns Raised Over EU

Traceability System Missing Deadline

1 SICPA Awarded New

Massachusetts Tax Stamp and Traceability Contract

2 Legal and Illegal Tobacco

Trade Often Intertwined, Claims Research

3 WHO Addresses Lack

of Global Guidance on Healthcare Track and Trace

4 Authentix Plans for its SPS Acquisition

5 BIR Probes Recycled Tax Stamps in Philippines

6 How Georgia Reduced Illicit Tobacco from 50% to 3%... While Still Increasing Taxes

2 TAX STAMP & TRACEABILITY NEWS | IN THE NEWS

on 23 April, to be exact) and also the first issuer to have been successfully registered and certified in the secondary repository. Meanwhile, the picture looks somewhat different in Germany, where Renate Sommer, a German European Parliament member, advised that TPD implementation in the country had reached a deadlock. ‘In Germany, the national implementation of the TPD requires the approval of the Bundesrat (the country’s legislative body which represents the 16 federated states). There, the vote was scheduled for 15 March but was then postponed. The problem is a dispute over the responsibility for the implementation of the track and trace system between the federal government and the Bundestag (the German federal parliament) on the one hand and the länder (federated states) on the other,’ she told EURACTIV, adding that there is no agreement in sight. She explained that the traceability system for tobacco products can only work if it exists in all EU member states, otherwise tobacco products will not be able to move within the EU single market.

‘The TPD2 comes into force on 20 May. Then, according to the law, the traceability of the products must be guaranteed. However, as this will obviously not be the case – at least in Germany – there are great uncertainties in the distribution chain, especially among SMEs (small and medium enterprises),’ she said. ‘The question is whether and how these companies will be able to continue their regular operations from 20 May onwards,’ she concluded.

French senator calls for annulment The implementation of the TPD is also not going very smoothly in France, reported Contrefaçon Riposte. French Senator Xavier Iacovelli, believing that the government decree published in March on the traceability of tobacco products does not conform with the WHO FCTC Protocol, has gone before the EU Court of Justice

and the European Council, calling for its annulment. Mr Iacovelli stated that the decree covers only part of the implementation of a tobacco traceability system as defined by Article 8 of the Protocol. ‘Moreover, no competitive bids were organised by the French government, which instead selected, at its own discretion, IN Groupe (formerly Imprimerie Nationale) to issue the codes. Code issuance represents only a quarter of an entire traceability solution, and the rest is being managed by tobacco companies and their allies, as they continue to feed parallel trade,’ he said. Several anti-smoking associations have similarly denounced the non-conformity of various European texts with the Protocol, including the National Committee against Smoking (CNCT) and Smoke Free Partnership, reported Contrefaçon Riposte.

Will all be made clear at technical briefing?

At the moment, the status of each member state with regard to tobacco traceability implementation under the TPD remains unclear. The Commission has merely said (in a Q&A statement released on 23 April) that it ‘will continue to monitor this process very carefully. If necessary, it will take all measures available in order to mitigate as much as possible any consequences that may arise from the failure of a member state to deliver on this obligation in time.’ However, the situation should no doubt be made clearer on 6 May, when interested stakeholders gather in Brussels for a technical briefing by the Commission, during which the latest available information on the preparatory work and level of readiness of the key components of the traceability system (ie. the data repositories and national ID issuers) will be revealed. As mentioned above, this is also the date by when all member states should have appointed a national ID issuer, so it will be interesting to see whether this will be the case.

Legal and Illegal Tobacco Trade Often Intertwined… and Industry Still Complicit in Illicit Trade, Claims Research In an interview with Illicit Trade News Network, Benoît Gomis, Research Associate of the Global Tobacco Control Research Programme at Simon Fraser University, Canada, spoke of his recent studies on illicit trade in South America, and explained how both the legal and illegal tobacco trade are often intertwined, and how the tobacco industry is still complicit in illicit trade in this region – albeit that the nature of such complicity is changing. In his studies, Mr Gomis referred specifically to the illicit trade that originated in the 1960s – when British American Tobacco (BAT) and Philip Morris International (PMI) began using Paraguay as a transit hub to smuggle cigarettes into Argentina and Brazil – and which was later capitalised on by Tabacalera del Este (one of Paraguay’s largest tobacco companies). He observed that these companies have used illicit trade – in particular the smuggling of products through free trade zones and other areas of weak governance – to enter new markets and increase revenue. They have then channelled this revenue back into their legal activities, by reinvesting in R&D and production facilities to produce more cigarettes to a higher standard and thus compete for new markets overseas. The studies also suggest that the nature of the illicit tobacco trade is changing. ‘Although there are still signs of transnational tobacco company (TTC) complicity in illicit trade, other non-TTC actors are increasingly involved as well. Meanwhile, TTCs are attempting to recast themselves as responsible partners to governments by providing intelligence, training, equipment, financial resources and even influencing budget decisions in various countries across Latin America, while also commissioning and funding studies on illicit trade and framing the issue in the media. ‘Through these activities, TTCs aim to undermine competitors and fight against tobacco control measures that have been effective in reducing smoking rates (eg. higher taxes, plain packaging),’ warned Mr Gomis. When asked what measures countries should take at national level to confront illicit tobacco, Mr Gomis replied that the first measure should be to tackle industry interference with policy making. ‘TTCs are attempting to circumvent international guidelines to reclaim influence in tobacco

control by supporting governments to tackle the illicit tobacco trade. But as the WHO warns, there is a fundamental and irreconcilable conflict between the tobacco industry’s interests and public health policy interests,’ he said. In addition, he advised countries to collect and analyse data independently of the tobacco industry, in order to avoid reliance on potentially misleading seizure figures and other data. And when asked about measures that should be taken at international level, he replied that governments should fully implement the WHO Framework Convention on Tobacco Control and its Protocol to Eliminate Illicit Trade in Tobacco Products. ‘Our research played an important role in the Paraguayan government’s decision to sign the Protocol, a step in the right direction. The Protocol features a number of useful action points, including Article 10.1.b which requires parties to take necessary measures so that companies supply tobacco products or manufacturing equipment in amounts commensurate with the demand for such products within the intended market of retail sale or use.’

Paraguay provides example of non-compliance

Indeed, the Paraguayan company Tabacalera del Este (or Tabesa) provides a good example of a manufacturer whose production levels have been anything but commensurate. ‘Based on data on the company’s imports of cigarette components, we estimate that Tabesa imports enough to produce 25-36 billion cigarette sticks per year. Given domestic consumption and legal export figures, this means that between 19-30 billion cigarettes produced by Tabesa annually end up on the illicit market. An estimated 70% of that is smuggled to Brazil, and our research finds that Tabesa has been exploring other international markets,’ advised Mr Gomis. He continued, ‘Tabesa executives notably told Paraguayan journalists that the company legally exports to a number of countries, including Bulgaria, Curaçao, the Netherlands Antilles and the Netherlands. However, our analysis of UN Comtrade data shows significant discrepancies, suggesting illicit trade. ‘For instance, between 2001 and 2016, there were no cigarette exports reported by Paraguay to Bulgaria, nor any cigarette imports reported by Bulgaria from

Paraguay. In that same period, Paraguay reported exports of 1.4 billion cigarettes to Curaçao, 481.2 million cigarettes to the Netherlands Antilles, and 111.4 million cigarettes to the Netherlands, yet none of those countries reported any cigarette imports from Paraguay. In total, between 2001 and 2016, 5.7 billion cigarettes officially shipped by Paraguay to 10 markets where Tabesa exported to were unaccounted for.’ On the subject of using traceability measures to combat illicit trade, Mr Gomis said that Article 8 of the FCTC Protocol on Tracking and Tracing is perhaps the most central article to the Protocol, but warned that a global track and trace regime was currently at risk of being controlled by the tobacco industry. He advised governments to engage in further research on the subject and practise caution to ensure that the track and trace measures put in place across the world effectively mitigate the illicit tobacco trade, rather than promote the commercial interests of TTCs at the expense of public health and good governance. The Global Tobacco Control Research Programme at Simon Fraser University involves researchers from Canada, the UK, the US and Australia who are particularly interested in studying the tobacco industry within the context of globalisation, how it operates as a business and how it seeks to influence and undermine public policy. Current research areas include, among others, the illicit trade in tobacco. http://www.sfu.ca/globaltobaccocontrol. html.

STUDIES| VOLUME 11 – NO 04|APRIL 2019

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Authentix Plans for its SPS Acquisition In early April, Texas-based Authentix Inc announced that it had acquired Security Print Solutions Ltd, which has its plant in northeast England. Authentix was formed in 2003 from the merger of Isotag and Biocode, American and British companies respectively which specialised in molecular markers. Security Print Solutions (SPS) was founded in the 1980s by Jim Crowther (formerly serving with De La Rue) and Mike Crowther. The organisation has grown steadily as a mid-level security printer, with products that include visas, tax stamps and certificates, but not high-security items such as banknotes and passports. Its 2018 reported turnover was £10.7 million with pre-tax profit of £954,000. To learn more about the background and plans for this acquisition, Tax Stamp & Traceability News™ (TSTN) spoke to Kevin McKenna, Authentix’ CEO, and Tim Driscoll, Senior Vice President & General Manager, Currency & Tax Stamp. TSTN: Thank you for agreeing to this interview to follow up on your announcement that Authentix has acquired Security Print Solutions. Please give a very brief overview of Authentix for our readers – history, specialities, company size and locations. Kevin McKenna (KM): For over 20 years, Authentix has delivered solutions that ‘productise’ analytical chemistry. We produce and market a range of markers, or taggants, to be put in or on products, and these are then read with our portable devices and analysers to authenticate the products and/or determine whether they have been diluted or falsified. In the last few years, we’ve expanded our offerings to include data analytics and information solutions to help some of the largest companies and national governments thrive amid the complexity of supply and distribution chains, providing innovative authentication solutions that help to effectively mitigate risks attached to the promotion of revenue growth and competitive advantage. We have discovered that we are gathering very important data, which can be aggregated with data from other sources to provide powerful information and diagnostic capabilities to our clients. Many clients want to know where they have a problem as well as be able to quantify the extent of different risks, so as to implement a remediation or action plan to mitigate potential market losses or impact to consumers. We can provide our clients with what we call ‘actionable insights’ through variable product tracking using the data available in AXIS®, our proprietary software.

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For decades, we’ve been providing advanced authentication solutions to ensure that local economies grow, banknote security remains intact and commercial products have robust market opportunities. Specifically, we work in three sectors: with governments for fuel authentication and tax stamp solutions; with central banks, where we offer advanced, level 3 authentication technologies and high-speed sensors for banknote security; and with commercial and consumer product companies, where we provide overt and covert solutions to protect manufacturers in the oil and gas, pharmaceutical, spirits, agrochemical and many other industries. We currently have about 250 employees – around 100 of them at our HQ in Addison, Texas, with the other 150 located around the world in our facilities and offices in the Middle East, Africa, and the UK. And of course, we have a network of strategic partners and technology suppliers as well.

Kevin McKenna, Authentix’ CEO

TSTN: So what was the attraction of SPS?

KM: SPS has excellent credentials in the tax stamp business with several reference accounts that will help us scale and further expand our own tax stamp business. Their overt, semi-covert and covert features will be an asset to complement the marker systems and security inks that we already offer. Further, they have a strong patent portfolio with some excellent security print techniques that are proprietary. Tim Driscoll (TD): To add to Kevin’s thoughts on this, SPS has excellent security design capabilities. They’re very efficient at creating highly featured, strong designs for security documents as small as tax stamps, as well as for their other products. SPS is also one of the most responsive security print providers in the industry, producing sample tax stamp designs and exemplars in a matter of days. TSTN: So how will you ensure this capability is maintained? KM: Paul Craig, SPS’ Director of Production Operations, and David Clough, Director of Commercial Operations, are both staying on in those roles. Jim and Mike Crowther are retiring but will remain as consultants, so we can turn to them as needed. TSTN: And how will you run SPS?

KM: It is now a wholly-owned subsidiary of Authentix Ltd, our UK company. Mark Weintrub, our Chief Administrative Officer and General Counsel, and Dianna MacDonald, our Chief Financial Officer, are the new SPS directors. Our executive management team from Addison will spend a fair amount of time in Consett (the location of SPS’ plant) in the next few months to implement our integration plan.

Tim Driscoll, Senior Vice President & General Manager, Currency & Tax Stamp

But our existing plan doesn’t call for making any major changes in the near term. Not only does SPS have great capabilities, but they have great staff retention! They have an excellent apprentice scheme to continue to develop talent and they have many employees who’ve been there for most of the company’s 37 years. So, it’s a strong operation with great people! The one priority we have is to integrate our sales and marketing operations in order to take advantage of new market opportunities for the consolidated group. TD: We will be able to bring together compelling technologies to make a very strong offering for tax stamps. We’ve been very impressed by SPS’ patent portfolio of security features and their ability to integrate UV and IR features with holograms, while Authentix has always been strong in machine readable features, forensic markers, colour shifting inks, and data management software. When SPS’ specialised physical overt and covert printing techniques are combined with Authentix proprietary products, including our AXIS information platform, the group will be an even stronger trusted partner to our government and consumer product clients.

TSTN: Do you have in-house security printing capability, and if not, where have you sourced your security documents from? KM: We do now! We’ve previously sourced from sub-contracted security printers, and in many cases, our brand owner customers have existing relationships with their own commercial printers, and we collaborate directly with our clients’ vendor to deliver the final solution. I expect we will continue to deliver that way in many cases. TSTN: SPS is certified by Intergraf under ISO 14298 (security print production management) but at the base level, so it’s not certified as a high security or government document printer. Do you expect to seek certification at a higher level? TD: SPS has built a great business as it is. We must learn from this business and see what’s needed as we enter new markets and expand offerings.

TSTN: Turning to Authentix’ existing tax stamp business, you’ve recently won two contracts to supply tax stamps that comply with the EU’s Tobacco Products Directive (TPD) – can you tell us more about these? TD: A part of our AXIS platform is enabling the Greek General Secretariat for Information Systems (Ministry of Finance) to serve as the ID issuer for economic operators based in Greece and Cyprus. The system registers economic operators into the programme, generates the product level and aggregation unique IDs, and delivers the codes in electronic format. The platform allows for economic operators to connect through either an application programme interface or a web browser. Greece will continue to issue physical tax stamps to provide its selected authentication features required under the TPD.

TD: All of SPS’ capabilities (design, print, feature implementation and serialisation solutions) will expand our offerings for manufacturers of consumer products. Also, SPS is a leading provider of secure educational certificates to the most prestigious universities, as well as secure prescription forms, and a host of other security documents across a broad group of UK and international customers, many of whom have been with SPS for years. These secure document capabilities are likely to also complement some of our existing authentication programmes. TSTN: Gentlemen, is there anything you’d like to add before we close? KM: I want to thank Jim and Mike Crowther for building a successful business. This endeavour can only build on our mission to secure the integrity of global commerce.

TSTN: We’ve focused on tax stamps so far, but what other SPS products will you work on?

BIR Probes Recycled Tax Stamps in Philippines The Philippines Bureau of Internal Revenue (BIR) has discovered a new scheme perpetrated by illicit tobacco traders suspected of using recycled tax stamps on illicit cigarettes. The traders have allegedly come up with a promotional scheme to gather used tax stamps from the public in exchange for a can of sardines or a pack of noodles. The used stamps (which are removed from sold cigarette packs) are then applied to illicit cigarettes, according to BIR Deputy Commissioner Arnel S D Guballa. According to www.businessmirror.com.ph, BIR chief Caesar R Dulay said he would be meeting with representatives from Philip Morris Philippines, Japan Tobacco International (Philippines) and other cigarette companies, as well as those responsible for managing BIR’s Internal Revenue Stamps Integrated System (IRSIS), to find out how to address this new modus operandi in the illicit tobacco trade. The BIR recently formed a strike team to crack down on illicit cigarette manufacturing and trade, in line with strengthening the campaign against smuggling and tax evasion in the country. In January this year, the Department of Finance, together with the BIR, led an operation to destroy several

machines used in the manufacture of illicitly traded cigarettes. The destroyed equipment included units and parts of three filter-making machines, two packaging machines, and a cigarettemaking machine, along with 484 master cases of various finished cigarette brands, and raw materials used in producing cigarettes, such as filter rods, tipping papers, packaging foil and acetate tow. The issue with the recycling of stamps leads us to wonder what kind of substrate, adhesive and other tamper-evident components are being used to produce the stamps in the Philippines, if such stamps are able to be removed from their original packs in a good enough state to be re-used on illicit product.

• The possibility of tax stamps being reused or harvested from used packaging; • The amount of technology input, capital investment, criminal effort and expected return on the fraudulent act of reusing tax stamps. It is hoped that the BIR, APO Production Unit (which produces the stamps), and Irsis Corp (which provides the security features) will heed this advice.

Indeed, the ISO standard for the content, security, issuance and examination of excise tax stamps (ISO 22382), states that tax authorities should affix stamps to the product in such a way that they cannot be altered, replaced or reused. Furthermore, the standard advises authorities to evaluate tamper-evidence in terms of: • The obviousness of change in the tax stamp’s structure upon alteration, tampering, tearing or opening, both when intended or unintended;

IN THE NEWS|VOLUME 11 – NO 04|APRIL 2019

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How Georgia Reduced Illicit Tobacco from 50% to 3%... While Still Increasing Taxes In the February issue of Tax Stamp & Traceability News™ (TSTN), we announced the release of an extensive World Bank review on the best practices used by different countries to deal with illicit tobacco. The 700-page ‘tome’ – entitled Confronting Illicit Tobacco Trade: A Global Review of Country Experiences – was produced as a tool to connect the normative guidance of the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products, with specific actions to bring the Protocol to life.

Given the importance – and considerable length – of the review, TSTN thought it would be useful to spend some time drawing out those key aspects of relevance to the tax stamp and secure traceability community.

and looked at how this country’s successful anti-illicit trade and tax recovery measures have ‘spilled over’ into the neighbouring countries of Tanzania and Uganda, which are busy implementing similar tax stamp and traceability systems.

We began our coverage in TSTN February with an overview of the strategic and specific actions recommended to combat illicit trade. Then, in March, we focused on one of the 20 best-practice country studies illustrated in the review – that of Kenya –

This month, we turn our attention to another country study covered by the review: that of Georgia. The following is an adaptation of this study by the authors of the original work.

Georgia: Controlling Illicit Cigarette Trade

By Hana Ross, University of Cape Town, South Africa, and George Bakhturidze, FCTC Implementation and Monitoring Centre, Georgia Georgia is a country that has successfully brought the illicit tobacco market under control, thanks to progressive economic reforms which targeted, among other institutions, the country’s revenue and customs services. In a relatively short period of time, Georgia managed to reduce corruption, set up effective tax administration and enforcement measures (including the extensive use of automated electronic processes, highly secure tax stamps and an integrated system for the movement and registration of products), and institute strong border controls as key components of its strategy to confront illicit trade. As a result, the country succeeded in substantially decreasing tax avoidance and evasion while regularly increasing cigarette excise taxes. So how did it manage this? To answer that question, let’s go back to before the fall of the Soviet Union.

Background

As part of the Union, Georgia was well known for growing tobacco leaves for its own cigarette production as well as for other Soviet territories. But this production collapsed with the fall of the Union in 1991, so that by 1994, Georgia’s tobacco crop was reduced to one third of what it used to be. The decline continued until the mid2000s, by which time cigarette output had fallen from the 17 billion sticks of Soviet Union days to just 3 billion sticks. This provided a great opportunity for transnational tobacco companies to enter Georgia to exploit its extremely high smoking prevalence. The Georgian government welcomed the tobacco industry by allowing it to sell tobacco taxfree. Between 1991-1997 no tax was levied

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on either domestic or imported cigarettes; however the situation was to change in 1997 with the introduction of specific excise and customs taxes. The new taxes were supported by the introduction of tax stamps in 1999. At that time, the stamps were used as tax collection tools only, and the security features on the stamps were initially minimal, making them vulnerable to counterfeiting and multiple usage. Until 2004, tax rates remained stable, but their values were being eroded by inflation and growing per capita incomes, making cigarettes increasingly affordable. The government therefore decided to implement substantial tax hikes in 2005. Tobacco companies prepared for the hikes by pre-purchasing tax stamps at the lower 2004 value, for release in 2005 (a tax avoidance practice called ‘forestalling’). This resulted in an unexpected increase in tobacco tax revenue in the second part of 2004 and disappointing revenue in 2005, which the industry was quick to blame on growing illicit trade. But a closer analysis reveals that 2004/05 revenue was 47% higher in real terms than that in 2002/03, demonstrating that the tax increase had indeed reaped significant additional revenue. Nevertheless, the tobacco industry was able to persuade the government to reduce tobacco excise tax in 2006, as a way ‘to decrease smuggling.’ This was a sharp blow to Georgia’s tax policy, and it would take the country almost 10 years to return to 2005 rates. But just how big was Georgia’s illicit cigarette market?

Illicit trade figures

A 2002 survey by Georgia’s State Department for Statistics revealed that only two thirds of cigarettes on the market carried the correct excise stamp. The majority of non-compliant imported cigarettes carried a Russian stamp. In addition, about 62.5% of domestic cigarettes on the market were produced in non-registered facilities. In a survey conducted one year later, by Kobeshavidze et al, it was reported that only 32.5% of cigarette brands sold in Georgia were legal. About 31% of brands were sold without an excise stamp or with a stamp from a foreign country, while the remaining 36% were sold both legally (with the proper stamp) and illegally. And a 2007 study, by Shalutashvili et al, estimated that, from 1997-2003, illicit cigarettes represented 50% and 30% of the cigarette market in rural and urban areas respectively (Euromonitor reported similar figures).

Large-scale reforms

In 2004, the government began implementing reforms to address corruption and widespread tax evasion. Large-scale changes at the Ministry of Finance and Georgia Customs led to improved tax administration, so that by 2005 the number of registered cigarette manufacturers had doubled compared to 1995 (due to the fact that formerly unregistered entities were forced to enter the ranks of registered companies). In addition, the Georgia Revenue Service implemented more than 100 electronic services, including fully electronic tax returns, e-invoices, appeals, and registration processes.

As a result of these measures, Georgia’s ranking in Transparency International’s Corruption Perceptions Index improved strikingly, from rank 133 in 2004 to 67 in 2008 and further to 51 in 2012, surpassing several EU countries. The economy began to grow, and the state budget increased by 300% between 2004-2007. A doubling of tobacco excise revenue contributed to this progress, thanks to a higher tobacco tax rate (despite the 2006 tax reduction as a result of industry manipulation), combined with the improved administration.

Secure tax stamps and traceability As an additional strengthening measure, in 2013, the Georgia Revenue Service’s ‘Integrated System of Movement and Registration of Products’ came into operation.

The system, which was contracted to SICPA, requires all packs intended for the domestic market to carry a paperbased tax stamp with high-level security features (overt, semi-covert, and covert). The stamps are unique, secure, and nonremovable. Packs intended for export carry a barcode indicating the destination country.

manufactured, and by capturing relevant production data in real time. Even though the system is capable of both tracking and tracing, it is currently used only for tracing, and the Georgia Revenue Service is reported to be satisfied with its performance. Revenue Service field officers carry hand-held inspection devices allowing them to authenticate products at retail level. An additional benefit of strengthening tobacco tax administration was the resulting spill-over of the various strengthening measures into the administration of other products. In 2012, the SICPA system was expanded to cover alcohol and beer, then further extended to non-alcoholic beverages in 2016. The cost of the system is slightly more than that of the previous, simple tax stamp system. Part of these expenses were initially covered by the government, but from 2018 they were passed on to the industry.

Vigorous enforcement

Another crucial measure used by Georgia to control illicit trade came in the form of strengthened enforcement, which was reflected, among other activities, by an increase in seizures. In 2016 and 2017, the Investigative Services unit of the Ministry of Finance seized 61,419 and 557,685 packs of illegal cigarettes respectively. In the same two years, Georgia Customs reported 96,896 and 228,071 cigarette packs that had not been declared, even though only a portion of them were intended for sale in Georgia. The growing number of seizures was also linked to the country’s increasing re-export business, which was making it vulnerable to leaks from trade volumes not intended for the domestic market.

Georgia’s current tobacco tax stamps for domestic product (top) and imported product.

Each stamp contains information stored in a serialised code for tracking and tracing – which is printed in both humanreadable form and as a 2D barcode using invisible ink – and recorded into a data management system. The information linked to the code includes the name of the producer or importer, product name, time and place of production, and volume. The data management system is located with the Georgia Revenue Service, and the information sent to the data centre is transmitted in near real time. A web application allows domestic producers and importers to forecast, order and pay for the stamps. Usage of the stamps on cigarette packaging lines is controlled with dedicated cameras, which capture each serialised code and record it in the central database. This electronic system of excise marking imposes an immediate control of each pack, by identifying each product as it is

Georgia Customs also implemented several measures to control illicit trade, including a risk analysis and assessment system to select suspicious trucks for inspection, as well as x-ray scanners at all border crossings and trained nicotine-sniffing dogs.

Illicit trade plummets to 3%

Despite these achievements, the tobacco industry and associated groups persisted in making erroneous claims. For example, they commented on the higher number of seizures in 2017, arguing that illicit trade in cigarettes had increased 18-fold. In this context, it is important to note that seizures are not the best indicator of illicit trade activity, since they are also a function of the intensity and level of law enforcement – as was the case in Georgia.

Ticking the World Bank’s boxes

Georgia provides an example of a country that ticks a good number of the World Bank’s ‘boxes’ in terms of recommended actions for confronting illicit tobacco trade. Such actions include: • Implement processes to strengthen customs and tax administration – Georgia has successfully improved the effectiveness of its tobacco tax and customs administration and, in so doing, has reduced illicit trade while increasing taxes and revenues; • Do not wait for reliable data on the size of the illicit market to be available before taking action – the absence of such data did not stop Georgia from moving ahead in controlling illicit trade; • Engage support from champions, at top government levels, as well as from key stakeholders in civil society, including NGOs, think tanks, and the media; • Require the use of excise tax stamps with multiple security layers, as these greatly facilitate enforcement and tax collection; • Establish an effective track and trace system to follow tobacco products through the supply chain, as this helps to address the challenge posed by underdeclared domestic cigarette production or production declared for export but then sold on the domestic market. Georgia has systems in place for the tight monitoring of domestic production and imports, using unique identifiers combined with excise stamps;

As a result of these various measures, the illicit cigarette trade in Georgia declined dramatically, despite substantial tax increases in 2015, 2016 and 2017, and even though cigarette prices in Georgia were, at one stage, higher than those in neighbouring countries.

• Establish effective enforcement teams equipped with automated reporting devices to reduce human discretion in tobacco tax administration – such devices played a major role in improving the level of enforcement in Georgia.

By 2017, the Head of the Healthcare Committee of the Georgian parliament reported that the illicit cigarette share was less than 3% of the total market, a truly remarkable reduction from the previous high levels.

Despite Georgia’s laudable achievements in confronting illicit tobacco, there are some remaining problems that the country needs to face, and the following are recommendations on how to face them:

The World Bank named Georgia the leading economic reformer in the world and noted that ‘Georgia’s transformation since 2003 has been remarkable. The lights are on, the streets are safe, and public services are corruption-free.’

Remaining issues

Continued on page 8 >

CASE STUDY | VOLUME 11 – NO 04|APRIL 2019

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Georgia: Controlling Illicit Cigarette Trade (continued) • Implement measures to counter ongoing forestalling practices by manufacturers – there are many ways to deal with forestalling, such as taxing existing inventories at the new tax rate, preventing the sale of cigarettes with old tax stamps immediately following a tax increase, and not allowing tobacco companies to order stamps in excess of their average sales prior to an increase; • Address issues of cross-border activities and the possible movement of illegal goods across Georgia to other countries, by ratifying the WHO FCTC Protocol. This will provide Georgia with more tools to address these loopholes in its system; The Georgian government should in any case analyse the extent to which its current system is compliant with the Protocol. For example, the Protocol requires licensing of economic operators involved in the tobacco product supply chain – which Georgia currently doesn’t require – as well as the marking of all tobacco products, including those intended for export. The effort needed to comply with the Protocol would be minimal, since Georgia already meets most of its requirements.

• Reinforce international cooperation and information exchange with neighbouring countries and EU member states, especially those bordering Russia – given that they are facing similar illicit trade problems. Georgia would also do well to enhance its interaction with Interpol, the European Anti-Fraud Office (OLAF), and other relevant agencies; • Accelerate plain packaging – the implementation of plain packaging, planned for December 2022, could be speeded up. Even though the tobacco industry is pointing to the threat of illicit trade, there is no research evidence to justify such concerns. Plain packaging could facilitate the identification of illicit cigarettes from other countries; • Bring government-tobacco industry relations in line with international norms – Georgia should amend its legislation to comply with the FCTC regarding tobacco industry interference in policy making. The most relevant FCTC provisions for controlling the illicit market are requirements that the tobacco industry and/or its affiliates cannot be involved in discussions related to the Protocol ratification or a track

and trace system. Such a move would help to address the industry’s continuing interference with Georgia’s excise tax policy.

Taxes have small role to play

In conclusion, Georgia provides ‘living proof’ that cigarette taxes are not major drivers of illicit trade. Although the highest level of tax evasion in the country occurred during 1997-2003, excise tax rates were substantially lower then than in 2017, when illicit trade was only at 3%. This confirms the empirical evidence from other countries of the relatively small role of cigarette taxes as illicit trade drivers. Georgia’s experience therefore adds to this growing body of evidence that tobacco tax increases can boost revenue as long as there is vigorous enforcement and strong administration processes in place to keep illicit trade at bay. The full World Bank review is available at http://documents.worldbank.org/curated/ en/677451548260528135/pdf/133959REPL-PUBLIC-6-2-2019-19-59-24WBGTobaccoIllicitTradeFINALvweb.pdf

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VOLUME 11 – NO 05-6 / MAY-JUNE 2019

Mexico May Extend its Tobacco Security Code to Alcohol

Ireland to Introduce New Tax Stamps on Tobacco Products According to rte.ie, Ireland’s tax authority, Revenue, is to introduce a new tax tamp on cigarette and rolling tobacco packaging in an effort to combat the supply and sale of illegal cigarettes. The new stamps will be produced by Smurfit Kappa Security Concepts, which has been designing and printing Ireland’s tobacco tax stamps since 1996. The stamps will appear from June onwards, replacing the previous stamp which has been in use since 2015.

Mexican alcohol tax stamps with serialised QR code.

In a recent World Bank review on how different countries and regions are confronting the global illicit tobacco trade, it was described how Mexico had introduced serialised fiscal markings (or ‘security codes’) on tobacco products – among other measures to counter illicit tobacco – and how these measures were suffering from a lack of transparency and security. We have now learned that the same, digitally printed coding system may be introduced on Mexico’s alcoholic beverages – despite the fact that such products already carry a tax stamp. Two recent articles in juntoscontralailegalidad.mx have reported that Mexico’s tax administration service (SAT) has signed collaboration agreements with the Commission for the Wine and Liquor Industry (CIVyl), the National Chamber for the Tequila Industry, and the Tequila Regulatory Council to combat the illegal production, import, export and commercialisation of alcohol products. The head of SAT, Margarita Ríos-Farjat, explained that the agreements seek

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to modernise the relevant regulatory framework, as well as strengthen oversight and incorporate preventive actions to increase revenue from alcohol in the country. With the signing of the agreements, Ms Rios-Farjat also presented the security code project, which she described as a simplification of the current tax stamp process, given that it would decrease the deadline to respond to taxpayer requests from 10 to three business days. She added that the agreement would also include the establishment of a specialised group to follow the value chain of the alcohol industry and protect the country’s formal market. Meanwhile, Erik Seiersen, President of CIVyL, acknowledged that signing this agreement was a step in the right direction. ‘The problem of illegality is global and, considering that in the member countries of the Organisation for Economic Co-operation and Development it oscillates between 8% and 12%, we still have a lot of work to do to reduce the illegality that represents health and fiscal evasion problems for Mexico,’ he said. Continued on page 3 >

Over 67 million illicit cigarettes and 2,000 kg of smoking tobacco with a combined value of over €42 million were seized by Revenue last year. ‘Improvements in technology facilitated a new stamp design that contains multiple complex security features to guard against counterfeiting and the illicit trade,’ said Emily Swift, head of the Alcohol, Tobacco and Multiples Branch in Revenue’s Large Corporates Division. ‘The use of innovative technological security features allows us to verify authentic tax stamps and identify counterfeit stamps in real time.’ The new tax stamps are to be introduced just a few weeks after the entry into force of Article 16 of the EU Tobacco Products Directive, which calls for all member states to apply five different security features (at overt, semi-covert and covert level) onto unit packs of cigarettes and roll-yourown tobacco sold on their territory. Most member states already apply tax stamps to tobacco products and have opted to use the security provided by these stamps to comply with Article 16.

Perspective on the New South African Track and Trace Tender By Telita Snyckers, Sovereign Border Solutions The South African Revenue Service (SARS) recently published a Request for Proposals (RFP) for the ‘provision of a production management and track and trace solution for cigarette products’ to replace the blink-and-you’ll-miss-it ‘diamond stamp’ that SARS currently imprints on cigarette packs (it is simply a rudimentary mark impressed on the top of tobacco packs).

Inside this Issue 1 Mexico Extends its Tobacco Security Code to Alcohol

1 Ireland to Introduce New Tax Stamps on Tobacco Products

2 Perspective on the New South African Track and Trace Tender

3 Competing Bid Stalls Nepal’s Security Printing Press Deal with France

3 EU Criminal Network Linked to Illicit Tobacco… Busted

4 Dominican Republic Set

to Launch New Tax Stamp and Traceability System for Cigarettes and Alcohol

6 Bruce DeBoer Returns to US

Cigarette Stamping Machine Industry

7 Unique Codes – Beyond Authentication

8 Food Traceability News 9 Ashton Potter Enhances ProLinc Solution

10 Programme Announced for Tax Stamp Forum

12 Where Do Strange Words Like ‘Contraband’ and ‘Banderol’ Come From?

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The stamps – to be blunt – are useless. They offer no modicum of control and no substantive insights into either the tax status or legitimacy of packs. The stamps themselves are easy to forge; there is no production control of – or oversight of – the usage of the stamps in the production environment; there is no compliance control or monitoring of products that have been stamped; and upon entry into South Africa, there is no mandate to check and confirm that the stamp has been applied to packs intended for local consumption. SARS has one of the world’s most advanced digital tax platforms for its other taxes – and yet it still tracks its diamond stamps manually, and literally can’t say just how many stamps are actually out there or who has them. The continued use of the diamond stamp has led to a false sense of control over tobacco production. Since the diamond stamp has been in operation, the penetration of illicit tobacco has increased dramatically from 12% in 2005 to 29% in 2014 (a 58% increase in the space of seven years), clearly highlighting the deficiencies of the current approach. Aside from this very basic pseudo control solution, there is very little other real focus on supply chain security – it is relatively easy to infiltrate illicit tobacco into the supply chain, and difficult to establish the legitimacy of products found on the market. The indisputable fact is that SARS has no production control and traceability solution in place, despite having a plethora of enormously powerful policy and operational solutions at its disposal. And while there were admittedly other priorities that demanded action from SARS, its relative inaction on this one has left a substantive vacuum which is holding its enforcement capacity back.

Big strides… but a long time coming To say that a production control and traceability system has been a long time coming would be something of an understatement:

• Since 2007, SARS has been communicating its intention to replace the diamond stamp with a proper, secure mark that would allow it to actually distinguish licit packs from illicit ones, to more easily track packs back to their point of manufacture, and to readily identify where along the supply chain packs may have been diverted into the illicit supply chain; • In 2007, the agency included a focus on illicit tobacco in its strategic plan; • In 2010, it implemented a tobacco marking pilot project using an industrydeveloped solution; • In 2013, SARS said it was considering replacing the diamond stamp, but indications are that resistance from the manufacturers made it virtually impossible for SARS to continue with this process at the time; • In 2016, SARS tabled a Customs and Excise Amendment Act that would in theory have allowed for the use of secure fiscal marks or ‘tax stamps’ and noted that it had completed a track and trace study into the cigarette industry supply chain to replace the diamond stamp, and that it intended introducing excise markers to help identify and track excisable goods; • In 2017, SARS simply noted that it was now working on a way of detecting illicit cigarettes as well as a better way of manually tracking the movements of cigarettes. SARS has also more recently been signalling that it may move to introduce counters on cigarette manufacturing lines. This would at least provide an illusion of compliance and a data set that can be used by the industry to ensure their declarations match the production they have chosen to count, but it is worrisome because it is arguably an outdated technology that can be fooled by a simple mirror or a drop of water on the lens of the counter – particularly when there are proven solutions on the market that have a solid track record of being used to counter illicit production and supply chain diversion. So, for SARS to now finally have published an RFP is making big strides indeed. Continued on page 9 >

Competing Bid Stalls Nepal’s Security Printing Press Deal with France In Tax Stamp & Traceability News™ March 2019, we reported that Nepal was planning to establish its own state security printing works in order to address the issue of outflowing funds for security printing – including those funds used to produce the country’s tobacco and alcohol tax stamps, which are currently being printed by Perum Peruri of Indonesia. We later learned that the French state printing works, IN Groupe, would be helping Nepal to establish this facility, under an MoU signed with the French government in March, with a final agreement due to be signed in June. We now learn, however, that a competing bid from an unnamed company in Germany has stalled the advancement of this project. Kathmandupost.ekantipur.com has reported that both France and Germany’s proposals will cost Nepal the same amount, but that their funding modalities are different. France has proposed a mixed model of a soft loan (ie. a loan with very favourable terms, typically made to a developing country) of €100 million, together with a technology transfer proposal, while Germany has offered a complete soft loan of €260 million at 2% interest to build the printing facility.

prepared, and a NPR 650 million (€5.2 million) budget allocated to carry out the logistical and other preparations. But there are concerns from some sections that the soft loans offered by both countries have overshot the project and that the interest rate is also high. ‘Nepal takes a soft loan at up to 1% or less with major donors like the World Bank and the Asian Development Bank,’ said a senior official at the ministry. Foreign Minister Pradeep Gyawali confirmed to Kathmandupost.ekantipur. com that both deals have yet to be finalised so details are still forthcoming. ‘There have been no significant developments in negotiations with the French,’ said Gyawali. ‘The concerned ministry is working on the terms, delivery time, phases and interest rate.’ In the meantime, Nepal has released a new family of cigarette stamps, which we assume have been produced by the incumbent supplier, Perum Perruri.

EU Criminal Network Linked to Illicit Tobacco… Busted A European operation has taken down a network of organised criminals linked to cigarette trafficking, illicit drugs and violent crime, reports securingindustry. com. The network – described by Europol as ‘one of Europe’s most prolific crime groups’ – was centred around Lithuania but involved multiple EU countries and has also been involved in assassinations and money laundering. The leader of the ring – a 48-year-old Lithuanian national – was arrested in Spain, and a further 21 suspects were detained in Poland, Lithuania, Spain and the UK. Around 450 police and customs officers were involved in the operation, dubbed ‘Icebreaker’, which is the biggest of its kind to date. All told, 40 house searches took place, resulting in the seizure of €8 million in cash, diamonds, gold bars, jewellery and luxury vehicles, as well as the discovery of hidden compartments used to smuggle drugs and psychotropic substances. A substantial quantity of illicit cigarettes was also seized, says Europol. ‘It is believed that these criminals acquired an estimated €680 million as a result of their criminal activities for the period 20172019 alone,’ stated the agency. ‘This criminal group would traffic drugs and cigarettes into the UK, before smuggling the illegally obtained cash to Poland by different means.’

After signing the MoU with France, the security printing division of Nepal’s Ministry of Information and Communication Technology had started formulating the required laws to set up the printing press as well as procuring related logistics. An expert team had been formed, a detailed project report of the architecture had been

The sophistication of the network is apparent. The group used counter surveillance and counter intelligence measures to try to evade law enforcement authorities, as well as specialised encrypted communication devices.

Mexico Extends its Tobacco Security Code to Alcohol (continued) Same system, same concerns

Under the security code system currently used for tobacco products, although SAT is responsible for generating the codes, it is the tobacco industry itself that downloads and prints the codes onto the packs. The concerns that have been raised by the World Bank review with regard to this system are twofold: • First, it is not clear who developed the technology to generate the codes and how SAT acquired that technology (no public bidding process was implemented). It is also not clear how much the technology cost, and whether

it was paid for with public resources. In other words, the review states it is impossible to rule out conflicts of interest in the implementation process as well as to assess the extent to which the code is under the exclusive control of SAT;

• Second, the security features of the code are relatively basic, given that no physical high-security features (including visible and non-visible elements) are required to be used in conjunction with the code. Despite these concerns, exactly the same model is now being proposed for alcohol, whereby the taxpayer will print the codes directly onto the commercial label or

counter-label of alcohol bottles.

The existing physical tax stamp has been criticised for years by the liquor industry, which claims that the state printer (TIEV) does not deliver the stamps on time, and that some stamps are of poor quality and delivered with missing codes. But these claims are considered by proponents of the current tax stamp system as pretexts by the industry to push for auto-control, which is what it is now achieving. It is therefore possible that Mexico’s physical alcohol tax stamps will soon cease to exist.

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Dominican Republic Set to Launch New Tax Stamp and Traceability System for Cigarettes and Alcohol

By Jorge Daniel Miñoso Compres, Head of Excise and Consumption Tax Department, Dirección General de Impuestos Internos, Dominican Republic The tax administration service of the Dominican Republic is composed of the General Directorate of Internal Taxes (DGII) and the General Directorate of Customs, which are both housed under the Treasury Department. Since 1968, the country has been imposing fiscal controls on alcoholic beverages and tobacco products in the form of tax stamps and the mandatory licensing of manufacturers and importers. The tax burden on these products is high, with beer products subject to a 40% burden, cigarettes to 54%, and rum to 63.5%. This means that for every dollar spent on rum, for example, almost 0.65 dollars go towards taxes. The first ever study relating to excise tax non-compliance on alcohol and tobacco was carried out in 2018. The study revealed that the rate of non-compliance in the country exceeded 40% – one of the highest rates in the region, as illustrated in the below graph. The orange line in the graph shows that although the level of non-compliance has remained relatively constant over the past decade (apart from a peak in 2010-2011), the fact that it is now sitting at an average of 42.4% over the last five years, means that this level is still very high. In fact, each percentage point of non-compliance in 2018 equals $11 million of lost taxes. We therefore realised we were facing a serious problem with regard to revenue losses. But an even more serious problem was that the health of our citizens was

being put at risk as a result of noncompliant products. In 2018, for example, 28 people died from the consumption of adulterated alcohol in the Dominican Republic and Haiti. Given the varied and devastating effects of illicit products, we realised that we needed to bring in other institutions (including health and consumer protection agencies) to work with us to find a solution for eradicating illicit trade.

Well, although we have had mechanisms in place since 1968 to control these industries, we have not until now had a track and trace mechanism. In addition, our tax stamp system is 50 years old and needs to be extensively upgraded. Therefore, one could say that we were driving a Mini while illicit traders were cruising around in Ferraris.

Types of illicit trade

The Dominican Republic is subject to various types of illicit trade in the alcohol and tobacco sector, including: • The commercialisation of adulterated or counterfeit product as a legal brand, or with no brand at all; • The smuggling of raw material or finished products; • Illegal artisanal alcohol manufactured for commercial purposes; • Alcohol not suitable for human consumption (such as pharmaceutical alcohol); • Locally manufactured product not declared for tax purposes; • Genuine cigarettes diverted from their intended market; • Illicit white cigarettes (ie. those manufactured mainly for the purpose of being smuggled and sold in markets where they have no legal distribution); But why has alcohol and tobacco tax noncompliance in the country been able to reach such high levels?

The TRAFICO system

In order to address the issues of noncompliance and illicit trade, we first needed to define an integral strategy for fiscal control. The strategy we came up with was composed of three pillars: 1. Production control;

2. Foreign trade control;

3. Control of circulating product and the ability to distinguish compliant from noncompliant products. Based on these three pillars, we implemented various control mechanisms that included: new regulations for alcohol and tobacco excise taxes; mechanisms to control industry inventories, shortages and destruction; the use of mechanical devices to control licensing and other processes; information and tax intelligence interchanges. Together, these various mechanisms have been brought together under one ‘roof’: TRAFICO. TRAFICO stands for Sistema de Control y Trazabilidad Fiscal para Bebidas Alcohólicas y Cigarrillos. It is based on the unique identification of each product with the aim of controlling and tracking each stage of that product, from its origin (ie. point of manufacture or import) to its final destination (ie. point of sale to the final consumer).

Excise tax non-compliance in the alcohol and tobacco sectors in the Dominican Republic (Source: Comisión Interinstitucional Medición del Incumplimiento Tributario).

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The system uses information technology and high-security features (both physical and digital) to allow all stakeholders to authenticate the validity, or otherwise, of alcohol and tobacco products along the supply chain.

The decision to implement a secure traceability system was based on the fact that more than 30 other countries worldwide are doing the same thing, with the result that they have been able to significantly increase their revenue levels. Furthermore, these systems are recognised by international organisations such as the World Bank, World Health Organisation and United Nations, as an efficient tool against illicit trade and tax evasion. Indeed, the United Nations Interregional Crime and Justice Research Institute (UNICRI), in its 2016 report on ensuring supply chain security, referred to authentication and track and trace technologies as some of the most effective barriers to illicit trade. The objectives of TRAFICO are six-fold: 1. Reduce unfair competition caused by illicit trade and tax evasion; 2. Decrease tax evasion, tax avoidance and fiscal fraud rates in domestic and imported alcohol and tobacco products; 3. Protect legal brands by differentiating them from illegal ones; 4. Provide the necessary means to detect products of dubious origin; 5. Reduce the consumption of harmful (eg. adulterated) products; 6. Empower the consumer and supply chain with an efficient tool to recognise the origin of particular products.

Scope and components

TRAFICO is an integral system for identifying, marking, authenticating, tracking and tracing both imported and domestically produced distilled beverages, wines and liquor, beer, low-alcohol drinks and cigarettes. The system uses both directly applied fiscal marks and paper-based tax stamps, all carrying a unique identifying code for traceability purposes, as well as material-based security features. The tax stamps carry 10 security features, consisting of overt, semi-covert, covert and forensic features, with design elements that include the national bird and flower of Dominican Republic, along with the colours of the national flag. The directly printed mark also carries material-based security features to allow inspectors to distinguish a genuine mark from a cloned one. The marks and stamps can be applied by manufacturers on automated, semiautomated or manual production lines. TRAFICO allows the state to have oversight not only of the product itself, but also of the producers and importers, as well as the other supply chain operators, right down to retail level. To this end, a dedicated handheld reading device will enable inspectors in the field to authenticate the fiscal marks or stamps and scan the codes thereon to obtain information on the product and manufacturer.

In addition, a web portal, mobile app and mobile texting service will allow consumers to carry out their own inspections to determine the legality of a product, by means of the serial number and QR code printed on the stamps. Such empowerment means that thousands of daily ‘inspectors’ can be ‘recruited’ by the DGII without it having to invest in additional resources.

The tender and pre-tender process

The TRAFICO system was born out of a pre-tender process that involved two years of research into existing global references, including a technical visit to the Internal Revenue Service (SRI) of Ecuador – which has already implemented a comprehensive tax stamp and track and trace system on tobacco and alcohol products (SIMAR). The information gathered from the pretender process was used as a basis for the TRAFICO project. The project itself was formally launched in January 2018, with the passing of a constitutional act, and its announcement in publications that included Tax Stamp & Traceability News™. It was also at this time that we began approaching different suppliers in the field – 21 of them, to be precise. By April 2018, we were ready to present the project internally and draw up terms of reference for it. And by July, a working group had been set up comprising the private sector (including manufacturers and importers) as well as the General Directorate of Customs – working in coordination with other government departments and the Pro-Consumidor consumer protection agency. With regard to the tender itself – which was an international tender – we opted to work with the United Nations Development Programme (UNDP) in order to ensure a balanced, transparent and nondiscriminative tender process. The UNDP is the lead development agency of the United Nations, helping countries to develop policies, partnering abilities and institutional capabilities in order to sustain developmental results. As such, it has extensive experience in managing procurement projects and contracts worldwide, combining regulatory frameworks with the highest standards of general and professional ethics, and upholding a zero tolerance policy with regard to fraudulent and corrupt practices. In 2017 alone, UNDP managed tenders amounting to $2.7 billion, which often involved the drawing up of complex terms of reference and meticulous technical evaluation protocols.

Jorge Miñoso presenting at High Security Printing Latin America Conference in Costa Rica, June 2019.

of DGII and an international expert on traceability hired by the Inter-American Centre of Tax Administrations (CIAT); and an adjudication committee comprising one representative from the church, one from civil society, and one from the press. By November 2018, the international tender was launched and between the launch date and the end of the year we conducted question and answer sessions and organised technical visits to different manufacturing sites. From January 2019, we began receiving responses to the tender, which were subsequently evaluated on both a technical and financial level before being reviewed by the adjudication committee. The contract for the TRAFICO project was finally awarded to SICPA in April 2019, for a five-year term.

Implementation process

The implementation of TRAFICO began in May 2019, and the process is split into four phases: 1. Software development (one month);

2. Integration with the General Directorate of Customs and its integrated management system (six months); 3. Implementation on alcoholic beverages (four months); 4. Implementation on cigarettes (two months). The go-live for alcohol is therefore planned for October this year, followed by cigarettes in November/December.

Expected goals

Our expected goals for the first 12 months include a 12-15% increase in revenue collections and a 6-8 percentage point reduction in non-compliant practices, which we are confident we will achieve.

As an additional measure to ensure a fair tendering process for the TRAFICO project, we set up two different committees: a technical evaluation committee composed of three members of UNDP, one member

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Bruce DeBoer Returns to US Cigarette Stamping Machine Industry Bruce DeBoer was one of the founders of Redstamp, a manufacturer of cigarette tax stamping equipment. About four years ago, his partners displaced him, as sometimes happens when a dispute about business strategy, business operations, or resource allocation occurs (the specific reasons remain unknown to this author). Recently, DeBoer’s non-compete agreement expired, and he founded KORECOM LLC in Grand Rapids, Michigan. His love for the tobacco excise tax industry and the relationships he enjoys with industry participants underpins his passion to return. An intense focus on exceeding customer satisfaction and building sturdy robust equipment fuel his strategy for succeeding in a market that outsiders would probably view as mature or shrinking.

Shrinking market? Depends on what you smoke

After all, in the US aren’t fewer people smoking… tobacco? Remember, US states are taxing and stamping cannabis as well. That market continues to rapidly grow even without US government legalisation something of which DeBoer remains keenly aware. If legalised nationwide in the US – something that many expect – the market would be large. According to Marijuana Business Daily, federal legalisation across all states in the US means potentially a $55 billion market. So, although the demand for cigarette tax stamping machines may flatten or decline, the need for cannabis stamping will likely offset or grow well beyond this decline.

Stamping equipment entry

Assuming a need exists, a new equipment supplier must enter the market with a strategy based on at least two of the three parts of the price/quality/service matrix. DeBoer believes that he can focus on quality and service and create enough value with robust equipment and high-level service to ensure that the cost of ownership is very competitive. ‘It’s been four years since I left Redstamp, and I don’t think that they or the other stamp machine companies have done a good job in keeping up with the times,’ said DeBoer. ‘I’m amazed at some of the stories I’m hearing. When I call people (equipment users), they complain about the lack of good service and supplier indifference.’ ‘Customer service is missing in the field. That is the number one complaint I hear. When a customer gets upset, as they always will, some technicians walk out because the customer yelled at them.

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I’ve heard of three incidences where a technician left and flew home, leaving the customer’s machine unfixed and not running because the customer yelled at them.’

DeBoer’s response

DeBoer said if he ever had a technician do this, he would fire them immediately. ‘I think it’s going to be easy for me to cherry pick.’ One potential customer (who asked to remain unnamed in this article) told him, ‘if you are truly back, you are going to make millions of dollars because no one comes close to what you were doing in customer service. Techs argue with us and tell us that it isn’t a mechanical issue (thereby implying it’s a user failure) and don’t really listen when we describe the problem.’

The core of his service – family and standards Four of DeBoer’s sons are involved in the business with a passionate commitment to the customer, like their father. Two of them work as service technicians and have experience building machinery. DeBoer has another experienced technician for the West Coast. To provide faster service and support regionally, he trained in-house at his facility six technicians with a contract machinery service company that covers all of the United States. He maintains high standards for his backup support. For one, they must all be certified electricians. A leaner crew enables competitive pricing – even though he is focused on service and quality. He was recently told with regard to a cutter proposal that he was at least 40% lower than his competitor.

New equipment

His latest piece of equipment is a new packing machine. DeBoer is also designing modules that can be used with existing machinery and will not require reprogramming. The retrofits that he provides will be only for machines that the customer owns and no leased machines. DeBoer noted that he has observed the oddity of customers leasing machines and then still having to pay for upgrades. ‘Makes no sense,’ says DeBoer, ‘that’s what you have a lease for. It’s crazy to charge a customer for upgrades while leasing them a machine.’ DeBoer plans to target customers in these situations for new sales when their leases expire.

More robust machines

DeBoer said that machine speed will be comparable to his competitors. ‘What will be different, the modules we put on and the upgrades we offer, will give customers

Bruce DeBoer.

less downtime,’ he said, ‘because of the assemblies we’re going to put in place.’ Typically, the assemblies he sees from his competitors in the field don’t tolerate the dust in the wholesaler’s facilities very well. Cardboard dust causes the machine sensors to shut down prematurely. The sensors think something is blocked because the front of the lens is being clogged by cardboard dust. ‘If they’re not cleaning these machines properly, they constantly get fault readings and downtime.’

Faults mean downtime which means more costs

‘When the machine goes down, half of the cigarette cartons are in the machines. They must eject them and remove them. This takes a lot of time before they can restart the machine.’ He watched one competitor’s new machine that could not run more than ten minutes without a shutdown caused by sensitive safety sensors not being able to perform in the dirty environment. ‘You just guard it the old-fashioned way, you make it robust, and you make it so it can take a beating. Some of these components that competitors are using are not measurable to millions of hits. I just hold a higher standard for the components that we use on our machines.’

Robust design ultimately saves service costs and builds reputation With robust machines the customer saves on downtime and service costs.

‘A robust machine should be made to last well beyond the warranty period. I want my customers to call me back after eight years and tell me, ‘I need to replace all the lines.’ I’m looking for replacement sales down the road. You grow your business by reputation and every seven to eight years you review with them if it is time to upgrade their machinery. I’m going to use robust components that will not be obsolete two years after they’re put on the machine.’

www.kore-com.com

Unique Codes – Beyond Authentication Austrian security label company Securikett Ulrich & Horn recently hosted the one-day Unique Codes Forum, on the theme of Digitise your products at item level. Securikett has become a global leader in the design and manufacture of product security labels and has recently also moved into the production of tax stamps. The company combines authentication and security components from leading suppliers with its proprietary VOID technology and CODIKETT® traceability codes. For example, it uses holograms from KURZ and NFC chips from NXP Semiconductors, so is well-connected for bringing user case studies and supplier technical papers to this Forum, the third it has organised.

Identifying cheating distributors

The day focused on the methods and benefits to brand owners of item level identification, with case studies from British hairbrush manufacturer Tangle Teezer® and Swedish vegan beauty products company Maria Nila complementing each other, the former covering the benefits and the latter showing how it applies uniquely coded labels onto each item. Daniel Nicholson, former Head of IT at Tangle Teezer, explained how the company had used unique codes to monitor the activities of distributors, discovering that some were contributing to grey market or other illicit sales. Markus Ederwall, Business Controller at Maria Nila, told delegates that since 2017 the company has been using Securikett’s CODIKETT traceability codes to combat counterfeiting, diversion and tampering. It has a unique code for every individual item and aggregates the codes at the multipack and pallet level, assigning every item to a customer. The difficulty faced by Maria Nila pertains to the very labour-intensive process required to match each item, multipack and pallet through aggregation. Code verification activities slow down the whole packing and shipping process and scanning manually to match products to orders is also labourintensive. So, the company has worked with four different organisations to develop a robotic system for marking, packing and palletising: • Spectrum Technologies has designed a robot cell to control packaging and palletising;

• Cognex Vision Systems has designed a code reading and verification system; • Cajo Laser Marking has worked on the multipack aggregation marking; • ABB Robotics is building a robot palletiser. With the installation of this automated system due to be completed later this year, all parties are hopeful that it will be an efficient and accurate way to mark, record, aggregate and palletise around 10 million units annually. Zanghee Cho and Sylvia Kaiser-Kershaw, Product Manager and Senior Marketing Manager respectively at NXP, reminded attendees that ‘100% security or safety does not exist in the real world, so the challenge is to find the right balance between risk (benefit) and protection (cost).’ To help achieve this balance in its NFC chips, NXP has devised what it terms ‘the CIA triad,’ where CIA stands for Confidentiality, Integrity and Availability. The requirement is to deliver the information on the chip only to an authorised person, so there is a secret key to allow the encryption or decryption of the message.

If consumers are motivated to engage with a product they have recently bought by scanning the UID, the aggregated data can provide other significant information to the brand owner. Analysing the data returned through these scans can reveal acts of unauthorised distribution, deliver geo-tracking data on each individual item and provide content for predictive analytics – in addition to more established processes such as inventory management. The Forum ended with a tour of Securikett’s plant, where the company presented its newest equipment installations, including the NFC/RFID coder mentioned above and a multi-function in-line label printing, laminating and cutting machine. The recognition that UIDs can deliver more than simply traceability and authentication (the latter preferably alongside some physical features, as recommended in ISO and GS1 standards) is gathering pace. The move to use the UID as a means to engage with customers may be seen as ‘authentication by stealth’, but this considerably enhances the value of the UID on each item, whether that item is a product or a tax stamp.

NXP has developed chips to meet its CIA criteria in the internet of things (IoT) and Securikett has installed the equipment to embed these chips into its labels and uniquely code them. However, these are seen as – currently at least – only suitable for high-value luxury items as the delivered price will be around €0.20 per label.

Consumer engagement for tracing by stealth

Marco Linsenmann of Securikett explained the further benefits of unique item codes – or unique identifiers (UIDs) – by describing how they can go beyond authentication for brand owners. The aspiration is that the codes can be used for brand owners to engage directly with consumers, so that authentication becomes an incidental benefit of that customer engagement. Authentication has obvious benefits to the brand owner and also gives reassurance to consumers; but it can also go further by facilitating the building of customer loyalty and engagement. When a consumer scans an item’s UID, that UID can, for example, allow that item to be personalised, or issue relevant alerts to the consumer. These might be product recalls but could also – in an example that piqued this writer’s interest – warn that a bottle of wine has reached its optimum drinkability state or should be consumed by a given date.

Sample CODIKETT labels produced for participants in the Unique Codes Forum, showing the versatility of Securikett’s shape-cutting technology, with additional security devices.

In particular, the current case studies provided material for discussions during the breaks. Daniel Nicholson reported on the advantages of smart packaging in the day-to-day business of Tangle Teezer.

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Food Traceability News Against a backdrop of the first-ever observance of World Food Safety Day, on 7 June, the US Food and Drug Administration (FDA) has announced a ‘new era of smarter food safety’ to leverage the use of digital technologies for food traceability. To kick off this initiative, the FDA intends to develop a ‘blueprint’ that will address several areas, including those related to traceability, digital technologies and evolving food business models. It will also be holding a public meeting later this year to discuss smarter food safety, seek stakeholder input and share ideas on overall strategy and specific initiatives. In a statement released on 30 April, FDA Acting Commissioner Norman E Sharpless MD and Deputy Commissioner for Food Policy and Response Frank Yiannas, explained that when it comes to food traceability, many in the food supply chain utilise a largely paper-based system of taking one step forward to identify where the food has gone and one step back to identify the source. However, when you look at how other industries digitally track the movement of planes, ride sharing and delivery of packaged goods, it becomes clear that exploration is needed into how these types of technologies could improve tracking when it comes to food. The use of new and evolving digital technologies may play a pivotal role in tracing the origin of a contaminated food to its source in minutes, or even seconds, instead of days or weeks, when contamination does occur, continued the FDA spokesmen. Access to information during an outbreak about the origin of contaminated food will help in conducting more timely root cause analysis and applying these learnings to prevent future incidents from happening in the first place. To help accomplish this goal, the ‘new era of smarter food safety’ work will explore opportunities and specific actions to evaluate new technologies and upgrade the FDA’s abilities to rapidly track and trace food through the supply chain. This work will support and be aligned with other track and trace efforts at the agency, such as its recently announced pilot programmes focused on tracking the movement of medicines throughout the supply chain as part of the Drug Supply Chain Security Act. Tracing is only one area where technology can enhance food safety, however, stated the press release. The FDA will also be looking at how to leverage emerging technologies and other approaches that are being used in society and other business sectors, such as distributed ledgers (eg.

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blockchain), sensors, the internet of things and artificial intelligence. The FDA will assess how these technologies could create a more digital, transparent and safer food system while also addressing consumer demands for quick access to information about where their foods come from, how they’re produced and, if the food is the subject of an ongoing recall. To this end, the FDA plans to conduct a new pilot that will leverage artificial intelligence and machine learning to explore new ways to enhance the agency’s review of imported foods at ports of entry to ensure they meet US food safety standards.

Global Food Traceability Market Expected to Garner $22.27 billion by 2025

Still on the subject of the food traceability market, according to a report published by Allied Market Research, food traceability is expected to garner $22.27 billion by 2025, up from $10.96 billion in 2017, registering a CAGR of 9.3% between 2018-2025. The report attributes this growth to supportive legislative frameworks, the ability to trace contamination and assist product recalls, and the existence of relevant certifications and standards. However, a lack of strict laws in developing economies, as well as privacy issues related to data sharing, and the problem of changing product needs have restrained market growth. On the other hand, growing demand for tracking technologies from developing countries have opened up new pathways in the industry. With regard to the use of specific equipment for food traceability, 2D and 1D scanners accounted for nearly one third of the total market share in 2017 and are

expected to maintain their lead status by 2023. This is due to a rise in demand for traceable solutions across various industries and the mandatory usage of barcodes, QR codes, datamatrix codes, and dot codes for packaging in food and beverages, personal care, pharmaceuticals, and other industries. However, the sensors segment is expected to register the largest growth rate with a CAGR of 10.9% during the forecast period, 2018–2025. This is due to the use of sensors for tracking details of food conditions at different stages of the supply chain and their reliability in difficult environmental conditions. Asia-Pacific is estimated to register the largest growth rate, according to the report, with a CAGR of 14.9% from 2018-2025, owing to growth in application industries such as fresh produce and seeds, fisheries, and meat and livestock, along with the expansion of leading players in China, India, and other emerging economies. Having said this, North America contributed to nearly two fifths of the total share in 2017, and will maintain its dominant position during the forecast period. This is due to supportive government initiatives for exploring and evaluating the methods and technologies for the fast and efficient tracking and tracing of foods. The leading market players analysed in the research are C H Robinson, Honeywell International, Intermec, DuPont Nutrition & Health, Cognex Corporation, Motorola Solutions, Bio-Rad Laboratories, MASS Group, IBM Corp, and Zebra Technologies. The report can be purchased at https:// www.alliedmarketresearch.com/purchaseenquiry/105.

Ashton Potter Enhances ProLinc Solution Ashton Potter, a leading provider of high-security printing and advanced technology for governments and manufacturers, has announced the optimisation of its SaaS-based ProLinc™ technology solution for high-precision recall management dedicated to the regulated food and beverage space. The company states that its enhanced solution provides a timely response to the ongoing recall epidemic, which continues to shake the bedrock of consumer confidence in food and beverage safety. The enhanced offering applies individualised, serialised identities to every ingredient and food item at any point in the value chain, beginning in the field and extending to the end consumer. The solution then stores these identities in a centralised, blockchain-enabled database to maximise data scalability, security, and accessibility for key stakeholders. Through a foundation of complete, crosslifecycle traceability, ProLinc enables food and beverage manufacturers to

proactively mitigate recalls before they occur by identifying anomalous practices in harvesting, processing, manufacturing, and distribution. ProLinc also enhances the ease of recall management by providing the backward and forward forensic data needed to rapidly identify and eliminate affected product. In the event the FDA announces a food recall, stakeholders can simply scan products to unlock highly detailed insights into an item’s genealogy, including the field in which ingredients were grown, the factory in which they were processed, the store in which they were sold, and a host of additional contextual details. Contaminated food items can be isolated in real-time, minimising the often lengthy process of resolving a food recall and eliminating billions of pounds of food waste due to the inability to pinpoint the source of contamination. ‘When a food recall is issued, investigatory agencies immediately seek out the point of compromise,’ said Kelly M Smith, Senior Vice President of Ashton Potter.

‘Even when accurate data is available, food and beverage companies are often unable to isolate with certainty which items passed through contaminated zones – or if other products later passed down the same production lines and are also at risk. ProLinc™ offers greater transparency into the food and beverage supply chain, instilling consumers with new confidence and brands with new visibility to protect their customers, image, and bottom line.’ In addition, the update introduces modules to help food and beverage providers address regulatory requirements and tax obligations that are levied based on location or item. The company advises that ProLinc can now document growing and manufacturing practices and tax fulfillment efforts, and provide on-demand access to complete, verifiable records. This enables food and beverage companies to cooperate with the FDA and other government agencies without interrupting operational output.

The New South African Track and Trace Tender (continued) Used to be one of world’s leading tax agencies

The RFP could not have come at a better time – not just because illicit trade in South Africa is indisputably on the rise, but because SARS is an agency that needs your help in restoring it to its former position as the leading government agency in the country, and indisputably one of the leading tax and customs agencies in the world. Here is why: For much of recent history, SARS had in fact made a substantial impact on the illicit trade in cigarettes. By 2014, SARS’ focus on criminality in the tobacco industry had resulted in a 25% increase in excise and VAT payments. In 2012, SARS had seized 54 million illicit cigarettes, and by 2014 this had increased to 270 million cigarettes taken off the market – just on the back of stronger enforcement action, and despite very little being done in the way of securing the broader supply chain. However, since 2014, excise revenue from tobacco products has fallen by 16%, and the number of cigarette packs on which tax has been paid has fallen by 27%. In 2015, SARS had seized around 204 million sticks of cigarettes, but by 2016 this had dropped to 133 million, and by 2018 only 61 million sticks were seized. Why? Because much of its enforcement capacity had been systematically and consciously decimated.

Whether SARS will finally get the ball rolling this time around remains to be seen – particularly given the push back we can expect from an industry that has thus far largely escaped having their supply chains regulated in any way in South Africa. Indeed, the usual industry arguments and rhetoric against the introduction of a secure marking and traceability programme are already evident and will likely only increase in the coming months. (The industry dynamics in South Africa are vastly more complex than first meets the eye, and not everything is necessarily as it seems. It’s a veritable dog’s breakfast of multinationals competing with independent manufacturers, both of whom play to rhetoric that reflects some of the broader philosophical questions around local politics.) My criticism on their slowness is wrapped in some sympathy for SARS. It has made huge advances in respect of how it administers its other tax types and has in many respects become a leading agency when it comes to digital taxpayer account management and compliance management. However, as with many agencies around the world, excise is traditionally the ugly stepchild, and receives less funding and less executive attention than most other tax types. But far more than that, SARS is emerging from a tumultuous few years, which has effectively seen its reputation and its efficiencies reduced to tatters,

with its previous Commissioner absolutely blanketed in controversy. It is an organisation that needs a new success story. It is an organisation that needs to return to its earlier glory days. I firmly believe that this programme – if it gets off the ground – has the potential to help SARS reclaim some of its dignity, some of its power as a regulator. We know that the RFP has elicited a great amount of interest on the part of solution providers. More than a hundred people attended the recent briefing by SARS. If you were one of them, or if you intend to respond to the RFP, please bear this in mind: this contract, this programme, is about more than bottom-line profits. It is about more than the cost of a stamp, or production line speeds. It’s about helping a country that once stood at the forefront of tackling illicit trade, to reclaim its foothold in the war against contraband. It’s about delivering a solution for an agency whose officers are deeply passionate and committed, who have proven their mettle in the face of taking on some of the biggest players in the black market – and who need your help to deliver a solution that actually makes a difference, and that genuinely makes them better than they already are. The closing date for submissions has now been extended to 30 August 2019. Your proposal could make a difference. Make it count.

VOLUME 11 – NO 05-6|MAY-JUNE 2019

9

Programme Announced for 2019 Tax Stamp Forum Three months to go until the 9th Tax Stamp Forum™ is upon us and we are happy to announce that the programme has now been released. The Forum takes place 11-13 September, in Budapest, Hungary (which also happens to be the city where the inaugural Forum was held, back in 2009).

The second workshop will be conducted by Michael Eads and Telita Snyckers of Sovereign Border Solutions and will also go back to basics by looking at the core principles for the governance and operating model of secure track and trace and automated production monitoring systems, including model contracts for track and trace solutions and different procurement options.

Papers and panel discussion

Moving to the conference programme itself, which will take place on 12 and 13 September, this is how the topics and speakers are stacking up so far:

Let’s take a look at how the programme will unfold:

Seminar and workshops

The first event in the programme will be a closed meeting for revenue and customs authorities, taking place on the morning of 11 September, and hosted by the International Tax Stamp Association. The meeting will offer authorities the opportunity to share common issues and best practices in a smaller, intimate group, before joining the rest of the delegates for the main conference. This is followed, after lunch, by two workshops open to all delegates. The first will be conducted by Ian Lancaster of Reconnaissance International and will concentrate on going back to basics, by answering questions that may seem obvious to some, but definitely not to all. Questions such as: what are tax stamps and why do we use them? How are they made and what are they made of? Why serialise and track and trace them? What is the difference between track and trace and secure track and trace? What are examples of cost-effective ways of producing tax stamps?

Ian Lancaster.

10 TAX STAMP & TRACEABILITY NEWS | CONFERENCES

• This is followed by Tim Driscoll of Authentix who will ask: ‘Is the EU Tobacco Products Directive (TPD) right for you?’ As nations start implementing plans for WHO FCTC compliance, Tim will look at whether it is worthwhile evaluating the TPD to see which aspects could serve as a best practice for countries outside of the EU. Tim will share Authentix’ views on the positive and negative aspects of the TPD, drawing from the company’s experience as a provider of a TPD unique ID issuance platform, as well as provider and supporter of comprehensive tax stamp programmes;

• After an opening address by Colonel Kristóf Péter Bakai, Director General for Customs of Hungary’s National Tax and Customs Administration, Telita Snyckers of Sovereign Border Solutions will explore why tax stamp and secure marking programmes do not always reach their full potential and what can be done about it. Telita will explain how such programmes often meet with less success than they should as a result of shortcomings within tax administrations and agencies. These include the lack of a burning platform, the need for more conceptual understanding of issues and potential solutions, the challenges around costs and funding models, the issue of being unprepared for industry push-back, and the difficulties involved with leveraging potential allies. Telita will also provide insights into how solution providers can change these dynamics, thereby helping authorities to maximise their programme’s potential;

Tim Driscoll.

• We stay on the subject of the WHO FCTC, as SICPA examines how dozens of countries are getting ready to establish fully compliant regional and national track and trace systems by 2023, in compliance with the FCTC Protocol to Eliminate Illicit Trade in Tobacco Products. In this presentation, SICPA will provide a gap analysis based on observations of prevailing tax stamp systems and will outline key upgrades that are fully in line with Protocol guidelines, in particular with the provisions of its Article 8;

Telita Snyckers.

• De La Rue will then focus on an integrated next generation solution for track and trace that delivers regulation compliance, best practice and interoperability for all involved players. By drawing on first-hand experience to demonstrate this approach, De La Rue will illustrate the benefits for both excise revenue collection and an easier route to industry implementation, in a combined and continued fight against global illicit trade;

• Avi Chaudhuri of Systech will next describe how the success of the criminal sector relies on exploiting a fundamental psychological property of all humans, whether they be trained inspectors or lay consumers. He will then propose what he calls a transformational solution based on two critical reforms: mitigating the psychosocial factors that allow criminals to succeed, and applying the right tax stamp design to assure total success of any programme that chooses to adopt it;

• Géza Imre of ANY Security Printing will next raise the ever-important question of the cost of security. He will explain that in business meetings he often hears clients saying ‘just provide me the minimum required security features and ensure the product is as cheap as possible.’ But does reducing security really reduce the costs significantly, and what solutions can be chosen that provide a higher level of security without increasing costs? This presentation will address these questions

and offer suggestions on how to choose the most appropriate solutions and combinations; • We’ll also hear from a number of revenue and customs authorities who will be presenting their country experiences at the Forum. These include: Elguja Loliashvili and Davit Chitaishvili of Georgia Revenue Service who will talk about their digital tax administration processes (of which there are over 150 available to Georgian taxpayers); Karambu Muthaura of Kenya Revenue Authority will describe the authority’s idea to transform its tax stamps into a single mark of compliance for use by all government agencies in Kenya that require such a mark; Michael Muhoja of Tanzania Revenue Authority will describe the role of the country’s new ‘electronic’ tax stamp system in supporting the industrial economy and boosting revenue; and Berta Macamo of Mozambique Revenue Authority will discuss the country’s fuel marking experience; • Barna Barabás of Jura will address the question of whether we should be using digital technology to print security designs, if a document printed with such technology could risk looking like a forgery? He will explain that, notwithstanding this question, digital printing is increasingly used in the security printing industry, not only for personalisation but also for printing the core design, therefore we need to understand what is possible and what is not in order to produce quality security products;

• Next up will be Sven Bergmann of Venture Global, who will address two important questions: how is blockchain impacting secure track and trace, and what if covert security alone was enough? Sven will also look at whether solutions that combine blockchain and secure track and trace have already been implemented, and how blockchain could fit into a track and trace solution under the FCTC Protocol.

Sven Bergmann.

• The Istituto Poligrafico e Zecca dello Stato (IPZS), Italy’s state printing works, will then examine the profound differences between two EU regulations for counteracting illegal markets: the TPD for tobacco products (that we all know), and the regulation for pharmaceuticals (that may be less familiar). While the TPD calls for the use of both traceability and anti-counterfeiting features, the pharma regulation considers a coding system and traceability database to be strong enough, in itself, to guarantee anti-counterfeiting. The IPZS will describe the Italian experience in controlling the pharma market, based on its Bollino Farmaceutico security stamp, which will demonstrate why security printing is still the only way to distinguish originals from fakes;

Barna Barabás.

Continuing with the theme of security and digital printing, Jeroen Van Bauwel of Xeikon will explain how tax stamps can be (and already are) printed 100% digitally while achieving the level of security needed to combat counterfeiting and deliver track and trace. This means that governments no longer require multiple printers and processes but can implement everything in house, with a single pass process, or alternatively outsource to a security printer; • KURZ will then describe how its tax stamp solution provides a simple way to manage the whole lifecycle of every single stamp, connecting physical tax stamps to software in order to open up a new world of extended functionalities that help revenue authorities in their daily work. Such functionalities include ordering, production, supply chain processes, data aggregation, product information and reporting modules;

• Another EU state printing works, Imprensa Nacional-Casa da Moeda of Portugal, will next present its UniQode system for tax stamps, incorporating a cryptographic code along with holograms and/or ink mixed with special visible metal particles (glitter). The hologram or glitter inks produce a random pattern which, in line with the disorder and chaos theory, is not possible to reproduce, thus constituting a physically unclonable function. To avoid the need for a database, a cryptographic code is printed with some of the minutia of the unique elements, thus allowing for offline authentication of the tax stamp; • Paul Taylor of Rotary Logic will then describe a new development involving the embossing of a registered cross foil, which was not previously possible with conventional techniques, and which Rotary Logic has developed exclusively for the tax stamp industry;

• Lawrence Hutter of Alvarez & Marsal Corporate Transformation Services will next take us through a new report that looks at the causes of the illicit tobacco trade and how governments can protect tobacco excise duty revenues based on well planned and designed tobacco taxation and appropriate enforcement; • The streamlining of tax stamp procurement with Intergraf’s ISO 14298 will be the subject of a presentation by Doris Schulz-Pätzold of Intergraf. Doris will explain how the organisation has been developing certification standards for security printers and their suppliers for more than 15 years, including the recent ISO 14298 standard. She will demonstrate the benefits of using ISO 14298, in accordance with Intergraf certification requirements, as a cost- and time-saving tool in tender documents and as a strategy to prevent security breaches with regard to printed matter such as tax stamps. In addition to these various papers, a panel of industry experts and revenue officials will be discussing the FCTC Protocol and how tax and customs authorities should be preparing themselves to implement the main aspects thereof – ie. a global secure track and trace system and information sharing platform.

Networking events

Moving to the social, networking side of the Forum, in addition to the usual evening cocktail functions in the exhibition area, this year’s event will include a conference dinner, which will give delegates the opportunity to relax, unwind, meet other delegates and enjoy an evening of fine food and entertainment. Please be sure to periodically check https://www.reconnaissance.net/taxstamp-forum/programme/programmeso-far/ for updates, as the programme is subject to modification and new and interesting presentations are currently in the pipeline, awaiting final approval.

CONFERENCES | VOLUME 11 – NO 05-6|MAY-JUNE 2019

11

Where Do Strange Words Like ‘Contraband’ and ‘Banderol’ Come From? In the Spanish colonies of Latin America in the 18th and 19th centuries, the arrival of a ship from the homeland was much anticipated by the colonists eagerly awaiting reminders of the mother country.

When a ship arrived in the ports of Latin America, and before its cargo was unloaded, a proclamation was issued detailing the contents of the cargo. This notice (or ‘bandos’ – in Spanish) was displayed around the port of entry to advertise the ship’s cargo, and was the source of much interest to the colonial citizens eager to see what could be purchased.

The Spanish and Portuguese crowns were also interested in this trade to ensure that taxes and levies were correctly applied. Upon the ship’s arrival at its destination, the colonial customs officers inspected the cargo to ensure that it matched the ship’s manifest and that everything to do with the importation was correct. When inconsistencies were discovered, the authorities pasted a notification across the bandos informing the citizens that the cargo was either illegal or in other ways nonconforming with the manifest and would be subject to further investigation, and as such should not be purchased. This pasted notification across the bandos was known as a ‘contra-bandos’ (‘against the proclamation’) and is the origin of the English word ‘contraband’. To determine that a high-value product (like alcohol or tobacco) had been imported or manufactured legally and was of legitimate origin, and that duty had been paid to the Spanish crown (or Portuguese crown in the case of Brazil), the consignors started producing printed labels which took their

name from the brightly coloured triangular flags or streamers flown by ships or from the tips of lances of mounted cavalry. These pennants were known as ‘banderols’, and the same word was used for the distinctive and often elaborately printed labels. It was common in the 19th century for these banderol labels to be printed on fine paper or papel sellado (literally, sealed paper) which confirmed that duty on the product had been paid to the crown. The low grammage and delicate nature of the papel sellado also meant that once applied to a bottle over the cork, or around a cigar, any attempt to remove the banderol usually resulted in the label’s destruction. Even today in continental Europe, domestically produced alcoholic spirits often have a printed label over the cork and attached to the bottle. These early ‘tax stamps’ were thus tamper-evident and self-destructing. The banderol around an expensive cigar also kept grease from the smoker’s fingers tainting the taste of the tobacco!

Events 11–14 AUGUST 2019

FEDERATION OF TAX ADMINISTRATORS (FTA) TECHNOLOGY CONFERENCE Detroit, MI, USA www.taxadmin.org

Publisher: Reconnaissance International Ltd. Editor: Nicola Sudan (right). Contributors: Randall Burgess, Ian Lancaster, Jorge Miñoso, Telita Snyckers, Martyn White. Advisors: Sven Bergmann, Chander Jeena, Ian Lancaster, Astrid Mitchell.

18–20 AUGUST 2019

FTA TOBACCO TAX ANNUAL MEETING Grand Rapids, MI, USA www.taxadmin.org

11–13 SEPTEMBER 2019

Annual subscription rate: £595 plus £25 per year for postage. Subscribers to Holography News, Authentication News or ID & Secure Document News: 20% discount. Ask about multiple/corporate subscriptions.

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08–10 OCTOBER 2019

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INTER-AMERICAN CENTER OF TAX ADMINISTRATIONS TECHNICAL CONFERENCE Marrakech, Morocco www.ciat.org

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12 TAX STAMP & TRACEABILITY NEWS | SPECIAL FEATURE

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VOLUME 11 – NO 07 / JULY 2019

Tanzania to Roll Out Second Phase of Tax Stamp Programme

ITSA Challenges EU Ruling on Tobacco Laws The International Tax Stamp Association (ITSA) has lodged an appeal against the European Union Court of Justice’s (EUCJ) decision to dismiss ITSA’s legal claims surrounding the Tobacco Products Directive (TPD). Specifically, the claims relate to the noncompliance of the TPD implementing regulations for traceability and security features with the World Health Organisation (WHO) Protocol to Eliminate Illicit Trade in Tobacco Products.

According to www.thecitizen.co.tz and other local media, the Tanzanian government is rolling out the second phase of its Electronic Tax Stamps (ETS) programme on 1 August, as it seeks to boost transparency in the collection of various taxes from manufacturers. The ETS system (which is provided by SICPA) currently gives the Tanzania Revenue Authority (TRA) real-time access to the cigarette, wine, beer and spirits production data of domestic manufacturers, thereby enabling the authority to identify and curb revenue leakages, as well as determine in advance the amount of excise duty, VAT and corporate tax owed by each manufacturer. The first phase of the project, launched in January this year, involved the installation of electronic stamp devices in the manufacturing sites of all four cigarette companies in the country, as well as seven beer brewers and 12 wine and spirits producers. Furthermore, another seven producers apply the stamps manually under the supervision of the TRA, since

www.taxstampnews.com

they still use old technology that cannot support the ETS system. In addition, 14 importers of cigarettes and alcoholic beverages have also reportedly joined the system. The TRA Commissioner General, Edwin Mhede, announced through a newspaper advertisement that the second phase of the project would be rolled out on domestic and imported flavoured water and carbonated drinks, adding that a final, third phase would see the system further extended to fruit and vegetable juices, water, films and music… so quite a long list! Back in April, former Commissioner General Charles Kichere told reporters that in March 2019 (ie. two months after the introduction of ETS), TRA had succeeded in collecting $1.5 million more cigarette and alcohol tax revenue than that collected the previous year. This is an encouraging early result that will hopefully be sustained as the system matures and expands to other products.

In 2018, ITSA launched a legal challenge at the EUCJ, claiming that the implementing regulations contravene Article 8 of the Protocol, which requires that a track and trace system be under the control of the government and that duties shall not be performed by or delegated to the tobacco industry. However, in May 2019 the EUCJ dismissed the claims on the grounds that ITSA could not challenge the EU track and trace system because it did not have ‘a direct interest’ in the TPD implementing regulation. Now ITSA has confirmed it will appeal against the decision, and in so doing will shed light on the EUCJ’s ‘misunderstanding of certain basic facts’. Nicola Sudan, General Secretary of ITSA, said: ‘we believe that an association constituted by entities historically involved in the implementation of anti-illicit trade technologies, notably for tobacco products in the EU, does indeed have a direct interest in the matter and therefore should be entitled to discuss it before the highest legal European institution.’

Continued on page 3 >

Happy Birthday Tax Stamp News! It was 10 years’ ago, in July 2009, that Tax Stamp News™ (which has since been renamed Tax Stamp & Traceability News™) was born. So please raise your glasses in a toast to this 10th anniversary. TSTN remains the only publication of its kind dedicated to excise tax stamps and their related track and trace and monitoring technologies, a sector which is nevertheless continuing to grow in size and importance throughout the world. We believe that this growth serves to further cement TSTN’s role as a conveyor of information and a platform for bringing the tax stamp community together, in an industry where there remains little available in the way of authoritative data and opportunities to exchange views. As a way to mark this important anniversary, we are introducing a regular feature called From the Archives, which will go back to issues covered in TSTN

Inside this Issue 1 Tanzania to Roll Out

Second Phase of Tax Stamp Programme

1 ITSA Challenges EU Court Ruling on Tobacco Laws

2 Happy Birthday Tax Stamp News!

3 EU Tobacco Traceability

Should Not be Considered Blueprint, Warns FCA

4 The New Luminescence 5 Coming in 2020… New Tax

Stamps & Traceability Report

5 Kenya Sets Stage for New Water Tax

6 Security Print Software and Digital Print Open Doors in Tax Stamp Production

6 Arjo Solutions Expands into Latin America

7 The Rise of Public-Private

Alliances in Latin America

8 UAE to Impose Tax Stamps on E-Cigarettes

2 TAX STAMP & TRACEABILITY NEWS | EDITORIAL

10 years ago and look at how they have developed since then – if, indeed, they have developed. So, let’s start off this new feature by going back to July 2009 and looking at two interesting headlines. But before we do that, here’s a little reminder of what we asked you to do in that very first issue, and what we still ask you to do today: ‘As the saying goes, if you like what we are doing, tell others. If you don’t, tell us. This news service is for the tax stamp community, and to fulfill this role most effectively your feedback, contributions and input going forward is not just welcome - it is invaluable.’

Cigarette Manufacturer Slams Canadian Regime

Back in 2009, we find the President and CEO of Imperial Tobacco Canada, Benjamin J Kemball, warning the government that the Canadian tobacco industry had become a ‘free-for-all’ that was causing the collapse of tobacco control. He said this was due to both provincial and federal governments ignoring the growing crisis of illegal tobacco sales, which represented more than 30% of all cigarettes bought in Canada and resulted in losses of about C$2.4 billion in taxes. Canada’s tax regime is characterised by both federal and provincial taxes, with the latter varying throughout the 13 provinces and resulting in price differentials which are a major cause of smuggling. In addition, the country has a number of reservations for native communities which enjoy taxfree status. Not only is there considerable diversion of products intended for these communities, but they are believed to be a major source themselves of counterfeit and contraband. The abuse of this tax-free status was seen by Kemball as key to the parlous state of the country’s tax regime. He called for enforcement of existing laws, the control of the supply of raw materials and machinery and, critically, a revenue-sharing agreement with the First Nation communities equivalent to a provincial tobacco tax. Kemball’s concerns were raised prior to the introduction of a new federal tax stamp scheme in 2010 as part of the Canadian Revenue Agency’s (CRA) Tobacco Compliance Strategy, which the agency described as ‘an effort to prevent contraband tobacco products from entering the Canadian market, and to ensure the integrity of the tobacco tax system.’ Before then, cigarettes were ‘marked’ with simple stickers or colour-coded selfadhesive tear tapes applied to the filmic overwrap, the colour denoting the province of origin. The CRA awarded the contract for the production of the new stamps to Canadian Bank Note (CBN) and SICPA. The

stamps were required for both domestically produced and imported tobacco and would contain overt security features, a unique sequential identifier and covert machineread features. Fast forward to 2014, and the GfK Illicit Monitor survey reported the overall share of illicit tobacco in Canada to be 17.9%, which indicated a significant decrease from the previous 30% – although the province of Ontario remained very high, at 31.1% (see TSN July 2016). Today, SICPA and CBN continue to provide tobacco stamps to CRA, both at provincial and federal level. Furthermore, following the full legalisation of marijuana in Canada in 2018, the SICPA/CBN contract was extended to cover the provision of marijuana tax stamps, based on the design and security features of the tobacco stamps.

FCTC Body Meets in Geneva to Agree on Protocol

The publication of the first issue of TSTN coincided with the conclusion of the third session of the Intergovernmental Negotiating Body (INB) on the Protocol to Eliminate Illicit Trade in Tobacco Products, which forms part of the Framework Convention on Tobacco Control (FCTC). Held in Geneva, the eight-day session was attended by representatives from some 130 countries to debate and reach agreement on the Protocol, the target date for the adoption of which was 2010. In particular, the Protocol calls for measures that include an international track and trace system for tobacco products, a system of record-keeping and obligations on companies to control their supply chains. Although the target adoption date had been set for 2010, the actual date of adoption was November 2012, with the entry into force of the Protocol taking place in September 2018, following the deposit of the 40th ratification. Today, 55 countries plus the European Union are parties to the Protocol, a full list of which can be viewed at treaties.un.org/pages/ViewDetails. aspx?src=TREATY&mtdsg_no=IX-4a&chapter=9&clang=_en

EU Tobacco Traceability Should Not be Considered Blueprint, Warns FCA The International Tax Stamp Association (ITSA) is not the only body to raise concerns about the compliance of the EU tobacco track and trace system under the Tobacco Products Directive (TPD) with the provisions of the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products (see page 1). In a recent blog post, the Framework Convention Alliance (FCA)* warned that the EU system should not be considered as a blueprint for the track and trace system required under the FCTC Protocol, and that the shortcomings of the system, together with its unique European context, required that parties to the Protocol take a ‘close look under the hood’ before deciding on any wholesale adoption of the system in their own territories. The blog post refers to an FCA policy briefing entitled Why the EU tracking and tracing system works only for the EU, in which the FCA highlights key shortcomings of the system and makes a number of recommendations for parties to the Protocol to consider. These include:

Key shortcomings

• A major flaw in the EU system is that it conflicts with Article 8.12 of the Protocol, by allowing certain obligations to be delegated to tobacco companies. For instance, manufacturers and importers are able to choose their own data storage providers and auditors; • Independent third parties do not have sufficient control over the unique identifiers applied to tobacco products at the time of manufacture. This is a weakness that the tobacco industry can exploit to flood the black market with cigarette packs that have no (or cloned) unique identifiers; • When it comes to the rules for third parties and data storage companies involved in the EU system, several data storage providers with historical links to tobacco companies have already been appointed to be part of the EU tracking and tracing system; • The security feature under the EU system is required to authenticate the pack, but not necessarily the unique identifier, whereas Article 8.3 of the Protocol requires a ‘unique, secure, and non-removable identification marking.’ Furthermore, the EU system only requires that one out of five authentication elements be sourced from an independent provider; • The longer list of elements to be included in the unique identifier under the EU system results in an unnecessarily complex system requiring input from the tobacco industry, with traceability data gathered from multiple sources. This model will prove a

significant challenge, particularly for middle and low income countries. In contrast, the FCTC Protocol only requires that the unique identifiers include date and place of manufacturing, manufacturing facility, product description and, where available, intended market of retail sale; • The EU system requires a time stamp at the time of manufacture. This seems to be a good idea, on the surface. But make no mistake: time stamps add another layer of complexity and create a problem when tax stamps are used for traceability purposes because tax stamps are generated in advance of the manufacturing.

Key recommendations

• Parties should not choose a track and trace solution which, as in the case of the EU TPD, allows for the delegation of obligations to tobacco companies, such as the choice of data storage providers. This would be a breach of the independence requirements of the Protocol; • Parties should require that providers of data storage services and generators of unique identifiers should not be selected by the tobacco industry itself and furthermore have no links to the development of the tobacco industry’s track and trace solutions; • Parties to the Protocol should use authentication elements and antitampering devices (such as digitally signed alphanumeric codes and security ink, as found in tax stamps). Digital signatures prevent third parties from generating their own codes, and security features prevent the copying of the unique identifier; • Parties should ensure that all authentication elements are supplied, installed and controlled by authorities independent from the tobacco companies; • Parties should require that the unique identifier includes only the elements listed in the Protocol (ie. date and place of manufacturing, manufacturing facility, product description and where available intended market of retail sale), and not the longer list required by the EU; • Parties should give serious consideration as to whether a time stamp is necessary and whether it can be replaced by the use of a camera and/or an antitampering device, which records the time of production and controls the correct applications of labels or stamps on the packs. * The Framework Convention Alliance is made up of nearly 500 non-government organisations from over 100 countries, working on the development, ratification and implementation of the world’s first modern-day global public health treaty (ie.

the WHO FCTC). The full FCA Policy Briefing can be found at: www.fctc.org/wp-content/ uploads/2019/07/FCA-Policy-Briefing_ Why-the-EU-tracking-and-tracingsystems-works-only-for-the-EU.pdf The full wording of the EU Implementing Regulations and Decisions for tobacco traceability system and security features: publications.europa.eu/en/publicationdetail/-/publication/536e4d37-4140-11e8b5fe-01aa75ed71a1. The FCTC Protocol to Eliminate Illicit Trade in Tobacco Products: apps.who.int/iris/bitstream/ handle/10665/80873/9789241505246_eng. pdf;jsessionid=52D5A8D3BE219F04649F5C 2387C7F7D7?sequence=1

ITSA Challenges EU (continued)

Ms Sudan continued: ‘the EUCJ appears to have confused the track and trace systems deployed by ITSA’s independent members with the tobacco industry’s Codentify® solution, which is largely under the control of the major tobacco companies. We are concerned that the European Commission has conceived and is promoting an EU track and trace system based on a governance model that unnecessarily entrusts core functions to the tobacco industry itself. This is at odds with the basic principles of the WHO Protocol, which limit the need for industry involvement to the extent strictly necessary and, essentially, prohibit the tobacco industry from influencing public policy. ‘In addition, the EU track and trace system does not provide for strong authentication tools to counter illicit tobacco trade and does not allow for a completely interoperable track and trace system based on established international standards and best practice. Our aim is to uphold the adoption of international technical standards to harmonise anti-illicit trade technologies and promote best practices, including those related to ISO 22382, which provides valuable guidance on the development of and specifications for excise tax stamps. ‘We hope that the EUCJ reconsiders its stance towards the admissibility of our claim and takes a closer look at the type of track and trace systems being applied under the TPD implementing regulation.’

VOLUME 11 – NO 07|JULY 2019

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The New Luminescence It has been 18 months since the world’s largest ink and pigment specialist, Sun Chemical, acquired Luminescence International Ltd, the British specialist producer of security printing inks and threads, so Tax Stamp & Traceability News™ spoke to Gerben van Wijk, the recently appointed Sales and Marketing Director, to learn about the progress since then.

Gerben van Wijk.

Gerben was appointed in March this year and has therefore had a steep learning curve to understand the merged company and its products. What he has brought to the company is many years of experience in the security print field, which means he is well-known and confident in helping the merged operation to position its products in the market. It was interesting to learn more of the logic and motives for this acquisition. Luminescence was a family company, formed in 1987 by four Cooper brothers – Paul, Andrew, John and Nick – which had grown to a staff of around 90 people, mostly in production and R&D, making a range of security inks, coatings and secure stitching threads for passports, but with limited scope to service large and highvalue orders, such as larger banknote orders which often require bid bonds. Sun Chemical, on the other hand, is a multinational with around 20,000 staff, many production facilities and 17 largescale R&D laboratories all over the world. It is wholly owned by the Japanese DIC Corporation (formerly Dai Nippon Ink and Chemicals Inc until the name-change in 2008), which is one of the world’s biggest ink, printing and specialty chemicals companies. Sun Chemical had identified security inks as a growth market, having established a security division to serve this market. It saw the opportunity to quickly expand its product portfolio at a time when Luminescence was looking for a way to make the jump to being able to supply inks for larger banknote orders. The two companies complement each other, Luminescence bringing its comprehensive product portfolio and Sun Chemical bringing its global reach,

4 TAX STAMP & TRACEABILITY NEWS | COMPANY PROFILE

R&D, legal and other investment/financial resources. As Gerben put it, if there is a need to supply security inks from a plant outside the UK, then Sun Chemical can readily devote space in one of its factories, even to the extent of creating a secure plant-within-a-plant. The business currently has the former Luminescence production sites in Harlow, England, and the Sun Chemical plant in Thourotte, France, but has its eyes set on opening further secure production sites across the world. Gerben also singled out inkjet as an R&D field in which Sun Chemical is particularly strong, with several laboratories and over 100 people dedicated to inkjet R&D, a resource which could readily be used by the security business to further expand its comprehensive range of inkjet security inks. Inkjet’s place in the tax stamp and traceability market is growing strongly and the company aims to launch various new solutions.

a technology transfer agreement with India (which has a strategic plan for all its banknote components to be produced in-country). Tax stamps are another large market – smaller than currency in terms of value, but similar in volume – with LSCS supplying intaglio, offset, flexo, gravure and digital inks for use on stamps. In response to the requirements of the EU’s Tobacco Products Directive (TPD) and its requirement for traceability, the company has developed a molecular taggant and proprietary readers for use on stamps or other labels or packs. It has also developed similar taggants for incorporation into offset inks.

Luminescence the strong brand

An indication of how Sun Chemical sees the relationship and the strength of Luminescence’s products and brand is the renaming of its security inks division as Luminescence Sun Chemical Security (LSCS), with the first word used as the short reference and for branding purposes. It is also notable that Paul Cooper has become the President of this operation. Gerben explained that the intention is to create a single unit which is focused on security, so it operates independently of Sun and DIC, even with its own management and control information systems (whereas most DIC units share the parent’s system). LSCS is DIC’s first truly global business division. Gerben is the operation’s first dedicated Sales and Marketing Director – another indication of the merged operation’s commitment and intent. At Luminescence Ltd the four brothers jointly undertook this function, alongside their respective roles managing offset and intaglio inks production and marketing. Nick is now Regional Manager for the Americas, while John is Technical Services Director, with Andrew taking the opportunity to retire. Gerben is building a sales and marketing team consisting of four international sales managers and two product managers, with more people to be recruited.

New traceable taggants

In terms of product and market development, the merged operation’s largest market sector by value is currency, where its inks are currently on banknotes of 55 countries, and it has negotiated

LSCS supplies a wide range of dedicated readers to support product authentication.

The third major market is identity documents, where LSCS is strong in stitching threads and security inks for all printing processes used on passports and in particular inks for polycarbonate. Gerben also sees brand protection as a growth market, a field in which Sun Chemical has already developed markers and codable coatings, but also anticipates working with other specialist traceability suppliers in offering new products to the market. This is one area where integration of the former company operations is still being considered. Gerben pointed out, though, that this is a tough market where margins are always under pressure as brand owners seek to keep costs down.

Not to compete with customers

Asked how the company sees its developing market position, Gerben’s underlying point is that ‘we don’t want to compete with our customers!’. The new division wants to be known as a specialist supplier of security inks and related chemical formulations, not a comprehensive solutions provider. But as Sales and Marketing Director Gerben – and indeed Paul as President – meet and deal with people at all levels of the customer chain, including printers, revenue authorities, passport issuers and central banks, the company could be a main contractor, although it’s more likely that the printer it supplies will fill that position.

‘It’s important to talk to people involved in the design and production, to ensure that our inks are used correctly. Our ink is a carrier which needs to be used in the right way,’ Gerben said.

Coming in 2020… New Tax Stamp & Traceability Report The report provides invaluable insight into how governments can develop effective tax revenue collection and antiillicit trade regimes that comply with the latest international regulations through the use of tax stamp and track and trace programmes, as well as how suppliers of physical and digital tax stamp solutions can both help drive forward the market, and benefit from the growing opportunities provided in this field.

Reconnaissance International is pleased to announce that the third edition of its highly acclaimed report Tax Stamps & Traceability: A Market Analysis and Technical Update will be released in early 2020. Described as ‘the definitive source of data and analysis on the market worldwide for tax stamp and excise recovery programmes’, this is the only report of its kind to examine and analyse the global tax stamp and traceability market for alcohol, tobacco and other products subject to excise.

The topics to be covered in the report include: the tax stamp eco-system; specification, regulation and enforcement of tax stamp programmes; current technologies; tax stamps and traceability systems; best practice case studies and global use of tax stamps; and future trends and market developments. The report is being produced in partnership with Axess Technologies. You can become involved in the third edition by contributing content and/or sponsoring. Please visit https://www.reconnaissance. net/tax-stamp-news/publications/taxstamp-report-3/ to find out more.

Colour shift inks continue to play a vital role in creating security.

It is this collaborative spirit that prompted Luminescence to become a Charter Subscriber to Tax Stamp & Traceability News, according to Gerben, who is also a member of the board of the International Tax Stamp Association (ITSA). ‘We have an obligation to the market, not just to ourselves, and there’s value in sharing information. As this is the only publication dedicated to tax stamps and traceability, we want to support it. For the same reason we’re members of the International Currency Association, the Document Security Alliance, ITSA and other industry associations. It’s a sign of our long-term commitment!’ www.luminescence.co.uk

Kenya Sets Stage for New Water Tax Following a delay in the extension of its Excisable Goods Management System (EGMS) to non-alcoholic beverages (which was caused by a court ruling that has since been overturned), Kenya Revenue Authority (KRA) is now preparing to introduce the system on bottled water, juices, soda, energy drinks, other non-alcoholic beverages, food supplements and cosmetics with effect from 1 September 2019.

According to a report in www. theeastafrican.co.ke, by extending the EGMS to these additional products, the KRA hopes to raise an additional $30 million from excise tax that had previously been lost as a result of unregulated products.

From that date, all concerned manufacturers will be required to affix excise tax stamps to all of these products (the system is already in place for tobacco and alcoholic beverages).

VOLUME 11 – NO 07|JULY 2019

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Security Print Software and Digital Print Open Doors in Tax Stamp Production Since Fedopress, the Belgian state printer, began producing tax stamps for Belgium and Luxembourg in 2016, using AGFA’s Arziro security print design software and a Xeikon digital press (see TSN March 2016), Agfa Graphics – the company’s print and graphics division – has continued to innovate with its security print software, while also recognising and focusing on the opportunity to use this software, linked to a high-speed digital printing system, to encourage state printers to expand into the security document arena.

The digitally printed Belgian tax stamp.

Arziro Design 4.0 – the fourth iteration of this specialist Adobe Illustrator plugin – was introduced in August last year, while Fortuna 11, the latest version of its complementary security design and pre-press assembly software suite, was introduced earlier in 2018. Allied to the latest generation of digital printers, such as the Xeikon CX3 – the latest model in the Xeikon Cheetah range – these enable general printers to produce uniquely numbered documents with specialist software-originated security graphics and other security elements.

Randall Burgess, Director of Government and Industry Sales for Security Printing at New ProImage America, pointed out to Tax Stamp & Traceability News™, that state printers see that they can use this capability to produce their own professional licences, vehicle titles, tickets, temporary IDs, passes, and other items. By doing so, they increase their value to other state agencies, consolidating their position as a necessary state agency at a time when there is a move to reduce state activities. Randall goes further in pointing out that this also opens the door for state printers to produce their state’s own tax stamps. The US is unusual in that most states use heat transfer tax stamps; only three use pressure-sensitive adhesive stamps, although these are among the most commonly used form of stamp elsewhere. Most states therefore have outside suppliers for their stamps because their printers do not have the equipment to produce heat transfer stamps, but if they can make a good return-on-investment case for adding the new equipment, with the necessary skilled workers, then they could bring not only tax stamps but numerous other serialised and securitydesigned documents in-house. Randall believes that with the Agfa security print software and the Cheetah CX3 printer they can make this case, because with this equipment they can produce both pressure-sensitive and heat transfer stamps, or other documents, with only some simple alterations to settings.

Focus on US states

These developments have seen Agfa, through its New ProImage America print software marketing and service subsidiary, identify an opportunity for tax stamp production at state-owned printworks in the USA. Each US state is responsible for many security documents, including birth certificates, driving licences, education certificates, ownership or title documents and tax stamps. Historically, many of these documents were provided to the state by commercial printers. While higher security documents such as driver licences were often sourced from specialist security printers, lower-level documents, including certificates and tax stamps, were, in some cases, produced by local generalist printers. The Fedopress model is now allowing state printers – which may not previously have been producing any security documents – to explore the possibility of printing such documents in-house.

6 TAX STAMP & TRACEABILITY NEWS | TECHNOLOGY PROFILE

Xeikon CX3 label press aka ‘the Cheetah’.

An advantage of Xeikon’s business model is that, once the equipment is purchased, it charges for consumables but doesn’t make a ‘click charge’ (ie. a charge per unit printed), which is important for the confidentiality of production of this type of security document.

Multiple copy versus single copy attacks

Randall also drew attention to the change in mindset that this development requires of state officials dealing with security documents. The type of document they normally issue – certificates, licences and so on – are

mainly subject to single copy fraud attacks, whereby someone copies or alters a document for their own use, whereas tax stamps are more similar to banknotes, in that fraudulent attacks see thousands or even millions of fakes produced. Combined with the much smaller size of a tax stamp and the little time that is usually spent examining one, this engenders a different set of challenges for the designer, printer and issuer. If a state printer can meet those opportunities this would give it a whole new range of market opportunities (even if that market is its sister state agencies). On the other hand, the states recognise the need to support wholesalers, support the application of the stamps produced, and add staff with new skill sets, while some states may also need to make legislative changes to bring stamp production ‘inhouse’. So, there are barriers to entry into stamp production, but the capabilities of this digital equipment may encourage states to invest, even if their subsequent move into the production of security documents is a step-by-step process.

A partnership model?

Although these developments could be seen as a threat by established commercial security printers currently supplying states with tax stamps or other secured documents, Randall sees them as an opportunity for these printers. The just-in-time model offered by digital printing eliminates the costs of inventory management and physical security, while enabling current producers to place production near to or even inside customer facilities where they can provide printing for other security documents, such as the finishing of birth certificates, in addition to tax stamps. This model, he argues, can benefit a current security printer by strengthening an enterprise relationship, or it can benefit a government printer that wants more control and oversight without making a direct capital investment. Also, existing producers of tax stamps can have their designers work more closely with a state’s graphic design department to make sure their offerings align if a state wants its branding guidelines to include tax stamps. For instance, some states like their spot colours to be on all documents, secure or not. US states and their tax stamps represent a particular approach to a jurisdiction’s security document production needs, but is this a model that would also work for other countries, provinces or states?

The Rise of Public-Private Alliances in Latin America At the end of July, a committee in the Costa Rican legislative assembly approved a project to implement changes in the contraband laws pertaining to the adulteration of all alcoholic beverages in the country. According to adiariocr.com, apart from increasing the penalties for adulterating alcohol products, the changes include an obligation for the Treasury to implement a track and trace system for domestic and imported alcohol, whereby a central repository controlled by the government will be responsible for monitoring the products, their manufacturing date, and any related tax payments. The day after the project was approved in the committee, the Vice Minister of the Treasury – Mr Nogui Acosta – criticised the project in a radio broadcast, mentioning, among other remarks that: • Track and trace is a very expensive mechanism to control alcoholic drinks; • Track and trace systems cannot control illicit trade and have not been effective in other countries; • The Ministry of the Treasury does not have the infrastructure to implement a track and trace system; • The final price of the product will increase significantly as a result of introducing a track and trace system, which will have the effect of increasing rather than decreasing illicit trade; • The project does not mention who will finance the purchase of the technology.

Such criticism is of particular concern to Costa Rica’s anti-tobacco organisation, Red Nacional Antitabaco (RENATA), which states that the Vice Minister is well aware of the benefits of using track and trace technology on alcohol products, as demonstrated in other Latin American countries such as Colombia and Ecuador. However, his participation, since 2014, in a public-private alliance between the Ministry of Finance and the Association of Producers and Importers of Alcoholic Beverages in Costa Rica – set up for the purpose of combating illegal commerce – means that he is heavily influenced by the industry. RENATA has spoken publicly about the inadmissibility of including private sector entities (ie. the manufacturers themselves) in plans to control their own industry, but the current government has declared that this complaint is a ‘non-issue’ and that both public and private sectors are working together to resolve the problem of counterfeiting and fraud.

Similar concerns in Mexico

Nevertheless, similar concerns about such public-private alliances have also been raised by the World Bank, in particular with regard to an alliance established in Mexico for tobacco products. In its recent publication, Confronting Illicit Tobacco Trade: A Global Review of Country Experiences, the World Bank includes a country case on Mexico which states that an inter-institutional task force set up in 2013 by the Mexican tax authority (SAT) to combat illegal practices, relating to

products including alcohol and tobacco, ignores specific WHO FCTC guidelines on how governments and the tobacco industry should interact. In particular, there are concerns that the details of concrete collaborative actions between government bodies and the industry are not being made public, leading to questions over possible conflicts of interest. Such a lack of transparency was reflected in the introduction, in late 2017, of fiscal marks on tobacco products in Mexico. The marks consist of a 12-digit alphanumeric sequence (similar to the Codentify® system originally developed by the tobacco industry itself), accompanied by a two-dimensional, machine-readable code. The World Bank report is concerned that critical details of the application of the marks – and the transparency of the information flowing from them – are unknown. Furthermore, as no bidding process was involved, it is not clear who developed the technology to generate the codes, how SAT obtained that technology and how much it cost. ‘In other words, it is impossible to rule out conflicts of interest in the implementation process and to assess the extent to which the code is under exclusive control of the SAT,’ concluded the report. The full World Bank report is available at documents.worldbank.org/curated/ en/677451548260528135/pdf/133959REPL-PUBLIC-6-2-2019-19-59-24WBGTobaccoIllicitTradeFINALvweb.pdf

Arjo Solutions Expands into Latin America Arjo Solutions – a subsidiary of the French industrial group Impala, and a leading provider of identification, authentication and traceability systems – recently announced its international expansion in Latin America with the launch of its first subsidiary in São Paulo, Brazil. Antoine Dubacq, Head of the Brazilian subsidiary said: ‘Latin America, which has been affected by the boom in illicit trade, is an important growth area for Arjo Solutions. We bring brands and public bodies unique

and innovative authentication solutions. In particular, we supply connected and highly secure labels that, like a banknote, incorporate several layers of security: visual elements such as holograms and invisible elements providing flawless authentication. As well as those purely security-related aspects, our labels also add a unique digital dimension to the products they protect, enabling our clients to monitor their products but also consumers to check their authenticity and provenance via a simple smartphone scan.’

Arjo Solutions CEO Aurélien Tignol, added: ‘we want to bring our clients in Brazil and across Latin America local support. Launching this first overseas subsidiary is a significant step for our company’s international development strategy. We’re very proud of the work that our team has done onsite and are determined to accelerate our expansion in Latin America.’ The Impala group is also the owner of INEXTO, successor to the tobacco industry-invented Codentify® technology. www.arjo-solutions.com

VOLUME 11 – NO 07|JULY 2019

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UAE to Become First Country to Impose Tax Stamps on E-Cigarettes From 1 November, the UAE will become – at least to our knowledge – the first country to apply tax stamps to e-cigarettes and shisha. Although other countries (as well as some US states) have started imposing excise taxes on e-cigarettes (or vapour products, as they are also called), no jurisdiction has yet begun applying tax stamps to such products.

There are two types of stamps used for tobacco products: a red one for products sold on the domestic market and in dutyfree arrivals, and a green one for duty-free departures. The stamps are printed with a unique identifier that allows the products to be electronically tracked along the full length of the supply chain, from the manufacturing site to the point of sale to the end consumer.

According to www.arabianbusiness.com, this move by the UAE (which will also be followed by Saudi Arabia) forms part of the Federal Tax Authority’s (FTA) strategy to expand the scope of its ‘Marking Tobacco and Tobacco Products Scheme’ to cover all tobacco products, both imported and domestic.

The stamps, together with their associated online order management and track and trace systems, as well as the tools used for their onsite authentication, are provided by De La Rue. The company has been commissioned by the FTA to produce 350 million tobacco stamps per year.

Phase one of the scheme already went into effect from 1 January this year, on imported and domestically produced cigarettes. As of 1 May, the import of any type of cigarettes into the UAE not bearing tax stamps has been prohibited, while the sale of unstamped cigarettes across UAE markets will be prohibited from 1 August.

In July, the results to date of the various tax administration systems implemented by the FTA were raised at an FTA board meeting. During this meeting the FTA Chairman, HH Sheikh Hamdan bin Rashid, was happy to report that the authority’s strategic partnerships with government and private entities had led to a drastic increase in self-compliance rates and tax awareness

among taxpayers, with the number of businesses and tax groups registered for VAT surpassing 307,000, and the number registered for excise tax totalling 724. The UAE was the first Gulf Cooperation Council (GCC) state to introduce excise tax on soft drinks and cigarettes in 2017, in a bid to curb consumption and introduce new sources of state income in the wake of rapidly declining oil prices. In order to administer these new tax regimes, the FTA was established in 2016, which was a first for this country of seven constituent monarchies. The fact that the UAE has been able to implement a comprehensive tax stamp and track and trace system on cigarettes just three years after the creation of its tax administration authority can be considered a significant achievement, especially when compared to other countries that have been battling for what seems like decades to introduce such systems.

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8 TAX STAMP & TRACEABILITY NEWS | IN THE NEWS

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VOLUME 11 – NO 08 / AUGUST 2019

Philippines to Introduce Alcohol Stamps and Enhance Tobacco Stamps

ITSA Urges Costa Rica to Adopt Secure Track and Trace In the July issue of Tax Stamp & Traceability News™, we reported on the approval of a project in the Costa Rican legislative assembly to implement a track and track system on domestic and imported alcohol products, and the subsequent public criticism of such a system by the country’s Vice Minister of the Treasury, Nogui Acosta.

In a recent www.business.inquirer.net report, after a number of years of delay, the Philippines Finance Undersecretary, Karl Kendrick T Chua, announced that the country will finally start affixing excise tax stamps on alcohol products in 2020, in conjunction with the introduction of higher excise taxes.

In addition, with the government still ‘smarting’ (as Business Enquirer puts it) over its experience with local cigarette manufacturer Mighty Corp – which supposedly faked cigarette stamps to evade tax payments – the government now wants to ensure that the alcohol stamps cannot be counterfeited.

Chua said the Bureau of Internal Revenue (BIR) is already in the middle of the procurement stage to extend its Internal Revenue Stamps Integrated System (IRSIS) – which is currently used on tobacco products – to alcohol.

Both the alcohol stamps, as well as the revised tobacco tax stamps, will therefore carry new designs and enhanced security features, announced BIR Commissioner Caesar R Dulay. This announcement is backed up by APO’s recent release of an Invitation to Bid for the ‘procurement of security features, enhancement and application support and maintenance of IRSIS for tobacco.’ The deadline for submitting bids is 10 September, and the four-year contract is worth PHP 450 million ($8.5 million) for the first year, or a total of PHP 1.8 billion over the full four years.

Last year the BIR began firming up a contract with state-run printer APO Production Unit Inc and Irsis Corp for the production of alcohol stamps, with APO printing the stamps and Irsis providing the security features. The rollout of IRSIS on alcohol has already been delayed several times due to issues related to costing and manufacturers’ concerns over possible disruptions to their production.

www.taxstampnews.com

Continued on page 6 >

Such criticism was of particular concern to Costa Rica’s anti-tobacco organisation, Red Nacional Antitabaco (RENATA), which declared that the Vice Minister was well aware of the benefits of using track and trace technology but had been severely influenced by the alcohol industry. Such was the extent of RENATA’s concern that it called upon the International Tax Stamp Association (ITSA) to counter some of the Vice Minister’s arguments against track and trace. These arguments included the following: • Track and trace is a very expensive mechanism to control alcoholic drinks; • Track and trace systems cannot control illicit trade and have not been effective in other countries; • The Ministry of the Treasury does not have the infrastructure to implement a track and trace system; • The final price of the product will increase significantly as a result of introducing a track and trace system, which will have the effect of increasing rather than decreasing illicit trade; • The project does not mention who will finance the purchase of the technology. Continued on page 2 >

ITSA Urges Costa Rica to Adopt Secure Track and Trace (continued)

In response to RENATA’s request, ITSA wrote a letter to 70 officials in the Costa Rican government – including the President of the Republic himself, as well as Treasury officials (including Mr Acosta), and health, economy, taxation, customs and communications officials. In the letter ITSA addressed the specific arguments raised by Mr Acosta, with the following statements:

‘Real life shows that well-designed secure track and trace systems, managed by governments and applied to all producers, are priced per unit and are much cheaper than opponents suggest. They provide a high return on investment – be that in terms of increased government revenues, direct benefits through providing information to consumers that a product is genuine, or increased market share for honest operators. ‘Depending on system design there may indeed be no increase in product price, although where so-called sin products are concerned (including spirits) governments may use the system to increase taxes while at the same time combating illicit trade.

‘In Costa Rica, 60% of liquor products are in some way illicit – representing a yearly loss of $90 million in excise taxes plus additional VAT and corporate income tax evasion. An independent track and trace system in Costa Rica would address this problem and it is reasonable to expect a cost-benefit ratio of higher than 1:15.’

‘There is complexity to a truly reliable modern system,’ continued ITSA, ‘but responsibility for this is normally delegated by the government to an experienced operator who can provide an end-to-end service and who generally provides all the up-front investment needed, so there is no budgetary drain on government resources. The government retains full control by defining requirements, determining system performance service level agreements, appointing the operator through a competitive tender and retaining full ownership of the data and intelligence which the system produces, which in turn feeds successful enforcement activity and prosecution. Modern systems give the government the tools to fulfil its role of protecting consumer well-being, and indeed actively involves consumers themselves in the process.’

Successful schemes already in place

Inside this Issue 1 Philippines to Introduce

Alcohol Stamps and Enhance Tobacco Stamps

1 ITSA Urges Costa Rica to

Adopt Secure Track and Trace

3 Tax Stamps and Secure Marks: Four Avenues to a Strategic Advantage

4 Cannabis and Smoke-Free Alternatives Take Centre Stage at FTA Meeting

6 Latest Developments in India 7 From the Archives 7 Counterfeit or Forgery?

ITSA went on to explain in its letter that ‘systems work by marking each unit of legitimate product in a way that is not counterfeit-able (eg. through deploying security inks and/or affixing a high-security tamper-evident tax stamp). A unique digital identity assigned to each unit means it can be tracked throughout its lifecycle with data captured every time there is a change in the chain of custody. The secure marking has both visible and invisible elements and includes the means for consumers and inspectors to check that the product is genuine. ‘Successful schemes have already been implemented by ITSA members in a number of Latin American countries and elsewhere in the world. Many of these multiproduct schemes have been examined by the World Bank and are included in their recently published report Confronting Illicit Tobacco Trade: A Global Review of Country Experiences, which focuses on excise control programmes for tobacco products, the principles of which apply equally to alcohol. ‘As far as specific cases are concerned a good example is Ecuador. In Ecuador the system operated by the Customs Administration, SENAE, has resulted in numerous smuggling rings being detected and the SRI (tax administration) system,

2 TAX STAMP & TRACEABILITY NEWS | IN THE NEWS

after two years of operation, has increased excise tax by 20%, producing a 250% rise in the number of registered operators. In addition, increased formalisation of the industry has reaped numerous benefits in terms of regulating health and safety standards. The system includes the VERIFICAME app which allows consumers to verify product authenticity in real-time and assure themselves that their liquor products are safe to drink. ‘In Colombia, a control system for alcohol, based on tax stamps, traceability and a tax administration information system – including the control of raw materials for liquor manufacturing, production control and control of product transport – has been in place for the last decade, successfully containing illicit activity. ‘In a similar way to tobacco taxation in the United States, Colombia levies alcohol tax at a regional as opposed to federal level, with some regions having experienced an estimated 14% increase in the legality of products. Furthermore, the country has been able to increase the range of its traceability system by exchanging information with other countries and systems, for the purposes of crosschecking import and export information between those countries. ‘Finally, the Dominican Republic is in the process of implementing a comprehensive track and trace system with support from the United Nations Development Programme (UNDP).’ Looking outside Latin America, ITSA concluded that ‘the United Nations Interregional Crime and Justice Research Institute (UNICRI), published a report entitled The role of Anti-Counterfeiting Technologies, which states that secure track and trace technologies provide for better visibility within the supply chain. UNICRI reports successful evidence of track and trace technologies in various countries, including Georgia, Kenya, Morocco, Turkey and India (Delhi).’ It is hoped that these messages will convince the government of the effectiveness of secure track and trace technologies on sin products, in a country where in the space of just one month, more than 20 people died from consuming drinks laced with methanol.

Tax Stamps and Secure Marks: Four Avenues to a Strategic Advantage

By Telita Snyckers, International Tax and Customs Transformation Consultant In previous issues of Tax Stamp & Traceability News™, we have explored how difficult it can be for tax stamp and traceability programmes to gain traction, which will likely become increasingly more difficult as more potential solution providers enter the market, and even as more governments begin to seek compliance with their track and trace obligations under the WHO FCTC. Watching from the side-lines, and particularly in the role of advising government agencies, I was struck by how many untapped opportunities there remain, to both improve the take-up rate of traceability solutions in general, and to improve individual companies’ potential success rates. Between the International Tax Stamp Association and its members, there seem to be a number of avenues that would even better position the industry, including: doing more to demystify track and trace; leveraging partnerships with untraditional partners; doing more around pre-sales marketing; creating more narratives around the successes that have been achieved through tax stamp and traceability programmes; and preparing agencies to better anticipate and counter industry tactics aimed at derailing traceability programmes.

Avenue 1: doing more to demystify tax stamps and track and trace The first avenue is both obvious and daunting: doing more to demystify tax stamps and track and trace. Even the simplest of concepts remain poorly understood by the officials who need to choose them, and the politicians who are supposed to fund them. There is very little real support to agencies, politicians, the media and the public in general aimed at demystifying exactly what these pieces of paper or codes are and what they do.

What little is available is often highly academic and not written in an accessible style, on obscure websites that you and I may know about but that are hardly likely to feature on the average person’s newsfeed. Much of the narrative that is available is critical of tax stamps and the companies that develop them (most likely driven by the very industries the tax stamps are meant to better control). If I were a lawyer at a customs and excise agency, facing a challenge of rampant illicit trade in excisable goods or needing to urgently bolster excise revenue collections, where would I start? It’s a veritable maze, with rabbit holes and back doors. Trying to understand the options and solutions

and implications is more herding cats than science. Knowing who to trust – and, by contrast, whose opinions come with a heavy dose of self-interest – is tricky. As an industry, we tend to be so quick to jump into conversations around overt and covert security, or the difference between digital and material tax stamps, that we often forget to start at the very beginning. Agencies often literally do not understand the difference between track and trace as we know it, and GPRS tracking devices on trucks. There are no simple guides aimed at translating industry jargon into something an average excise officer can relate to. Presentations are often highly sophisticated and overwhelming, potentially leaving agencies with little real understanding of the implications of the options they choose, or the alternatives that might be available to them, and are not empowered to ask the right questions that would help them in choosing the best possible solutions for their individual situations. Investing in a solution provider-agnostic, simple guide, that speaks to the average excise officer and their political masters, detailing what questions to ask, what options they could potentially choose from, and what the implications of those different options would be, would be a substantial strategic win for the secure marking and tax stamp industry. It would allow agencies to make more informed decisions, and in doing so, would be a sound PR win for the industry.

Avenue 2: leveraging partnerships with untraditional partners A second avenue, that would similarly constitute a bit of a PR triumph, perhaps lies in better leveraging partnerships with – in particular – the health fraternity. Of course, tax stamps and traceability programmes go far beyond just securing compliance with the FCTC, but they have the potential to be a powerful promotional driver for the industry.

Unfortunately, much of the tax stamp and secure marking industry is viewed with some scepticism by the health community, which refuses to partner or even engage with industry. At the FCTC meetings in Geneva in 2018, the MOP and COP sessions explicitly excluded secure marking industry representatives – while the tobacco industry managed to get a seat at the table through its proxies. It represents a real lost opportunity for two sectors who at least in this one regard have a common goal in mind – reducing the illicit trade in excisable products.

The relative lack of trust and engagement is a loss to both industry and the health fraternity, and something of a win for those manufacturers of excisable products out to cheat the system. We end up attending our own conferences, reading our own newsletters, preaching to the choir, and not leveraging what could be an inordinately powerful ally in better securing supply chains. I firmly believe that the tax stamp and secure printing industry should have a seat at the FCTC table, and developing a roadmap that begins to deliver on this goal would similarly be a strategic investment in even more robustly positioning the industry. Part of developing both the simple guide and gaining more trust within the health fraternity perhaps lies in a third avenue of strategic advantage: doing more to exploit the real value that tax stamps and secure marks can potentially contribute.

Avenue 3: doing more to communicate successes

We were recently asked to compile a quick list of examples of successes achieved using secure marks. As it turns out, this is quite a tricky request. The studies that are available tend to repeatedly focus on the same small number of sample countries, and don’t necessarily convincingly make the case – in a powerful and accessible way – that investing in tax stamps and secure marks goes beyond simple rhetoric or an obligation imposed by the FCTC, but actually yield real, substantive, measurable successes. We need far more substance around the success stories attributable to tax stamps and secure marks. It is extremely difficult to sell a product or a service when there isn’t a compelling story to tell – and without a comprehensive list of country examples where secure marks made a notable difference, there simply isn’t a compelling story. Perhaps what is needed is an anonymised case study – ensuring that specific vendors or countries aren’t identifiable – detailing simply what type of security features were used, and what impact they had on excise collections, excise declarations and illicit trade in general. Continued on page 8 >

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Cannabis and Smoke-Free Alternatives Take Centre Stage at FTA Meeting The 2019 Federation of Tax Administrators (FTA) Tobacco Tax Annual Meeting (held in August in Michigan, USA) brought together tax administrators, tobacco product manufacturers, wholesalers, distributors, tax stamp producers, stamping equipment manufacturers, and software companies. A total of 36 states and localities attended this year’s conference, some with representatives from multiple departments. Promoting practice standards, information sharing, regulatory compliance, data uniformity, enforcement, and fraud prevention remained core topics in the annual event’s agenda. Although cannabis continued to occupy discussions and evoke extensive interest among attendees from a taxation, enforcement, track and trace, as well as health and safety perspective, cannabis manufacturers and most supporting industries were not proportionately present. Their attendance will, however, most definitely increase in the future. SICPA/Meyercord, an active participant in this segment, gave an industry update and CalCannabis Cultivation Licensing Division gave a detailed presentation of its programme in California. Newer alternative products also received due attention. Juul presented its efforts to curb product abuse, counterfeiting and diversion; Altria presented IQOS, which is just now entering the US market; and SICPA/Meyercord presented how alternative products impact the Master Settlement Agreement (MSA).

ITSA asks who would implement track and trace

Alex Finkel of SICPA/Meyercord delivered the first presentation on behalf of the International Tax Stamp Association (ITSA), with a clear description of how ITSA’s work relates to the US. After introducing ITSA, its members, and the standards for the industry, he compared the US market to other global markets. In most countries, smuggling, counterfeiting, foreign production, and weak governance define the landscape. The US by comparison suffers primarily from cross-state activity driven by tax differences. Finkel’s definition of track and trace, its critical elements, and the federal bodies with the power to implement it perhaps contributed to much of the discussion during the conference, with a key question being that of who would implement. The debate around state rights versus federal

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authority complicates many political issues in the US including those related to taxation. Finkel, on ITSA’s behalf, offered a state-level alternative to bypass the potential gridlock of a national track and trace system. He referred to the three-legged stool of licencing, enforcement, and product marking and the real-life successes created by implementing this model in California, Michigan, and Ecuador. Concluding with the equation of traceability + authentication = increased revenues, he emphasised that traceability in and of itself is not authentication but it is a great medium to acquire product and distribution data to help enforcement, and when coupled with authentication solutions can greatly benefit managing authorities.

California cannabis track and trace update

Richard Parrott, Director of the CalCannabis Cultivation Licensing Division with the California Department of Food and Agriculture gave a comprehensive presentation of the cannabis programme in that state, including a description of how it generates revenue by charging annual licencing fees to economic operators. Depending on the role of the operator – ie. cultivation, processing, packaging, distribution, or retail – the cannabis industry involves three state agencies: CalCannabis, the California Bureau of Cannabis Control, and the California Department of Public Health. Most people assume statewide uniform practice exists for the industry, but local governance has the effect of complicating industry participation. Not all cities or counties in California allow cannabis cultivation and processing, while others have varying levels of restriction. California uses Metrc for seed-to-sale traceability for recreational cannabis. A cloud-based SaaS system, Metrc uses unique identifiers with RFID chips for individual plants and packages. A portion of the licencing fees charged to the operators covers the cost of the tags and track and trace system. The SICPATRACE® system supplied by SICPA/Meyercord to Humboldt County and Mendocino County in California differs from Metrc in that SICPATRACE, as it is currently used, is designed for medical cannabis control. Another key difference is that SICPATRACE is used in conjunction with an authentication label carrying multi-level security features, while the Metrc tag does not appear to carry any security features – or, at least, not visible ones.

Cannabis national overview

Alex Spelman of SICPA/Meyercord colourfully prepared his audience by wearing a black suit covered with bright green cannabis plants. The cannabis medical programmes have been less contentious with regard to introduction and maintenance than the recreational programmes, with over 30 US states having some form of medical programme. The more contentious state-legalised recreational use began on the West Coast and has started to migrate to middle and eastern states. The expansion has been driven by voter initiatives as opposed to legislative initiatives aimed at finding new ways to raise revenue. At the federal level, cannabis continues to be classed as an illegal Schedule 1 drug. This creates several challenges to the states and those involved in the cultivation, distribution, and sale of the product. Banking activities, for example, continue to be a problem since the federal government regulates and insures such activities. Although banking guidelines have been developed, no major banking institution currently serves the industry. This has the effect of chaining the industry and the states collecting taxes from the industry to a mostly cash economy. This conundrum brings with it all the risks and challenges of holding and using large amounts of cash. Smaller credit unions and financial institutions are emerging to offer banking services, but remain far short of fulfilling the need. Despite the hopes and promises of many who pushed for recreational cannabis legalisation, such legalisation has not eliminated the black market. A number of issues have kept the black market in place until permanent solutions emerge, including: issues related to banking restrictions; the cost differential between legal and illicit products arising from regulatory fees and taxes; the lack of access to federal crop insurance programmes and other federal agriculture assistance; and restrictions pertaining to moving product across state lines. According to Spelman, certain states, in a true interstate market, would have robust export capabilities, but this is not currently the case. For example, it has been reported that Oregon has six years’ worth of cannabis on store shelves. The in-state legal market in Oregon cannot fully consume what is produced, yet Oregon licencees are not allowed to sell their product in other, legalised states.

The natural alignment between production and consumption is artificially constrained, creating markets where there is sometimes either too much product or not enough. Much work remains.

Juul counterfeit and diversion issues

John Connolly and Spencer Morrison of Juul Labs Brand Protection presented efforts to combat counterfeiting, diversion, and underage use. Juul has a comprehensive team dealing with fraud, which is organised into units for investigation, intelligence, online matters, audit, customs, litigation and IP. In addition to being nearly unique to the FTA meeting as a vaping company, Juul faces a problem that most of the rest of the audience doesn’t: diversion from other countries. As part of its efforts to combat this, Juul serialises vaping devices as well as pod vapes (www.vaping360.com describes a pod vape as a mini vape based on a twopart system: a pod filled with vape juice that snaps into a small battery).

differences between counterfeit and genuine products will be withheld in this article. Tax Stamp & Traceability News™ encourages investigators or prosecutors to contact Connolly or Spencer for more information and will share their emails with qualified government, enforcement, or investigative personnel. Please contact the editor who will refer your inquiry to Juul Brand Protection.

Altria introducing IQOS to US market

David Fernandez of Altria presented the IQOS product which will soon be launched in the US market, starting in Atlanta, Georgia. Many readers already familiar with this product know it to be a safer and healthier alternative to traditional cigarettes. Some cigarette smokers have found vaping not as satisfying as cigarettes, and Altria, as part of Philip Morris International, has proven that IQOS elsewhere in the world can effectively serve this segment of smokers with a healthier alternative. Part of its strategy is to invite existing smokers into a comfortable boutique environment to learn about the product. Curious non-smokers will politely be turned away as this is a product designed to help and improve the health of existing smokers. The IQOS sticks will be taxed as cigarettes. As packaging is smaller and thinner it will produce some challenges for stamping machine manufacturers and stamp makers, but equipment manufacturers already have solutions in process.

Alternative products under MSA Juul voluntarily stopped selling flavoured pods to retailers last year to reduce underage vaping. Now the only flavours available to retailers are Virginia Tobacco, Classic and Menthol, with additional flavours obtained through direct online channels only. Some retailers continue to obtain flavours by having employees purchase as individuals online. This practice, known as collecting, is a long-time practice by offenders in the grey market. The bulk of the diverted flavoured pods come from Canada. Diverters often also engage in counterfeiting by creating warning labels to cover the characteristic skull and crossbones warning on the Canadian Juul Pod packaging. Criminals also divert from other countries. Connolly and Spencer showed examples of the differences between warning labels. The

Kara Parga recently joined SICPA and formerly worked for the state of Nebraska. She started her career there as Master Settlement Agreement (MSA) auditor. She spoke about how alternative products would impact the MSA. The MSA was signed into law in 1998 and restricts advertising, sponsorship, promotion and distribution of tobacco products. Under the MSA, tobacco manufacturers make payments to states based on the amount of product sold into the state. The states use the MSA funds for tobacco control, healthcare, and other programmes.

New potential suppliers

Now and again new potential suppliers attend FTA meetings to understand the US tax stamp market: • US security printer Ashton Potter, based in New York State, prints tax stamps for some countries outside the US, and was a first time attendee; • Xeikon attended to present the concept to existing stamp producers of Just in Time Security Printing (JITSP) as a means to reduce inventory and improve supply chain management. Xeikon hopes, along with Agfa, to replicate the JITSP model of Fedopress (the printer of the Belgian and Luxembourg tax stamps) in the US; • Bruce DeBoer with Kore-Com attended with his partners to renew relationships and review business opportunities. DeBoer commented that he already had a machine design which could stamp the IQOS sticks; • Notably absent was a recent stamp producing entrant, Multi Color Corporation, which continues to supply a few states with tax stamps.

Vendor participation welcomed

Although attending the annual FTA event has many benefits, the real benefit can only be gained by involvement in the organisation through various committees and other service opportunities. Suppliers contemplating the US tax stamp market, in addition to preparing and proving out their technologies and services, therefore need to understand that strong supportive relationships form the foundation for delivering any new solutions to FTA members. For instance, the FTA welcomes vendor participation in its regional and national uniformity committees, which are behind most of the benefits and cost savings enjoyed by revenue authorities, wholesalers, service providers, and ultimately stamping equipment and stamp suppliers. The next annual conference will be held in Portland, Maine, on 16-19 August 2020, with the uniformity committee meeting taking place on 14-15 August.

The market shift away from traditional cigarettes to alternatives raises the question of how to treat these newer products. IQOS is one of the easier ones to define as it will be treated as a cigarette, but how other products will be treated continues to be discussed.

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Latest Developments in India Over the last few months, a number of developments in India have provided interesting examples of the correct (or not so correct) use of tax stamps and anti-counterfeiting strategies. In the first development, which occurred in February in the state of Uttar Pradesh (one of the biggest states in the country), more than 70 people died as a result of consuming spurious liquor. The incident has raised concerns over the state excise department’s decision to replace the previous secured holographic liquor tax stamps with plain barcoded stamps devoid of any physical security features, in compliance with a move to implement track and trace technology. The second development pertains to a recent tender floated by the two Indian states of Chhattisgarh and Haryana, which are upgrading their existing tax stamps with a traceability function. Both states have a combined estimated requirement of 4.8 billion tax stamps over a period of three years. While Chhattisgarh is upgrading its existing holographic tax stamps with new features, Haryana is replacing its paper label with a holographic stamp. In both cases, a full polyester security hologram will be integrated with a 2D matrix code for traceability purposes. The third development comes from the country’s capital, New Delhi. The Delhi government has banned Anheuser-Busch InBev from selling its products in the territory for the next three years following a raid at one of the restaurants owned by its distributor/agent. It was discovered that duplicate labels had been used on one case of beer, leading to suspicions of connivance between the company and the distributor in order to evade taxes. This incident has spurred the Delhi government into finally upgrading its plain paper-based tax stamps with additional security features. Tax Stamp & Traceability News™ has regularly reported on the issue of the Delhi tax stamps, since the capital decided to

introduce plain barcode labels in 2013 as part of its Excise Supply Chain Information Management System – an initiative for enhancing excise revenues and controlling illicit flows of spirits, wine and beer into the territory (see TSN January 2016). The label is a very plain, purely digital affair that seems to go to the opposite extreme of its earlier full-face hologram. It is devoid of colour, as well as of any material-based overt or covert security features for physical authentication. There is no way of telling, just by looking at the label, whether it is a fake, unless it happens to be sitting next to a label with an identical code. This lack of visible security is one reason duplicates have been able to slip into the market so easily. All three incidents provide good examples of how important it is to integrate physical security features with digital technologies. While Delhi has learnt its lesson, Uttar Pradesh is still using a plain barcode-based label, but hopefully it will soon be taking the necessary steps to rectify this problem, having recognised the benefit of combining secure excise labels with track and trace functionality. While tax stamp enhancements are being made on the liquor side, there is good news from other sectors with regard to implementing secure traceability solutions, including the pharmaceutical and seed sectors.

Seed traceability by 2020

The union government is planning to create a mechanism for traceability, linking 130 seed testing and certification centres in the country. The move follows a series of incidents in which falsified seeds caused problems for farmers. Over the past few years, there have been multiple cases of cotton and chili producers losing crops due to spurious seeds, which were in some cases bought at reduced rates from unlicensed sellers. According to estimates, India is producing about 3.8 million tonnes of seeds against

a requirement of only 3.5 million tonnes. In identifying seeds as a key factor in ensuring sustainability for farmers, the union government is developing the traceability mechanism for introduction in June 2020.

Pharma traceability for domestic markets

Regulatory compliance with regard to serialisation is increasingly becoming a focus area for pharmaceutical manufacturers and supply chain partners across the world. While the regulation of Indian pharma exports was already implemented a years ago, there have now been positive steps taken towards implementing a track and trace system for the key ingredients used to make domestic pharma products, which could be a major move in combating the 7-10% of substandard or spurious medicines existing in India. This latest development follows recommendations by the Drugs Technical Advisory Board — India’s apex drug advisory body – to include ‘necessary’ provisions in the country’s drug and cosmetics rules, including the use of QR coding on active pharmaceutical ingredient labels. Although the various developments and initiatives described above are welcome, there is perhaps a lot more to be done in order to avoid de-linking the layered approach between physical authentication features and digital traceability solutions. For example, in the case of the EU Falsified Medicines Directive, governments that have adopted and implemented some combination of physical and digital authentication solutions, together with appropriate penalties and increased coordination, enforcement, and public education efforts have been successful in curbing illicit trade. The more comprehensive and coordinated approaches have been more effective in addressing this problem. The layered approach is always better.

Philippines to Introduce Alcohol Stamps (continued) The bids must not exceed PHP 0.10 ($.002) per stamp delivered, for an estimated stamp volume of 4.5 billion per year. The objective with this Invitation to Bid is to find suppliers who can provide overt and covert security features in addition to those already used on the tax stamps. In particular, it calls for at least three new overt features, excluding the microtext and deliberate error which already form part of APO’s base printing of the stamps. One of

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these three new features must consist of the intricate fine lines within the aesthetic design of the stamp, while the other two features can be chosen by the supplier itself.

covert features and one of them must be a third-level, forensic feature which can be authenticated via special laboratory equipment and instruments available in the Philippines.

With regard to the covert features, there must also be at least three new elements introduced into the stamps, excluding the invisible security inks which already exist in the printed base of the stamps. Two of the new elements must be second-level

In addition, the covert features, as well as the unique identifier required on the stamp for track and trace purposes, must be able to be read by mobile verification devices.

From the Archives 10 years ago and today… identifying counterfeit spirits and wine

Fast forward 10 years, and scientists from the universities of Glasgow and Strathclyde have developed an artificial tongue that can taste the differences between different varieties of whisky.

Counterfeit or Forgery?

In a paper published in the Royal Society of Chemistry’s journal Nanoscale, scientists describe how they built the tiny bimetallic nano-plasmonic tongue, which exploits the optical properties of gold and aluminium to test different samples.

While the main focus of Tax Stamp & Traceability News™ (TSTN) is on tax stamps themselves, it also covers the factors driving the use of stamps – in particular illicit trade, whether in the form of illegal diversion or counterfeiting. With respect to the latter, there is a constant stream of new technologies being developed to deter counterfeiting, and throughout the years TSTN has been covering some of those technologies as they pertain to the tobacco and alcohol sectors. August 2009 saw TSTN focusing on scientific techniques that were being adapted to authenticate vintage spirits and wines. In particular, scientists at the Oxford Radio Acceleration Unit (funded by the National Research Council) had discovered that minute levels of radioactive carbon absorbed by barley, as it grew and before it was harvested to make whisky, could betray how old the whisky was. The date could be pinpointed by detecting traces of radioactive particles created by nuclear bomb tests in the 1950s. The scientists could also use natural background levels of radioactivity to identify whiskies that were made in earlier centuries. In addition, nuclear scientists from the National Centre for Scientific Research in Bordeaux, France had developed a technique based on particle acceleration to measure the age of wine bottles, in order to distinguish between genuine and counterfeit vintage wines. Ion beams generated by the accelerator were projected on the bottle and a reading taken with a semi-conductor detector of the X-rays that were emitted. Since the chemical composition of the glass changed over time, and since production methods differed between manufacturers, each bottle had its own signature which the technique could measure and compare with information in a database containing the sample.

Using electron-beam lithography and metal-evaporation, sub-microscopic slices of gold and aluminium metals, arranged in a checkerboard pattern, were made to act as the ‘tastebuds’ in the team’s artificial tongue. The researchers poured samples of whisky over the tastebuds – which are about 500 times smaller than their human equivalents – and measured how they absorb light while submerged. Statistical analysis of the very subtle differences in how the metals in the artificial tongue absorb light – their plasmonic resonance – allowed the team to identify different types of whiskies. The team used the tongue to sample a selection of whiskies from Glenfiddich, Glen Marnoch and Laphroaig. The tongue was able to taste the differences between the drinks with greater than 99% accuracy and was also capable of identifying the subtler distinctions between the same whisky aged in different barrels, as well as distinguish between the same whisky aged for 12, 15 and 18 years. Dr Alasdair Clark, of the University of Glasgow’s School of Engineering, is the paper’s lead author. Dr Clark said: ‘we call this an artificial tongue because it acts similarly to a human tongue – like us, it can’t identify the individual chemicals which make coffee taste different to apple juice, but it can easily tell the difference between these complex chemical mixtures. ‘We’re not the first researchers to make an artificial tongue, but we’re the first to make a single artificial tongue that uses two different types of nanoscale metal ‘tastebuds’, which provides more information about the ‘taste’ of each sample and allows a faster and more accurate response.’

In the field of security documents – whether they are banknotes, passports or certificates of authenticity (brand protection) – the criminal will try and imitate or reproduce the security features of genuine documents. There is often confusion over the terminology applied to such imitations, and quite frequently the most common terms are misused, with the words counterfeit and forgery being transcribed one for the other. If one looks at the origins of the two words, their correct use becomes clearer. Counterfeit comes from the Latin contra- ‘in opposition’ + facere ‘make’ – thus a counterfeit is something that has been ‘made against’ and is the word used for the wholesale reproduction of a document or a product. The word forgery may originate from the French; the word ‘forgere’ is still used to describe the process of forging metal by a blacksmith to make items such as horse shoes. This metal processing takes place in a blacksmith’s forge and is used to describe the conversion and shaping of metal using heat, and physical attrition. Originally the word forge applied to coins which were genuinely made – or minted – in the blacksmith’s forging process, but which could also be imitated using base metal to imitate the real silver or gold. Quite often the value of a coin could be changed in a forging process. In today’s parlance counterfeit is correctly used to describe the wholesale fraudulent reproduction of a genuine document, and forgery is properly used when a genuine article or document has been criminally altered to, for example, change the identity of an owner (such as on a passport) or change the value of a document or the product it is associated with (such as on a certificate of authenticity).

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Tax Stamps and Secure Marks: Four Avenues (continued) A big part of this conversation should arguably expand the way in which success is measured, beyond simply the number of products marked, or an increase in excise revenues, to broader measures around a decrease in illicit trade, strike rates of enforcement activities, and the rate of successful prosecutions – all of which should be the real reasons governments invest in tax stamp and secure marking programmes. Implementing tax stamps and secure marks should be an easy sell, but often is not. A consolidated, global study that anonymises solution provider data, whilst still detailing the nature of the different solutions (and perhaps what other supplementary solutions were implemented), together with an indication of type of successes achieved, would be a win for the industry as a whole – particularly considering the fact that agencies indisputably in practice do have a choice of whether or not to pursue what is often a contentious issue.

Avenue 4: better countering industry tactics

A last worthy investment for the industry would be very strongly investing in more

robust guidance to agencies on the kind of pushback and obstacles they can expect from the industries they are trying to regulate – whether this is the tobacco industry, or alcohol, or sugar, or whatever other behemoth agencies may have in their sights. We know from experience that these industries tend to have a somewhat generic set of tactics, arguments and rhetoric that they use to dilute, derail or delay the programmes that are meant to better regulate their supply chains. And we also know from experience that much of these tactics and rhetoric are easy enough to counter or engage with constructively, but that an unprepared agency may well not be able to do so. As a result, we see far too often how even the best of programmes fall by the wayside, simply not gaining traction, as the larger manufacturers flex their fiscal muscles, relying on the soft power that comes from being a significant revenue contributor. They argue that they are capable of selfregulating, propose that government should instead be focusing its efforts simply on low-cost manufacturers; deflect more

sophisticated solutions with concerns about costs, and on occasion even capture or corrupt agencies. And far too many agencies bend and bow and sway to this pressure, walking away from engagements which they could easily direct – if only they had easier access to facts and counterarguments. A simple generic guide to the reasons why tax stamp and secure marking programmes fail, highlighting the type of narratives and arguments an agency is likely to be faced with, and a set of facts and counterarguments for agencies to rely on, would go a long way to ensuring that even more programmes make it out of the gate and actually get implemented. What is needed is more generic, industrywide efforts, that do more to simplify what is otherwise a somewhat opaque business. What is needed is far more technologyagnostic publications on the principles, options and implications of different choices, written in a simple, accessible style. What is needed are compelling stories that sell the concept, and I’m convinced we’re on the road to even greater things.

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Tax Stamp Forum Goes Back to Where It All Began

UK to Suspend Tobacco Track & Trace if No-Deal Brexit The UK’s newly implemented track and trace system for tobacco products will be suspended in the event of a nodeal Brexit, Her Majesty’s Revenue & Customs (HMRC) has confirmed. The system, which was a requirement of the EU Tobacco Products Directive, would likely be suspended for up to one year if the UK leaves the EU without a deal on 31 October, while it attempts to introduce a UK stand-alone system, an HMRC spokesperson told www. conveniencestore.co.uk.

Two months ago we celebrated the 10th anniversary of Tax Stamp & Traceability News™, which was launched in July 2009 under its original name of Tax Stamp News™. But this wasn’t the only thing relating to tax stamps that was introduced that year, given that the Tax Stamp Forum™ was also launched in 2009, by Reconnaissance International, in the wonderful city of Budapest, Hungary. To mark this important anniversary, we thought we’d return to where it all began 10 years ago, by holding the 2019 forum in the same city. And we have to say that it was great to be back! The forum kicked off with a brief introduction by Astrid Mitchell, Chief Executive, Reconnaissance, who took us on a journey through the different locations that have played host to the event over the last decade. After Budapest in 2009, the forum moved to London in 2011, and then across the pond to Washington DC in 2012. It then came back to Europe in 2013, in Vienna, before heading off to Dubai in 2014, then back over the Atlantic to Miami a year

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later, and Berlin in 2017. The 2018 event was a milestone in that it was held for the first time on African soil, in Nairobi, Kenya. And now back to Budapest this year. This gives a total of nine forums – as opposed to 10 – given that up to now they have been held every 15 to 18 months. You will see that we have endeavoured, in general, to cover locations where there is interest in and activity around excise tax stamp programmes. However gaps remain, particularly in respect of Asia and Latin America, and we do need to look at bringing future forums to these regions, especially given the extensive tax stamp activities taking place there – and also given that Tax Stamp Forum is a global event which needs to be globally present. As Astrid Mitchell commented in her opening remarks at this year’s event, ‘although we use the words ‘tax stamp’ to describe this forum it covers so much more than the stamp itself. The stamp is a component of a much broader ecosystem for excise collection, product authentication, secure track and trace and production monitoring.’ Continued on page 3 >

The track and trace legislation was enforced on 20 May 2019, requiring retailers across the UK to apply for unique codes – an Economic Operator Identifier Code registered to their business and a Facility Identifier Code for each of their stores – in order to purchase new track and trace compliant tobacco products, which are now available in wholesale. ‘If we have to suspend the track and trace system following a no-deal EU exit, we are fully committed to restarting a UK system as quickly as possible with the minimum changes necessary to give the UK full regulatory control,’ the HMRC spokesman said. ‘If we leave the EU with a deal, the track and trace system will continue in its current format,’ he added. The Association of Convenience Stores (ACS) is seeking assurances from HMRC that retailers will not have to go through the application process again, in the event of a no deal.

The 9th Tax Stamp Forum in Quotes and Photos “There is not much that can be done to improve the event, all was perfectly organised. Location, welcome, transportation, selections, timing and food. Honestly I was initially a bit sceptical concerning the Danube river cruise: “how boring will be a dinner where you are held on a boat with your competition all together.” All wrong! The event was grandiose, as behind competitors you find humans and people with the same interests and objectives.” “Great arena for networking with vendors, competitors, suppliers and customers in the tax stamp and traceability business.”

Inside this Issue 1 Tax Stamp Forum Goes Back to Where it All Began

1 UK to Suspend Tobacco Track & Trace if No-Deal Brexit

2 The 9th Tax Stamp Forum in Quotes and Photos

“Year after year it is becoming a must-attend conference both for suppliers of solutions and revenue authorities. A vivid example of public and private cooperation.” “Some great presentations about the benefits of tax stamps. Especially good for our company to see how we can propose our vision solutions as a leader in pharma to a new market which is growing at an exceptional rate.”

4 The SARS Tender: Can an

Agency in Turmoil be Both Agile and Prudent?

6 Human and/or Digital

Interrogation of Tax Stamps

7 ITSA Appoints Three New Board Members

8 Cannabis News In Brief

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“This event has been an eyeopening experience for me with a lot of new information, providing another area of opportunity for our country. The sky is certainly the limit for new innovation and technological advances to efficiently fight illicit trade.”

Tax Stamp Forum Goes Back to Where it All Began (continued)

She continued, ‘we would like to think that with all that’s been going on, at international level in particular with the FCTC Protocol and EU Tobacco Products Directive, that when we were setting up the Tax Stamp Forum 10 years ago, we saw all these developments coming. But to be honest we didn’t really, it just sort of happened, but I’m glad that we were fortunate to be there at the right place and right time in order that we can now be of service to those concerned by these developments.’

Georgia here we come

To kick off the next 10 years of the Tax Stamp Forum, we are pleased to announce that Georgia Revenue Service has invited us to hold the next event in Tbilisi, Georgia. We are also happy to advise that from now on we will be holding the forum on a 12-month cycle, therefore the date for the Tbilisi forum will be October 2020. So please mark your diaries now!

Attendance honours list

“The forum has significantly brought together the needs of stamp issuers, producers of stamps and providers of integrated solutions. The closed government forum is particularly useful.”

To mark the 10-year anniversary, Astrid presented an ‘honours list’ of 10 delegates who had attended the first forum in 2009 and who were also present at this forum 10 years later. And out of those 10 delegates, two were identified as having attended all nine forums: Pat Fitzmaurice of DLR Security Concepts and Kelly Smith of Ashton Potter. Astrid congratulated these longstanding delegates and as a token of appreciation for their continuing support presented them with a bottle of Pálinka, the local Hungarian fruit brandy, complete, of course, with a tax stamp.

Some stats

The 2019 event was attended by just under 240 attendees from 50 countries and 116 different organisations. In addition, around 25 government organisations from across the world were in attendance, mainly consisting of tax revenue authorities. These included authorities from Guyana, Chile, Israel, Poland, Rwanda, Kenya, Uganda, Georgia, European Commission, Pakistan, Bangladesh, Sri Lanka, Mauritius, Botswana, India, Thailand, Italy, Spain, Ireland, Taiwan, Moldova, Lesotho, Romania and of course the host nation, Hungary.

And one other change to announce is that Tax Stamp Forum will now be called: Tax Stamp & Traceability Forum™. This change is in line with the renaming of this newsletter to Tax Stamp & Traceability News, and reflects the fact that, as Astrid said above, it’s not just about tax stamps. On a final note, Reconnaissance would like to express its sincere thanks to the 13 sponsors, 21 exhibitors, 35 speakers and panellists, government authorities and all other delegates, for making the 10th anniversary Tax Stamp Forum an event to remember. THANK YOU! Over the course of the next few months we will be covering some of the presentations and workshops included in the Tax Stamp Forum programme, so please be sure to look out for them.

VOLUME 11 – NO 09|SEPTEMBER 2019

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The SARS Tender: Can an Agency in Turmoil be Both Agile and Prudent?

By Telita Snyckers, International Tax and Customs Transformation Consultant At the recent Tax Stamp Forum™ in Budapest one question that kept coming up was: what is the status of the South African Revenue Service (SARS) tender for a tax stamp or secure marking solution for tobacco products? (The current SARS tender has already been extended twice, with the closing date for submissions now set for 31 October 2019.) The tender has elicited great interest from potential solution vendors, with more than 100 people attending the briefing by SARS in May 2019. The short answer, of course, is that no one really knows what the status is as SARS has said little about the project from its original announcement earlier this year. The tender was issued four days before new Commissioner Edward Kieswetter took office, following the dismissal of his predecessor Tom Moyane (whose legacy of failure and corruption was described by a commission of enquiry as having turned the tax institution – once hailed as a worldclass system – ‘on its head’). The process is high profile, politicised and directly associated with much broader issues in relation to South Africa’s struggle against state capture. The question dovetails nicely with the presentation I gave at the conference, on the subject of what more can be done by solution providers – and the secure marking industry in general – to improve their conversion rates and actually get solutions implemented. As we’ve pointed out in earlier articles, and as we again explored at this year’s conference, it seems that solution providers face the same intractable challenges time and again: solutions are pitched that never go to tender; tenders are issued but are never awarded; awarded tenders are challenged or cancelled; tenders are awarded for solutions that are never implemented; and the tax stamp and secure printing industry ends up spending a considerable amount of resources on programmes that never materialise. A quick recap of the SARS history may be in order: SARS’ efforts to address illicit trade in a meaningful way is long overdue. In 2007, the agency included a focus on illicit tobacco in its strategic plan. In 2010 it

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implemented a tobacco marking pilot project using an industry-developed solution. In 2013, SARS said it was considering replacing the so-called ‘diamond’ stamp, but indications are that resistance from manufacturers made SARS walk away from this process. In 2016, SARS tabled a legislative amendment that would in theory have allowed for the use of secure fiscal marks and noted that it had completed a track and trace study into the cigarette supply chain. Then in 2017, SARS simply noted that it was working on developing a way of detecting illicit cigarettes and improving the manual tracking of cigarette movements. Then in 2018, SARS signalled its intention to introduce production counters on cigarette manufacturing lines. So, for SARS to finally have published a tender in 2019 was making big strides indeed. So why has it taken so long to get this over the line? Perhaps as a result of an interplay of several key reasons: conversations around secure marking are being driven almost entirely by the tobacco industry; the benefits of secure marks are in general being under-sold; SARS, like most agencies, has no experience with track and trace and the related technologies; and given recent scandals that have literally rocked the once-beloved agency to its core, SARS has reason to be extremely cautious.

The conversation is being entirely shaped by the tobacco industry A large part of the answer may lie in the presentation I did at the Tax Stamp Forum: because the rationale behind secure marking, and the benefits it could potentially offer the country, have simply not surfaced sufficiently. In fact, the only voices being heard on better securing the supply chain, and on the proposed marking of cigarettes, are those of the tobacco industry. I did a quick analysis. In the few months since SARS announced the tender, around 22 directly-related articles appeared in the media. Of those, only three argued in favour of a secure marking solution: one by the International Tax Stamp Association (ITSA), one by my colleague Michael Eads, and one by South Africa’s Council Against Smoking. So, in South Africa, arguments supporting a sensible, proven solution to illicit trade have featured in around 13% of media articles since the publication of the tender. The rest of the articles argue why the introduction of a secure marking and traceability solution would spell sheer devastation: secure marks ‘would not address the main problem of illegal tobacco trade’; the new system was described as ‘rushed’ (well, it’s only taken them 10 years); the ‘paper-based fiscal markers are more easily stolen, counterfeited or forged’; ‘the system specified in the tender will capture only the legal market and could

drive illicit trade up further,’ and the industry noted its concern about SARS introducing ‘such a sophisticated, IT-intensive system’ (SARS actually has a pretty good track record when it comes to rolling out sophisticated IT systems.) Alarmist statements have become common, with the industry noting that: ‘the resultant adverse economic effects will not be limited to the loss of jobs and state revenue, but also all the local leaf growers and others who supply goods and services to the tobacco factories in South Africa. 10,000 farmers will be immediately wiped out, putting another 35,000 dependents at risk.’ And the system would simply see ‘a multi-billion-rand tender awarded to a monopoly.’ Every single one of these statements come from the industry body representing big tobacco.

There certainly are compelling examples of successes, some of which were featured at the Tax Stamp Forum. In our interactions with agencies this is one of the first questions they ask, and one that we find hardest to answer. It is also one of the key bits of rhetoric that is ultimately often used to get governments to walk away from secure marking programmes. The few studies that are available are often old, cover very few countries, and seem to be limited in focus. Writing captivating, engaging content to better balance the current debate – not just in South Africa, but the world over – would be so much easier if there was a more substantial, comprehensive body of evidence covering a wide range of countries on how solutions indisputably can and do make a difference.

We know that the tobacco industry frequently meets with SARS to ‘coordinate’ efforts to combat illicit trade. And yet it is vehemently opposed to the one measure (track and trace) as agreed by experts and embodied in the FCTC Protocol that can best address the issue. Any industry that legitimately wants to fight against illicit trade should welcome the initiative. The fact that the big players in the tobacco industry do not do so may suggest that the companies themselves would prefer the tobacco supply chain to remain opaque. One can only speculate why that might be so. Instead, the industry’s proposed solution is a simple one: SARS should rather station customs officers at manufacturers’ premises. Anybody who knows anything about best practice when it comes to compliance and risk management can tell you that human interactions are inherently fraught with integrity risks, and no modern tax administration would ever introduce manual processes reliant on human discretion, given a choice. The problem, of course, is that public policy tends to follow public opinion. And public opinion has been shaped almost entirely by the very industry that SARS is trying to regulate. So, the first part of the challenge, then, lies in bringing more balance to the conversation around the importance of supply chain management and why tobacco supply chains are so inherently risky. It lies in at least bringing a more objective view to ‘Joe Public’ on what tax stamps and secure marks do, how they work, and their importance in better securing the tobacco supply chain.

What is the ROI?

Something we also touched on at the recent Tax Stamp Forum was the importance of being able to tell a compelling story about the return an agency can expect to see if they implement a secure marking solution.

The current ‘diamond stamp’.

Agencies are not traceability or secure marking specialists

The development of a marking solution does not fall within the core competence of the typical tax or customs agency – even an organisation like SARS that has actually developed and implemented other worldclass and highly sophisticated IT systems. Through something like the most recent Tax Stamp Forum, an agency like SARS would have had the opportunity to interact substantively with the very solutions it is trying to implement. Many of its Southern African neighbours attended and actively engaged – SARS did not. SARS’ failure to attend the forum represents a real missed opportunity for the agency. This highlights the importance of the ITSA initiative to include government agencies as associate members. It may perhaps come too late for SARS, but for other agencies it may well help to gain better traction for solutions that work.

An agency in turmoil: can it be both quick and prudent?

SARS has had a traumatic few years (and quite a bit of it related to the tobacco industry). The new Commissioner, Edward Kieswetter, grapples with depleted capacity, low staff morale, and weakening tax morality. He has inherited an agency that is viewed with scepticism by many, in a country where allegations of state capture and cronyism have become rife.

(SARS is actively lobbying to have global powerhouses Gartner and Bain, along with international law firm Hogan Lovells, banned from doing business with any government departments in future for their role in the capture and collapse of the institution. McKinsey has already had to pay the country’s government back around $68 million for other tenders that were unduly awarded to it and is already on the list of companies government won’t touch.) The tender was announced just days before Kieswetter officially took on his new role. He has to be seen to be both decisive in dealing with illicit tobacco – which is easily the single most visible issue in the media facing the organisation – and transparent in how he does so. He has to move both quickly and prudently – in an environment that is complex and among many that would be happy to see him fail. We have long argued that SARS should have moved much faster in better securing the tobacco supply chain, and that secure marks and traceability are key in doing so. Indeed, it should have done this when there was some impetus behind the process some years ago. While we continue to argue for the introduction of these and other sensible policy solutions, we also have some sympathy for SARS in trying to navigate what has become a veritable minefield.

Conclusion

It’s anybody’s guess what SARS’ next move will be. We’d like it to move faster because it is estimated that illicit trade sits at between 30-35% of the cigarette market (source: Nicole Vellios, Illicit cigarette trade in South Africa 2011-2017), – equating to more than 66,000 policemen’s salaries a year. But we’d also like it to move cautiously, to make sure that its decisions are informed by more than simple anti-regulation rhetoric. In the meantime, we need to do far more in terms of bringing balance to the public narrative – so that we move beyond the very low 13% of media coverage actively supporting the introduction of secure marks, to telling a far more compelling story about how supply chain security actively and substantively serves to curb illicit trade. Telita Snyckers is an international tax and customs transformation consultant. Key clients include the International Monetary Fund and Sovereign Border Solutions, after having previously worked as an executive at SARS and a compliance manager with the taxman in Singapore.

VIEWPOINT | VOLUME 11 – NO 09|SEPTEMBER 2019

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Human and/or Digital Interrogation of Tax Stamps By Ian Lancaster, Associate, Reconnaissance International An intriguing and important discussion regarding the relative role of human senses and digital methods in authentication has been sparked by two contrasting presentations at the recent Tax Stamp Forum™. Ian Lancaster, who presented one of those papers, here describes the contrasting presentations and the follow-up discussion.

A fingerprinting technique

On the first morning of the forum Avi Chaudhuri, Chief Scientist at Systech, gave a paper titled The Perfect Tax Stamp, in which he argued for the use of ‘fingerprint’ methods to authenticate stamps – specifically Systech’s new e-Fingerprint® technique. This works on the basis that if a tax stamp carries a two-dimensional barcode (eg. a QR or datamatrix code), the barcode pattern printed on each stamp will unavoidably vary (caused by environmental variations, dust, line speed, vibrations and printing or substrate imperfections). The e-Fingerprint solution involves the use of a high-resolution camera to capture the printed code and these stochastic variations. They are then algorithmically digitised for storing on a database (data repository in Dr Chaudhuri’s words) which holds the file of every recorded barcode. The examiner then captures the barcode on each stamp using the UniSecure proprietary app on his or her smartphone; the app connects to the database to compare this with the genuine code and report to the examiner whether the code (and therefore the stamp it’s printed on) is genuine or not.

might include ‘legacy’ authentication and anti-tamper features. He suggested that ‘overt (analogue) features may be added to complement the stamp design’ but noted that these are ‘optional’ and increase the cost ‘without additional authentication benefits.’ He further commented that ‘many overt features are easily duplicated’ and that ‘the familiarity effect’ may create false assurance.

But what about human senses?

My paper was titled The Role of Human Senses in the Digital Age, in which I argued that it is dangerous to rely only on digital methods of authentication and that there should continue to be a role for humans to inspect tax stamps. It is impossible for a person to understand a barcode or – more importantly – to detect variations in one that has been fraudulently altered. Nor is it possible to know what instructions a barcode is giving to a reading device such as a smartphone, or whether it is connecting to the legitimate database or website, or whether it is capturing or corrupting any of the data on the operator’s phone. I suggested that, given this situation, we are generally too trusting in our digital systems and smartphones. Dr Hannah Fry, Associate Professor of the Mathematics of Cities at University College, London, has written that ‘our reluctance to question the power of an algorithm has opened the door to people who wish to exploit us.’ There are too many examples of recent database hacks and data breaches to demonstrate that there truly are people already exploiting us by stealing sensitive personal information. One of the most alarming figures is provided by the Identity Theft Resource Center, a US non-profit organisation, which reveals that in 2018 nearly 450 million records containing sensitive personally identifiable information were hacked in the USA alone.

So the e-Fingerprint system, which Systech claims is highly reliable because barcodes cannot be copied or cloned without this being detected, does not require human evaluation, other than reading the smartphone display after the connection to the data store.

One problem is that we don’t pay attention when we use digital tools as a substitute for physical secured documents. Neuropsychologists have explained the importance of paying attention and engaging our brains in order to properly perceive and not just see. This is what examiners of physical security documents do, but this is not possible in a wholly digital system; indeed, we suspend our scepticism and trust our digital systems too much.

In his paper Dr Chaudhuri did, however, recognise that the perfect tax stamp

Digital systems are of course here to stay, but I suggest that we need a two-part

Examples of the print micro-variations captured in the e-Fingerprint system.

6 TAX STAMP & TRACEABILITY NEWS | VIEWPOINT

approach to improving their performance where they are used in a security application: 1. To imbue the community of developers of digital methods of identity, financial transactions and secured document authentication with the same priority for security and protection that is intrinsic in the physical secured document community, which has over 1,000 years of experience in combatting counterfeits and other fraud; 2. For human senses to work with digital systems and for digital systems to exploit the subtleties of those senses. Smartphones, with the appropriate app to interrogate a specialist authentication feature, can be a very powerful tool in the hands of an experienced examiner, but phones – or other digital readers and systems – can be compromised if they connect to a database over a network, because of the possibility of hacking and data corruption. The industrial designer Dieter Rams recently said that ‘the world that can be perceived through the senses exudes an aura that cannot be digitised’; this ‘aura’ is perceived by physical document examiners who develop the ability to sense that a document is fake even before they closely examine it. Fingerspitzengefühl is the German word for this; literally it translates as ‘fingertips feeling’, but it is used for the intuition that comes with experience. It is the interplay of Fingerspitzengefühl with Rams’ ‘aura’ that works so well in physical document examination. We jeopardise security and authentication by neglecting the use of human senses, especially those of trained and experienced document or feature examiners.

And so to blog…

My presentation appears to have hit a nerve for Dr Chaudhuri, who continued the debate after the end of the forum. His academic qualifications are in neural physiology, a speciality that he drew on in an extended article on the Systech blog titled The Role of Human Sensory Perception in Anti-Counterfeiting Technologies. In this blog he shows several well-known optical illusions, pointing out that ‘our interpretation of the visual world can differ based on the way our mind interprets what we’re seeing,’ going on to aver that to claim that ‘our senses are immune to being fooled is naïve and has been proven false

by a vast body of neuroscience literature.’ He then writes ‘Gestalt psychology argues that we actively interpret what we see based on a mix of prior experiences, expectations and a logical sense of what we believe should be present.’ He also makes the case that holograms and other anti-counterfeit technologies can be easily replicated, so asking human observers to ‘rely only on their eyes to distinguish between real and fake items’ is a win for the criminals. In this he ignores the distinction between the cursory examination of the public or even a shop assistant and the examination of a professional, equipped examiner. It is very difficult to make a fake sufficiently accurate to pass a professional’s examination.

I responded to this article (although at Tax Stamp & Traceability News™ press date my response has not appeared on the Systech blog, only in an abridged form on Dr Chaudhuri’s LinkedIn page where he links to the article), pointing out that in Dr Chaudhuri’s reference to Gestalt psychology he is supporting my view that professionals and not consumers should be the people inspecting and examining authentication features; they, after all, have the ‘prior experiences, expectations and… sense of what… should be present.’ Regarding the optical illusions that Dr Chaudhuri shows, designers of security documents and optical authentication features fully understand these illusions and know they need to avoid any design that is visually ambiguous.

Dr Chaudhuri has more faith than me in the integrity of digital systems, claiming that fingerprinting technologies ‘suffer none of the security drawbacks that have plagued other digital offerings of the past’ while offering a ‘robust and unassailable technology.’ In this he is both overlooking the examples of supposedly unassailable technologies that have been compromised – including Blockchain and cryptocurrencies – and almost inviting the criminals to show that these technologies can be successfully attacked. It’s only a matter of time if it’s worthwhile for them. Both presentations are available from the Tax Stamp Forum website and the Systech blog can be read at blog.systechone. com.TSTN welcomes your thoughts and contributions on this important discussion.

ITSA Appoints Three New Board Members The International Tax Stamp Association (ITSA) has welcomed three new board members to its leadership team. Tim Driscoll, Kelly Smith and Marietta Ulrich-Horn have joined the board in a move which will continue to cement the trade body’s reputation as an authoritative voice on illicit global trade and effective revenue protection solutions. Kelly is Senior Vice President of Ashton Potter Security Printers, a leading provider of security printing and advanced technology for the world’s governments and manufacturers and one of the founding members of ITSA when it was formed in 2015. Since joining the company in 1994, he has been in senior management positions, building an extensive knowledge of tax stamps and supply chain track and trace solutions and has been actively involved in the security printing industry for nearly four decades. Marietta is the co-founder and CoManaging Director of Austria-headquartered product security firm SECURIKETT, which specialises in security labels and stamps and their traceability. She has been delegated by the Austrian Standards Institute to actively contribute to the emergence of European and international standards on authentication, traceability by unique identifiers (UIDs), tax bands and tamper evidence. Tim holds a dual role as Senior Vice President and General Manager of Currency and Tax Stamps at Authentix, which

Kelly Smith

Marietta -Ulrich-Horn

provides authentication and track and trace solutions for governments, central banks and commercial products. As well as leading the expansion of the company’s tax stamp business, he was also instrumental in the launch of the Ghana tax stamp programme and has been involved in the design, development and implementation of authentication solutions for banknotes and excise tax recovery for almost 25 years. In addition to making the three appointments, ITSA has also confirmed the reappointment of Juan Carlos Yañez Arenas as Chairman. Juan said: ‘we are delighted to welcome three highly experienced individuals to our board as we look to cement our position as a strong advocate for the use of tax stamps in track and trace systems and the development of industry best practice.

Tim Driscoll

‘Going forward, we are looking to expand the membership to include tax revenue authorities who want to get involved in our work and be able to present their position and have a voice in our association.’ ITSA now has 23 members (including latest newcomer, Wellking Technologies of China), but other organisations are being urged to join. Membership is open to legally incorporated companies that supply tax stamp components and features, finished tax stamps, equipment for stamp design, manufacture, application and authentication, and systems for coding and marketing stamps. www.tax-stamps.org.

VOLUME 11 – NO 09|SEPTEMBER 2019

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Cannabis News In Brief

KushCo Enters Exclusive Agreement with De La Rue KushCo Holdings – providers of ancillary products and services to the cannabis industry – has entered into an exclusive distribution agreement with De La Rue, for the provision of standard and custombranded anti-counterfeit security labels to this growing industry.

The solution will comprise visual authentication technology using 3D photopolymer images, as well as unique IDs to support product serialisation, and a digital verification system to enable authentication and tracking throughout the regulated cannabis supply chain.

Nearly All California Cannabis Businesses in System By End October The Californian government has declared that its state-wide system for tracking cannabis products from seed-to-sale will soon cover the entire industry. According to www.marijuanaretailreport. com, in May this year less than 10% of licensed cannabis businesses were enrolled in the system. However, speaking

at a September press conference, Nick Maduros with the California Department of Tax and Fee Administration said: ‘as of about a week ago, well over half the market is in track and trace. By the end of next month, we should have just about everybody into track and trace.’ Sacramento lobbying firm K Street Consulting, which reviews licensing and compliance trends in California, confirmed that more than 4,500 of the state’s 6,700 licensed cannabis businesses were indeed enrolled in the system – which consists of serialised RFID tags provided by Franwell Inc’s Metrc® solution.

But, that doesn’t mean they’re fully integrated therein, warned the firm. Enrollment means workers receive training, but additional steps are required before all products from a business are tracked. Consultant Jackie McGowan said that until everyone in the industry is fully integrated, unscrupulous businesses can fabricate test results and certificates of authenticity. ‘We’ve seen a lot of those being fakes, and without a rigorous seed-to-sale tracking system, it’s been easy to get away with,’ she said.

Maine Cannabis Regulators Address Seed-To-Sale Tracking Confusion Another US state in the ‘cannabis track and trace’ news is Maine, which is using BioTrackTHC’s cloud-based software together with barcoded tags and labels for its recreational cannabis seed-to-sale tracking system, after having scrapped a $150,000 contract with the providers of the Metrc system, reports Marijuana Business Daily. We now learn that the Maine Office of Marijuana Policy is trying to curb confusion about the new programme after cannabis business owners expressed concerns that hundreds of tags (costing $0.25 each) would be required for the life of just one plant, since that plant could be processed into many products. The marijuana office subsequently clarified that individual products available for sale would not require individual labels. BioTrackTHC reportedly received a six-year, $275,000 contract from Maine to provide the tracking system.

Events 08–10 OCTOBER 2019

INTER-AMERICAN CENTER OF TAX ADMINISTRATIONS TECHNICAL CONFERENCE Marrakech, Morocco www.ciat.org

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VOLUME 11 – NO 10 / OCTOBER 2019

Uganda Launches Tax Stamps on Six Different Products… All In One Go!

Controversy Reigns Over Pakistan Tender Award After 12 years of failed RFPs and a great deal of controversy, a contract for implementing a tax stamp, electronic monitoring and track and trace system on tobacco products in Pakistan has been awarded to the National Radio & Telecommunication Corporation (NRTC).

Uganda has launched its new tax stamp and traceability programme on six different products: beer, spirits, wine, soda, mineral water and tobacco products. Locally produced and imported tobacco products will carry a standard-sized, paper-based stamp, while local and imported wine, spirits and beer kegs will carry a long stamp placed as a seal over the opening of the bottle/keg. As for imported beer, soda and mineral water, these will be affixed with a round stamp, while local beer, soda and mineral water will carry a directly printed unique secure mark, instead of a paper stamp (as shown in the pictures above). The main design feature of the stamps takes the form of the national bird of Uganda – the crested crane – which also appears on the Ugandan flag and coat of arms. Manufacturers have been given a threemonth grace period, up to end January, 2020, to use up all stock in the distribution chain that does not carry the new stamps, reports www.independent.co.ug. In the same grace period, installation of stampaffixing technology will take place on the manufacturers’ and importers’ production lines.

www.taxstampnews.com

The DTS, as the new system is called (where DTS stands for both Digital Tax Stamps and Digital Tracking Solution) is reported to be a significant upgrade to the previous tax stamps, which were used on cigarettes only and which had no unique identifying code for track and trace purposes. The system is provided by SICPA. Traditionally, one of the only measures used by the Uganda Revenue Authority (URA) to control the recovery of excise duties involved the posting of staff at each factory to physically monitor the volume of production. In 2002, the URA introduced tax stamps as an additional measure to monitor production and imports. However, the recovery of excise has remained persistently below expectations due to inefficiencies in the product monitoring process. For instance, the URA reported recently that only 18% of Ugandan soda and bottled water companies are on the tax register. And according to the Uganda Manufacturers Association, the soda and bottled water tax gap is eye-wateringly wide, with less than 1% of excise taxes actually being collected.

‘To the who?’ we hear you ask, given that NRTC is not an organisation commonly associated with tax stamps and track and trace, but is, rather, a national security telecommunication company. However, according to www.qrius.com (a sub-continental news website derived from The Indian Economist), a closer look at this organisation reveals that NRTC procures its track and trace technology from a subcontractor called Inexto, a name which will be much more familiar to us all, given that it is Inexto which owns the Codentify digital marking and tracing solution originally created by Philip Morris International (PMI). ‘It was PMI that in the mid 2000s created Codentify to promote to governments all over the globe as a solution to the illicit cigarette problem,’ said QRIUS. ‘But since an industry-devised and controlled track and trace system is not allowed under the WHO FCTC, Codentify was sold to a newly created company in 2016 – Inexto – to give Codentify at least a semblance of independence. Inexto has been offering the technology ever since, despite the fact that it is staffed with former PMI officials’. Continued on page 2 >

Controversy Reigns Over Pakistan Tender Award (continued) The connection between NRTC and Inexto has naturally raised serious concerns with regard to the extent of the tobacco industry’s influence over the Pakistani government, especially since Pakistan has ratified the WHO Framework Convention on Tobacco Control (FCTC) and its Protocol to Eliminate Illicit Trade in Tobacco Products. The Protocol expressly requires all countries that are party to it to ensure that obligations such as establishing a global track and trace system ‘shall not be performed by or delegated to the tobacco industry’ – a requirement that is further reflected in Pakistani law. ‘From this it becomes abundantly clear why Pakistan would be well-advised not to award the contract to NRTC: doing so would allow an industry Trojan Horse into the system, opening all doors to Big Tobacco, its lobbying and PR. Apart from rendering moot all hopes that Pakistan’s finances could profit from reduced tax evasion by tobacco producers, it would also be an international embarrassment to Islamabad. After all, Inexto is incompatible with Pakistan’s FCTC commitments and the Convention is ultimately only as strong as its weakest members,’ warned QRIUS.

Inside this Issue 1 Uganda Launches Tax Stamps on Six Different Products… All In One Go!

1 Controversy Reigns Over Pakistan Tender Award

3 Tobacco Industry Interference Index – What It Means for Secure Track and Trace

4 Graphi Mecc’s Serialisation Equipment Offerings

5 INCM - Art to Machine Readable Coding

6 How Countries Around the World Charge Excise Taxes

This latest demonstration of industry influence in Pakistan serves to reinforce the poor ranking attributed to the country in a recently released global tobacco industry interference index (see page 3). While Pakistan wasn’t at the very bottom of the list, it was among the worst offenders with a score of 66 out of 100, which puts it at number 13 on the list (Japan fared the worst, with a score of 88 out of 100).

Tumultuous tender process

So, what happened exactly in the tender process that led to NRTC being chosen above eight other candidates? Initially, the FBR had advised that the selection process would be based on a points scheme, whereby a total of 80 points would be available, of which 70 would apply to the technical qualifications of each bid. So far, so good. But then one week before the tender closed, a lobbying meeting took place between Pakistan’s Federal Board of Revenue (FBR) and the tobacco industry. After this meeting, the FBR modified the selection procedure by replacing the technical part of the points scheme with a simple yes/no process, followed by a final decision-making step that was based purely on price, thereby effectively shifting the emphasis away from technical qualification and onto price. The yes/no technical evaluations were subsequently finalised within a few days – an impossibly short time to evaluate the large amount of documentation provided by each qualifying bidder. Then followed the opening of the price envelopes, where NRTC was found to be the cheapest – although it had been initially disqualified for using an incorrect method of expressing its price (it had quoted Rs 0.731 per 1,000 stamps instead of Rs 731, mistakenly thinking that it was supposed to be quoting for single stamps). The next two cheapest bids were also disqualified on the basis of technical grounds that appeared spurious, leading the companies concerned, together with other companies that had submitted qualifying bids, to issue formal complaints. In the meantime, the decision to disqualify NRTC was reversed, allowing the company to re-enter a playing field that was now empty of its closest competitors, and to ultimately win the five-year contract.

Concerned NGOs

In a country where close to one third of men are tobacco users, and where (according to the Society for the Protection of the Rights of the Child in Karachi) up to 1,200 children are reported to take up smoking every day, a number of public health NGOs are concerned about the awarding of the

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track and trace contract to an organisation that is both inexperienced in track and trace programmes of this kind and that appears to be supported by the tobacco industry. One such NGO is the Pakistan National Heart Association, which, in a www.nation. com.pk story, expressed its concerns that the ‘tobacco industry once again has tricked the government and remained successful in awarding the track and trace system contract to its favoured company.’ The association’s Secretary General also referred to the problem of the chosen system not having a mobile application solution attached to it because this was something that NRTC couldn’t provide and so it had been removed from the list of requirements. Another concerned NGO was the Campaign for Tobacco-Free Kids, whose country representative, Malik Imran, also referred to the abandoned mobile app when telling The Express Tribune that ‘a powerful lobby has succeeded in eliminating the important feature of mobile application built for tracing the cigarette packs.’ Without this device, the unique identifying codes needed to trace each pack would not be able to be readily scanned and checked for authenticity by different stakeholders, leading to a situation where cloned codes on multiple packs could pass unnoticed. Fortunately, however, there will be a paperbased tax stamp programme included in the NRTC offering, in addition to the track and trace system. The stamp, which will be produced by Perum Peruri, will presumably not be the bearer of the unique identifier for track and trace, but will provide physical security features to allow different stakeholders to distinguish between compliant and non-compliant products.

ITSA calls WHO to action

The International Tax Stamp Association (ITSA) has expressed a concern that the actions of Pakistan, as a party to the FCTC Protocol, will set a precedent for other countries to follow. This is especially true for developing countries that are at the beginning of the implementation process and that will need a lot of guidance and support to see them through the whole experience… unless the WHO and relevant NGOs across the world decide to reaffirm their commitment to ensuring that tobacco track and trace systems implemented under the Protocol are free from the influence of industry.

Tobacco Industry Interference Index – What It Means for Secure Track and Trace By Telita Snyckers, International Tax and Customs Transformation Consultant The 2019 Global Tobacco Industry Interference Index has recently been released. The concept is not a new one and borrows from the methodology originally developed by the South East Asia Tobacco Control Alliance to assess the extent to which the tobacco industry was unduly influencing governments in Asia. The report confirms what we already know: how the tobacco industry works strategically to delay and defeat tobacco control measures using various tactics. Governments have identified tobacco industry interference as the most serious barrier to passing strong tobacco control measures – and yet better controlling this lies almost entirely in government’s own hands. In support of the World Health Organisation’s Framework Convention on Tobacco Control, a set of recommendations were adopted to protect governments from industry interference. The Interference Index measures the extent to which governments have adopted those recommendations, across a number of dimensions: tobacco industry involvement in policy development; the use of corporate social responsibility (CSR) campaigns to influence government relationships; the securing of preferential treatment for the industry; the extent of unnecessary interaction between government departments and the tobacco industry; the transparency of government engagements with the industry; and the extent to which there may be a conflict of interest on the part of government officials vis-à-vis the tobacco industry.

Customs agencies at particular risk

This first Global Tobacco Industry Interference Index shows that major improvement is needed, with a lack of transparency in many countries when dealing with the tobacco industry, and with particularly non-health government departments (like tax and customs authorities) remaining vulnerable to industry interference. This is especially true because tax and customs agencies have historically developed close relationships with the tobacco industry, in part because of the ongoing operational interaction between them, but also because these companies invariably end up being significant revenue contributors, and frequently enter into MOUs with government. The close nature of the relationship – and the very significant

capacity constraints that tend to face most government agencies – means that governments often resort to policy positions advanced by the industry itself.

Country performance on the index

The 10 countries most at risk from tobacco industry interference are rated as Japan, Jordan, Bangladesh, Lebanon, Indonesia, Egypt, China, USA, South Africa and Tanzania. In respect of these countries, the report highlights a number of examples. In Japan, the government owns 33% of JTI, allowing JTI significant clout as far as interfering in policy development is concerned. When senior government officials retire, they move to key leadership positions in JTI. (The current Chairman of JTI started his career in the Ministry of Finance, including a stint as Special Advisor to the Cabinet before being appointed as Chair of JTI.) In Pakistan (which is 13th on the list of countries at risk), the previous Finance Secretary and Secretary General, Finance and Economic Affairs, became the Chairman of the Board of Pakistan Tobacco. In Bangladesh, the former Senior Secretary of the Ministry of Agriculture and the former Secretary of the Ministry of Industries are both independent directors of BAT. In Cambodia, the owner of a cigarette business was appointed a senator. In Egypt, closed meetings held with government allowed for pricing agreements to be reached; in several countries, non-health ministers were involved in endorsing tobacco-related CSR activities; in Indonesia, VAT for all consumer products is charged at 10%, while cigarettes are taxed at 8.7%. In South Africa, promises to introduce a secure marking solution have (to date) come to nought, with government now indicating its intention to rely on production counters in factories – a solution that was apparently proposed by the tobacco industry. The tobacco industry is known to have had closed door meetings with the Finance Ministry on taxation issues, without disclosure of the agenda, in at least Bangladesh, Indonesia, Malaysia and South Africa. And Bangladesh, Brazil, India, South Africa, Jordan, Lao PDR, India, Lebanon and Ukraine all receive some form of technical assistance from the tobacco industry in the fight against illicit trade.

The challenges are equally pressing in countries where governments enter into state-owned enterprises (SOEs) or joint ventures, as happens in, for example, China, Egypt, Japan, Lao PDR, Lebanon, Thailand and Vietnam. In these countries government officials may find themselves inadvertently conflicted in adopting tobacco control measures, with many of them performing poorly on the Interference Index because of pressure to give preference to business interests over tobacco control. The bottom line is that countries where the tobacco industry has a stronger influence are less likely to adopt policy positions that may antagonise these behemoths, because they are often viewed more as partners than as subjects to be regulated. Such influence too easily becomes administrative capture, leaving governments adopting rhetoric that favours the industry, without applying its own mind objectively.

How does industry interference influence adoption of secure traceability solutions? I did a quick analysis, comparing the ranking of countries in respect of the Interference Index, and the WHO Country Reports on the status of FCTC implementation, to assess at a very rudimentary level whether there is any correlation between the extent of interference, and the policy positions governments adopt.

A key issue immediately becomes apparent: at least some of the data in the WHO Country Reports is either simply wrong, or outdated. So, for instance, the Country Reports note that USA, Tanzania and Iran do not use tobacco tax stamps, when we in fact know that they do. Worst performing on interference index

Best performing on interference index

Reported use of tax stamps and secure marks

Reported use of tax stamps and secure marks

WHO Country Reports

Actual

UK Uganda Iran Kenya Brazil France Uruguay Nepal Thailand Canada

No Yes No Yes Yes No No Yes Yes Yes 60%

Yes Yes Yes Yes Yes Yes No Yes Yes Yes 90%

Japan Jordan Bangladesh Lebanon Indonesia Egypt China USA South Africa Tanzania

WHO Country Reports

Actual

No No Yes No Yes Yes No No No na 30%

No No Yes No Yes Yes No Yes No Yes 50%

Bottom line: 90% of the best-performing countries on the Interference Index use tax stamps, or some form of secure mark or label, against only 50% of the worstperforming countries that do. Continued on page 4 >

Two thirds of the countries reviewed in the Interference Index allow political contributions from the tobacco industry.

REPORTS | VOLUME 11 – NO 10|OCTOBER 2019

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Graphi Mecc’s Serialisation Equipment Offerings Italian equipment manufacturer Graphi Mecc Group (GMG), based in Verona, has devoted many years since its founding in 1985 to devising the most fool-proof way to produce encoded unique serial numbers, ensuring that sequences are correct, no numbers are skipped or duplicated and the encoding in a variety of formats is accurate.

It guarantees zero errors and now offers its variable data certification (VDC) on all of its serialisation equipment. The equipment can generate and print alphanumeric, linear (1D) barcodes, QR and data matrix codes, such as used on tax stamps, as required on tobacco products under the WHO’s FCTC and anything else that requires traceability. GMG was established by Andrea Ranzato Vianello, who remains President and CEO, as a re-seller of numbering equipment, with Istituto Poligrafico e Zecca dello Stato (IPZS, Italy’s state-owned security printer) as its first customer. In 1999, Vianello decided to develop his own technology, prompted by IPZS’ requirement for a fast, accurate, numbering system to use on the state-issued Bollinos (excise seal) for use on medicines. (Italy was one of the first countries to require the serialisation of medicine labels in a system run by the state. The serial number on the label also serves as the reimbursement code for prescription

medicines, while the latest version of the Bollinos is EU Falsified Medicines Directivecompliant and also has other authentication components.)

100% error-free Bollinos requirement

IPZS’ requirement was to be able to print the serial number, with a guarantee of 100% error-free numbering – so no errors on the final labels on the roll to be delivered to the pharma or packaging company. At that time the equipment available wasn’t capable of meeting this specification, so GMG developed a new production process and installed its first machine at IPZS in 2002. This machine proved very successful, and in 2003 GMG installed 17 of the machines for several organisations, including more at IPZS. One selling point was that the equipment could be customised for each user, but its key strength is that regardless of the operator and the production conditions, every type of error is intercepted and removed, ensuring the finished product perfectly complies with the production specifications. This success has seen GMG expand rapidly. It now operates from a (nearly) 7,500m2 facility in Verona – which Ranzato Vianello told us is the largest plant in Italy for the design and manufacture of graphic converting and serialisation equipment.

The company currently has 32 staff with a network of more than 300 indirect collaborators covering 32 countries across the world. The Verona plant includes the Innova Lab (R&D) and Encoding Lab (jointly dubbed The Experience Platform), where solutions to a customer’s specific requirements are devised, tested and demonstrated. GMG develops and tests its own mechanics, software and engineering with 14 people working on R&D. There are now over 80 GMG machines installed at customers, including PWPW (the Polish Security Printing Works), which has two machines to serialise tobacco tax stamps, Bundesdruckerei, SPP India, the Bank of Italy and IPZS. Its equipment is offered for web or sheet printing, in widths of 80, 350, 450 and 600mm, at prices ranging from €150,000 to €1.5 million. The equipment can be configured with in-built quality control monitoring, including cameras, and is offered in standalone or modular versions, the latter for integration into print equipment.

Tobacco Industry Interference Index (continued) More work is required to fully understand the statistical relationship between industry interference and the statistical likelihood of secure marking and traceability solutions being implemented. But even a very cursory provisional assessment suggests that traceability solutions are more likely to find application in countries where the influence of the tobacco industry is more restricted. In the 10 worst-performing countries on the Interference Index, only 50% have introduced some kind of tax stamp or secure marking – compared to 90% in the best-performing countries, suggesting that industry interference may have a role to play in how governments choose to respond to illicit trade. There is also a second observation worth mentioning: countries with a poorer score on the Interference Index are also less likely to adopt sound policy measures relating to the countering of illicit trade in general. Comparing the scores of countries that are rated on both the Interference Index and the Economist’s Illicit Trade Index

4 TAX STAMP & TRACEABILITY NEWS | TECHNOLOGY PROFILE

highlights how countries with higher levels of interference have a lower chance of adopting good policy practices (which would, obviously, include the use of tax stamps and secure marks). The average score in respect of the adoption of good policy practices on the Illicit Trade Index for countries that perform poorly from an interference perspective is 61 – for countries with lower levels of interference, the average score for adoption of good policy practices is 75. However, these observations are made simply as a place holder, and more work is required to unpack other indicators around the statistical impact that industry influence may be having on the types of solutions governments choose in curbing illicit trade.

Importance of findings for secure marking and traceability

Experts agree that the single biggest way to curb the illicit trade in cigarettes is to better secure the supply chain, and a critical component of that lies in securely marking cigarettes and being able to trace

them through that chain. Despite the value of the solution being indisputable, it often fails to gain traction – in large part because of the disproportionate power the tobacco industry has, and its influence over government agencies. For solution providers to increase their conversion rates, an understanding of the extent and impact of industry inference is critical – as is the development of a strategy that allows them to counter some of that influence, by making it easier for governments to understand the dynamics at play, as well as simplifying how solutions are pitched, and promulgating the importance of better securing the tobacco supply chain and the best ways in which to do so. The Interference Index can be downloaded from http://exposetobacco.org/wpcontent/uploads/2019/10/GlobalTIIIndex_ Report_2019.pdf

INCM - Art to Machine Readable Coding The Portuguese Mint and Official Printing Office, INCM SA, in a presentation by Nuno Gonçalves at the recent Tax Stamp Forum™ in Budapest, described its new coding system, but unlike other such systems, this one, UNIQODE®, is artistically as well as technically innovative. (Patents are pending.) UNIQODE is the outcome of an innovation project with the University of Coimbra, established for the design of security elements able to be validated by ubiquitous mobile devices. The objective was to develop a unique identifier with several levels of security involving both the physical and digital levels, which was completely configurable with excise tax stamps as well as being aimed at the consumer market. The primary objective was that the identifier should be readable by smartphones, enabling both authorities and consumers to validate the identifier and, consequently, the excise stamp and/or product at any place in the supply chain. The important aspects of the solution are that the coded information has several levels of security (private, public and encrypted), the aesthetics are highly improved, it has a high capacity to code long messages, it has unique patterns and, being efficient and fast, is suitable for realtime applications. Three technologies are available to be configured: a printed graphic code, a holographic feature and glitter inks, each able to encode a unique and irreproducible message.

Graphic code

The graphic code is pixel-based, with each coloured pixel being substituted by a pattern of 3x3 pixels. Some patterns are dictionary-based, ie. they code a character, but all others are randomly chosen. However, all of the patterns must maintain the average colour/tone of the base image.

It is also possible to use icons in the place of pixels, which enables the composition of images with a higher aesthetic value, with the benefit that the codes hidden in the images are less evident. An example of icon-based coding is shown in Figure 2.

function (PUF). Another such (PUF) solution is the use of a mixture of ink and glitter particles – used to create prints with a random dispersion of particles. As in the previous two methods, uniqueness of the image is guaranteed.

Registration of uniqueness

Figure 2 – decoding of icon-based and pixel-based images is similar.

Security holograms

Holograms are widely used to provide physical and forensic authentication for banknotes, passports and ID, tax stamps and branded products etc., and now they can also be validated using a smartphone. The manner in which they are used in UNIQODE involves a technology called edge recognition, ie. if a wallpaper holographic (diffractive) image is cut out, the cut position and consequently the geometric coordinates of the icons can be used as a unique identifier. This allows traceability with a high level of uniqueness. In this type of UNIQODE, printed and holographic codes are combined – an example of which is shown in Figure 3. Randomly generated geometric coordinates of the hologram can be coded in the graphic code and these coordinates are photographed and registered on the production line. The unique random position of the hologram is impossible or impractical to reproduce and is, in effect, a fingerprint of the stamp. In this type of UNIQODE, validation can be made offline with an extremely high level of security and reliability.

An image of the pattern is used to register the code, which is then stored in a database (optional). The unique descriptor of the hologram or glitter pattern – ie. geometric features and physical features such as brightness and orientation – are also created, described and stored, for example using a smartphone. Both the descriptor and the image can be used for validation and authenticity. The whole process, which is low cost yet impractical to reproduce, allows traceability of documents, products and trademarks with (according to INCM) an extremely high level of security yet with easy validation, which can be either online or offline. The technology has been used in the new 2019 Portuguese tobacco excise stamp that includes an OpSec Security hologram stripe, as illustrated in Figure 4. This involves the use of a mobile app that securely authenticates the stamp, validating the stamp structure, colour, graphic code integrity, hologram colour shift, hologram features and unique identifier registration, but may also display other information on the product, manufacturer or logistics chain by integration with a complete track and trace system.

The coded message is a series of interconnected or interdependent characters with the security guaranteed by several layers of information such as checksum, bit correction, public/private key or cryptography. A unique aspect is the graphic nature of the codes – examples of which are shown in Figure 1 – any single shape or combination thereof can be created according to the requirements of the product or user.

Figure 3 – UNIQODE examples with printed (above) and holographic (below) codes.

Glitter inks

In the hologram version of UNIQODE (Figure 3), the uniqueness of the cut of the hologram provides the security – it is described as a physical ‘un-clonable’

Figure 4 – use of smartphone to examine tax stamp; and one of the outputs indicating the stamp passed all tests.

Figure 1 – examples of graphic codes.

TECHNOLOGY PROFILE| VOLUME 11 – NO 10|OCTOBER 2019

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How Countries Around the World Charge Excise Taxes Excise taxes are levied on the sale and use of certain products and services. They are charged directly from businesses and then the costs are passed on to consumers to some extent, often in an obscure way.

The gasoline and diesel taxes were dedicated to the Leaking Underground Storage Tank Trust Fund.

Like other taxes based on income and consumption, excise taxes are designed to generate substantial revenue for governments. What is unique about them, however, is that they strategically target specific ‘necessities’ deemed harmful to health and/or the environment. Instead of criminalising activities such as smoking cigarettes, drinking alcoholic or sugar-based beverages and using marijuana, national, regional and/or local governments implement excise taxes to curb risky behaviour and fund well-thoughtout projects or initiatives to help offset their negative effects. These special taxes, which can come under numerous names, always try to achieve these twin goals. Addressing health and environment issues have become their primary objective these days, though. Our friends at Fortunly (https://fortunly. com/infographics/taxation-around-theworld-infographic/) agree that excise taxes are usually regressive. These taxes disproportionately affect lower-income consumers, who are as likely to purchase the taxed products and services – like fuel, cigarettes, and alcohol – as wealthy people. Nevertheless, there is no denying the merits in imposing excise taxes whenever governments see fit. Today, let us explore what excise taxes countries in major regions across the globe charge, how some consumers have reacted toward them, and how they are collected.

North America The United States

In the US, the federal excise tax revenue-togross domestic product ratio has historically decreased. In 2017, excise tax revenues represented only 2.5% of all federal tax receipts. In that fiscal year, highway-related taxes raised $37.6 billion, which was equivalent to 45% of the collective excise tax revenue. Most of these taxes came from gasoline and diesel sales. The rest was generated from taxing tyres, trailers, trucks and other fuels. Natural gas was taxed at a much lower rate, so it was partially exempted. Producers of ‘cleaner’ fuels such as biodiesel and alternative fuel mixtures were eligible for tax credits.

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Aviation-related taxes totalled $15.1 billion, which accounted for 18% of all excise tax revenues. The money was raised by taxing passenger airfares, domestic air cargos and aviation fuels. The funds were earmarked for the Airport and Airway Trust Fund. Accounting for 16% of all excise receipts, taxes imposed on tobacco products, including chewing tobacco and roll-yourown tobacco, were collected by the US Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau, not by the Internal Service Revenue. Alcohol taxes, which comprised 12% of the overall excise tax revenue, were imposed on wine, beer and distilled spirits. The Affordable Care Act of 2010 created a host of health-related excise taxes. The most affected parties have been health insurance providers, manufacturers and importers of branded prescription drugs and medical device companies. A 40% excise tax was supposed to be imposed on high-cost employer-sponsored health insurance plans in 2018, but it was suspended until 2022. Health-related excise taxes dropped from $14.8 billion in 2016 to $4.1 billion in 2017. As a result, these taxes represented only 5% of all excise receipts in 2017, significantly low compared to 16% in 2016. The newest areas of interest in excise taxation in the US are sports betting, marijuana consumption and usage of vapour products. Only a few states have taxed such activities thus far, bearing the brunt of trial and error for the rest of the country. Pioneering states are learning that they can only expect to generate a modest revenue out of sports betting for now since online platforms are rather difficult to tax. Raising excise tax rates might discourage in-person betting, which could have more disastrous results. State marijuana-specific taxes have produced more revenues than the costs of cannabis regulatory regimes. As a result,

they have helped pay for other federal government expenditures. Heading into 2019, only nine states and the District of Columbia have taxed vapour products. The use of electronic cigarettes and other similar devices is a fairly new phenomenon, so the policymakers in most states have yet to figure out the proper way to tax them. So far, the harmful effects of vapour products still need more research. That is why some territories impose a high excise tax on them to discourage traditional tobacco smokers from switching to e-cigarettes. For example, Washington DC’s ad valorem tax is a staggering 96% of the wholesale price of vapour goods. Despite the wisdom behind excise taxes, some of them have had unintended economic consequences. A good case in point was the adoption of soda taxes in Cook County, Illinois. The authorities repealed the sugar tax in 2017 after just one year of implementation. Apart from the additional financial burden to lower-income households, consumers decided to purchase their groceries in other areas to avoid the tax. As a result, Cook County failed to collect taxes from other goods. Seattle had the same experience. The city saw its overall revenue plummet after its residents went to shop in neighbouring communities where the soda tax does not apply. According to researchers at Cornell University, imposing taxes on sugary beverages could push people to drink more alcohol, unintentionally encouraging one unhealthy behaviour by curbing another. Negative reactions to an excise tax in the United States are old news. In 1791, the implementation of the Excise Whiskey Tax provoked the ire of southern and western farmers who planted the grain used to make whiskey. The revenue the tax hoped to raise was intended to cancel out the state debts the federal government assumed. Pennsylvania farmers resisted the tax collection efforts of federal officials. The situation forced the hand of President George Washington to send more or less 13,000 troops to control the situation and avert a potential revolt.

Canada

Canada imposes excise taxes on fuel-inefficient motor vehicles, car air conditioners and some petroleum products. The country also charges excise duties on beer, wine and spirits as well as tobaccobased goods.

When it comes to the federal carbon tax, it aims to help reduce Canada’s total greenhouse gas emissions by increasing the prices of fossil fuels based on the amount of carbon dioxide they emit when burned. Naturally, the excise tax renders cleaner sources of energy, such as hydroelectricity, less costly.

For instance, the implementation of sugar taxes has been a popular trend across Europe over the past years. Belgian authorities recently raised the excise taxes on sweetened drinks. The year 2018 saw Ireland and the UK introduce a special tax on products containing high levels of sugar, particularly soft drinks.

Although the federal carbon tax backstop applies only to Manitoba, New Brunswick, Nunavut, Ontario, Saskatchewan and Yukon as of 2019, other provinces and territories can have their own equivalent tax regimes. Actually, some residents living outside the said jurisdictions have already been paying for a carbon tax to some extent for many years.

In Scandinavia, Sweden began imposing a flight excise tax in 2018 to minimise the carbon footprint related to aviation.

Canada has also devised a national framework to tax carbon pollution. It allows certain provinces to come up with unique policies without any interference from the federal government, provided that they adhere to the terms of the agreement. The country’s marijuana tax is considered a success, although much of the weed trade is still happening in the black market. To further curb the illegal sales of cannabisbased goods, the Canadian authorities decided to change the law and tax marijuana based on tetrahydrocannabinol (THC) content rather than on the products themselves. The new law, which came into effect on 1 May, 2019, is expected to encourage the consumption of alternative cannabis products. The stocks of companies manufacturing goods with high THC content are not too happy about it, even if the marijuana tax policy adjustment targets quite affluent customers.

EMEIA

European Union (EU) countries

Acting as a single market, the EU observes common rules to facilitate the trade of goods subject to excise duties, such as alcoholic beverages, tobacco products and types of energy used for heating and transport, among its member states, including the UK until Brexit finally materialises. Generally, the excise duty is paid in the member state of consumption. If a product is released for consumption and has to be moved again to another member state as final destination, the EU has created a system of reimbursement, which may apply under certain circumstances, to avoid getting taxed twice. The EU imposes minimum excise duty rates to prevent competitive distortions. Nevertheless, all member countries have the right to set higher rates to attain strategic goals. Beyond the taxable goods (alcohol, tobacco and energy) spelled out in EU legislation, the list of dutiable products being targeted by individual member states is growing.

The Middle East

The Gulf Cooperation Council (GCC) launched a general framework for excise taxation in 2016. This treaty introduces excise duties on tobacco products (100%), carbonated beverages (50%) and energy drinks (100%). The GCC’s new tax regime affects about 54 million consumers across Saudi Arabia, the United Arab Emirates (UAE), Qatar, Bahrain, Kuwait and Oman. The UAE recently announced that it is expanding its scope of excise taxation. The country’s new excise product categories are electronic smoking devices (100%), the liquids used in e-cigarettes (100%) and sugary drinks (50%).

India

The legal framework that spells out the implementation of excise duties in India is largely made up of two pieces of legislation: the Central Excise Act of 1944 and Central Excise Tariff Act of 1985. In general, the central government levies three types of excise duties: Basic Excise Duty, Additional Excise Duty and Special Excise Duty. The first is applicable to all excisable goods, with the exception of salt. The second is imposable on specific goods outlined in Section 3 of the Additional Duties of Excise (Goods of Special Importance) Act of 1957. The third is levied on certain products mentioned in the Second Schedule of the Central Excise Tariff Act of 1985, such as pan masala (which is a chewing mixture) and snuff. The excise duties in India are charged only on goods produced and manufactured within the country. When it comes to the imported counterparts of excisable products, customs duties apply. Generally, state governments can’t collect excise duty, for it is levied by the central government. One important exception, however, is excise duty on alcoholic beverages, which is levied at state level. The manufacturer of goods, whether or not the entity directly produced them or hired labour, is liable to pay the tax.

Africa

motor vehicles, pieces of electronic equipment and goods considered as ‘luxury items’, as well as alcohol, petroleum and tobacco products. SACU-member countries may also impose excise taxes on other products uniquely. In South Africa, tyres, plastic bags, exported diamonds, electric filament lamps and sugary beverages are considered excise goods. Excise receipts account for more or less 10% of the country’s tax collection. South Africa’s economy may have benefited significantly from excise taxation, but the country has yet to alleviate every health issue it hopes to address. Despite being dutiable products, South African alcoholic beverages remain some of the world’s cheapest. Further fiscal intervention may be necessary to mitigate the negative effects of drinking on South Africans. In the east, Kenya spearheaded the taxation on mobile phone transactions in the continent. The country has inspired its sub-Saharan neighbours to follow suit. The nation’s Finance Act of 2018 also raised the excise taxes on bank remittances (from 10% to 20%), airtime (from 10% to 15%) and mobile financial transactions (from 10% to 12%). Furthermore, the legislation rendered Internet data services and fixed-line telephone services subject to a 15% excise tax. While such tax reforms promise greater revenue because of the explosion of smartphone usage in the region, some experts fear that they might compromise the substantial gains achieved in financial inclusion and encourage consumers to go back to cash.

Asia-Pacific Southeast Asia

Like other parts of the world, Southeast Asia categorises tobacco products and alcoholic beverages as excise goods. By its diverse nature, however, this region has interesting takes on certain items. For example, Malaysia, Thailand, Laos and Vietnam impose an excise tax on playing cards. Myanmar considers insurance products (except life insurance policies) and hotels sources of excise revenue. TimorLeste charges 200% of the excise value of arms and ammunition, while Indonesia imposes a tax rate anywhere between 40% and 50% on shotguns and other firearms. In the Philippines, mineral products, including coal and indigenous petroleum, are deemed excise goods. In Singapore, entertainment establishments, such as pubs and karaoke bars, are subject to an excise tax. Continued on page 8 >

Members of the Southern African Customs Union (SACU), Botswana, Lesotho, Eswatini, Namibia and South Africa, levy excise duties on cosmetics, perfumeries,

SPECIAL FEATURE |VOLUME 11 – NO 10|OCTOBER 2019

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How Countries Around the World Charge Excise (continued) While the Philippine Congress is working on a piece of legislation that will finalise the levy on electronic cigarettes and other vapour products, health officials in Thailand are hoping to soon tax salty food products (except seasoning sauces, street food and snacks), such as instant noodles and canned items, to help change the sodiumrich diets of the locals for the better.

Australia and New Zealand

In the Land Down Under, excisable goods are alcohol, tobacco, fuel and petroleum products. If any of the said commodities are imported, though, they will be categorised as ‘excise equivalent goods’, making them subject to customs duty at a similar rate to their excise tax counterparts in Australia. Like its bigger neighbour, New Zealand collects excise revenue from alcohol, tobacco and petroleum products. Unlike other island nations and territories in the Pacific, such as American Samoa, Fiji, Guam, Kiribati, Marshall Islands, Micronesia, Nauru, Samoa and Tonga, Australia and New Zealand do not seem to be in a hurry to impose a sugar tax, despite the worsening cases of obesity in both countries.

In terms of carbon tax, Australia and New Zealand have had different experiences. The former axed the tax in 2014 because it lacked bipartisan support and was even weaponised by the then-opposition LiberalNational coalition during the campaign. New Zealand, on the other hand, was the first to tax carbon pollution on the planet. The country is poised to pull another historic milestone should its zero carbon bill be passed into law.

The future of excise tax administration

Currently, most of the world is still at the first level of tax digitalisation. Embracing a sophisticated tax stamp authentication technology has proven to be effective in catching counterfeit products. Adopting more advanced innovations, however, is necessary to oversee the movement of excise goods across international borders more efficiently and bust tax evaders. Even the EU, which typically uses its Excise Movement Control System to track the journey of certain products under tax suspension, is struggling to monitor e-commerce shipments. The union is trying different regimes to tax excise goods traded

online more effectively, but none can be applied universally. Fortunately, governments around the world have plenty of technologies at their disposal to improve excise tax collection in the areas of accuracy, efficiency, transparency, data analysis, global collaboration and compliance. When used together to maximum effect, cloud computing, 3D printing, artificial intelligence, mobile, the Internet of Things, virtual and augmented realities, robotics and advanced analytics can boost the revenues generated by excise taxes and successfully address the social ills they intend to remedy.

Final word

Analysing the feasibility of one excise tax and measuring the effectiveness of another are Herculean tasks. While each country should learn from others, it is imperative to consult with internal stakeholders to craft tax policies in context.

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VOLUME 11 – NO 11 / NOVEMBER 2019

SICPA Signs Cooperation Agreement with Kazakh Telecoms Company

Pakistan Tender Award Faces Multiple Legal Challenges in High Court The Pakistan tender award for a tax stamp, electronic monitoring and track and trace system for tobacco products (announced in last month’s Tax Stamp & Traceability News™), has been challenged in the Islamabad and Karachi high courts, with a number of bidders filing formal complaints with regard to the allegedly spurious manner in which their bids were evaluated. Initially, the evaluation process had been based on an 80-point scheme, of which 70 points applied to the technical qualifications of each bid.

During a Kazakh-Swiss roundtable business forum, held on 22 November in Nur-Sultan, Kazakhstan (and part of the official visit of Swiss President Ueli Maurer to the country), a cooperation agreement was signed between the Swiss company SICPA SA and Transtelecom JSC – one of the leading information and telecom service providers in Kazakhstan. ‘There is a great demand in Kazakhstan for the creation of innovative industries and the implementation of projects in the field of high technology, energy, agriculture, medicine and pharmaceuticals,’ said Kasym-Zhomart Tokayev, the country’s president, in a nur.kz article. Transtelecom is reported to be actively implementing what is referred to as the ‘Digital Kazakhstan’ programme, which includes the secure labelling and

www.taxstampnews.com

traceability of certain goods manufactured and sold in the country. The cooperation agreement with SICPA gives Transtelecom the sole right to use the SICPATRACE® product labelling and traceability solution for this purpose. The programme is intended to have a global economic effect for Kazakhstan, in the form of higher tax collections, a reduction in the shadow economy, increased seizures of illicit goods, improvements in the business environment and fairer competition. Switzerland is one of the largest trading partners of Kazakhstan, and the turnover between the two countries for the first nine months of 2019 amounted to $1.9 billion.

But then, one week before the tender closed, a lobbying meeting took place between Pakistan’s Federal Board of Revenue (FBR) and the tobacco industry. Following this meeting, the FBR modified the evaluation process by replacing the technical part of the points scheme with a simple yes/no mechanism, together with a final decision-making step that was based purely on price, thereby effectively shifting the emphasis away from technical qualification and onto price. A formal legal complaint, which is still under consideration, was subsequently lodged at the High Court of Karachi against this change. Continued on page 4 >

Save the Date for the 2020 Tax Stamp & Traceability Forum The next Tax Stamp & Traceability Forum™ (formerly known as Tax Stamp Forum™) will take place from 19-21 October 2020 in the beautiful city of Tbilisi, Georgia. Georgia is a former Soviet republic of 4 million people, situated at the intersection of Europe and Asia, and surrounded by the Black Sea to the west, Russia to the north, and Azerbaijan, Armenia and Turkey to the east and south. It is one of the most ancient countries in the world with an uninterrupted tradition of viticulture and winemaking. In fact, cultivated grape pips were recently discovered that indicate that Georgia has been making wine for some 8,000 years, leading experts to believe that Georgia is the birthplace of wine. Georgia’s capital, Tbilisi, looks to some as if it has come straight from the pages of a Gothic fairytale. A deep valley forms the backdrop to brightly coloured turrets, cobblestoned streets, sulphur bath houses and a burgeoning art scene.

Inside this Issue 1 SICPA Signs Cooperation Agreement with Kazakh Telecoms Company

1 Pakistan Tender Award Faces Multiple Legal Challenges in High Court

2 Save the Date for the 2020 Tax Stamp & Traceability Forum

3 Track and Trace Working Group for FCTC Protocol Launches in Panama

5 India Needs Comprehensive National Policy to Tackle Alcohol, Declares ASPA

6 New Tobacco Track and

Trace System Bestows ‘Digital Enforcement Powers’ on Chile Revenue Authority

8 SICPA Launches its ‘Brightest Star’ for Secure Labels

2 TAX STAMP & TRACEABILITY NEWS | CONFERENCES

But there is another, sharply contrasting side to Tbilisi, in the shape of ultra-modern, space-age architectural structures, which have been carefully inserted into the city alongside the older buildings, to surprisingly harmonious effect. To put it in movie terms: if the older Tbilisi resembles a scene from Shrek, these modern structures belong in a Star Trek movie (although, funnily enough, a movie that has actually been filmed on the streets of Tbilisi recently is the latest instalment of the Fast and Furious franchise – an entirely different movie altogether). This architectural transformation of Tbilisi serves to symbolise Georgia’s healthy economic growth. In 2007, the World Bank named Georgia the world’s number one economic reformer, and has consistently ranked the country at the top of its ‘ease of doing business’ index. Furthermore, according to Transparency International’s 2018 report, Georgia is the least corrupt nation in the Black Sea region, outperforming all of its immediate neighbours, as well as nearby European Union states. As far as tax stamp programmes are concerned, Georgia uses stamps and traceability systems (either paper-based stamps or direct marking) on cigarettes, spirits, beer, bottled water and soft/energy drinks, as part of its Integrated System for the Movement and Registration of Products. This system, combined with improvements in the tax administration process and strengthened enforcement and border controls, allowed Georgia to reduce its cigarette illicit trade from a high of 50%, at the turn of the century, to a remarkable low of 3% by 2017 – despite regular increases in excise tax rates. Reconnaissance is very happy to announce that Georgia Revenue Service (GRS) is lending its full support of and active involvement in the 2020 Tax Stamp & Traceability Forum. In fact, it was the GRS that approached us in the first place to propose that the next forum be held in Tbilisi. This demonstrates a general openness of the country towards the development of international relations, as well as a (justified) pride in having Georgia be the host of the next forum. Registration is not open yet but details of the fees and sponsorship/exhibitor options can be found at www.taxstampforum. com. And if you would already like to submit an abstract for a presentation at the forum then please visit https://www. reconnaissance.net/tax-stamp-forum/ programme/call-for-papers.

Track and Trace Working Group for FCTC Protocol Launches in Panama This month, in Panama, the first meeting of a working group set up by the parties to the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products was held, with a focus on the tracking and tracing, global information-sharing focal point and unique ID requirements of the Protocol. Although the meeting was hosted by the Panama Ministry of Health as opposed to, say the Ministry of Finance (given that the FCTC is a global public health treaty, rather than, say, a tobacco tax treaty), the meeting was largely attended by finance, tax, customs and law enforcement departments, serving to confirm the important role of these departments in implementing the track and trace provisions of the Protocol. Also in attendance were representatives from non-governmental organisations, including members of the Framework Convention Alliance (FCA), which is made up of nearly 500 organisations from over 100 countries, dedicated to the development, ratification and implementation of the FCTC (which stands for Framework Convention on Tobacco Control). In support of the working group, the FCA released a very useful guidebook on implementing Article 8 of the Protocol (ie. the track and trace part), which was prepared by Sovereign Border Solutions. The guidebook aims, in the words of the FCA, to ‘explain a sophisticated mechanism in straightforward terms,’ and to ‘provide a practical, step-by-step approach aimed to help policy makers when they are tasked with putting the Protocol into practice.’ In her opening address at the working group meeting, Dr Vera Luiza da Costa e Silva, Head of the FCTC Secretariat, said that Article 8 could be described as one of the core articles of the Protocol, with timebound measures that demanded immediate action both from the Protocol parties and the Secretariat. She also stressed the fact that time was ticking, with only four years left to develop and implement this global regime. ‘I therefore look forward to receiving your guidance on the next steps in collecting your experiences with tracking and tracing, your questions, your concerns and your examples and practices in the implementation of such systems and of the unique identification markings,’ said Dr Da Costa. ‘Furthermore, on the global information-sharing focal point, we will use

the coming days to discuss the elements of the conceptual analysis of such an instrument, how it should function, how we should protect its confidentiality and integrity and how it should be used in the most optimal way,’ she added. Dr Da Costa e Silva warned the working group, however, to stay vigilant with regard to the tobacco industry. ‘The tobacco industry uses the illicit trade argument to oppose tobacco control regulations with regard to taxes and price increases, plain packaging and tobacco advertisements, promotion and sponsorship. The industry likes to create a wrong perception to governments that every example of such action will generate illicit trade.’ ‘Furthermore, the industry pretends to be part of the solution,’ she warned. ‘The industry has developed and promoted its own tracking and tracing mechanism, Codentify or Inexto, that is far less transparent than the tool required by the Protocol.’ It remains to be seen, however, whether the parties will pay enough heed to this warning. This is particularly true for Pakistan, for example, which, despite being a party to the Protocol, recently awarded a tender for a tax stamp and track and trace solution to an organisation which uses the Inexto technology (see page 4).’

Working group to review EU TPD

On the subject of working groups that have been set up to deal with supra-national tobacco regulations, European Parliament member (MEP) Cristian Bușoi is establishing a working group for the revision of the EU Tobacco Products Directive (TPD), which is well ahead of the scheduled review of the directive, in 2021. Bușoi, who, according to an article in eureporter.co, has a history of fighting to regulate the tobacco industry, is seeking to involve MEPs from the ENVI (Environment, Public Health and Food Safety), IMCO (Internal Market and Consumer Protection) or ITRE (Industry, Research and Energy) committees. The need to prepare the revision of the TPD well in advance is logical given both the directive’s pivotal importance and the tobacco industry’s heavy lobbying against it, commented eureporter. The tobacco industry did its utmost to water down the provisions of the TPD. In fact, the directive is considered to be the most lobbied file in the EU’s history. The tobacco industry allegedly hired more than 200 lobbyists – one for every 3.5 MEPs –

on top of the network of front groups also pushing the industry’s agenda. This concerted effort apparently bore some fruit, with the final text of the TPD appearing to be lenient with tobacco manufacturers in a number of areas, said the article. Several TPD provisions were completely redrafted during the opaque trialogue phase, and associations and MEPs alike suspected that the European Commission, which had seemed fairly open to lobbying in general, had given up ground to the tobacco lobby. Given the fact that the cigarette industry is almost certain to renew this pressure ahead of the 2021 review of the TPD, it makes sense that civil society groups are already trying to see how they can push back. According to Bușoi, the upcoming review has to address a number of issues which have cropped up since the TPD was adopted in 2014. For one thing, the growing debate and general uncertainties surrounding electronic cigarettes means that the legislative framework needs to be adapted accordingly. Another important development is that the WHO FCTC Protocol entered into force on 25 September 2018 after having obtained the 40 ratifications necessary. 57 parties have now signed onto this international treaty, including 16 EU member states and the EU itself, meaning that a more comprehensive review of control over the tobacco supply chain is needed. This broad range of issues to be dealt with during the review of the TPD underpins Bușoi’s desire to start preparing the review now in his working group. According to Bușoi, such early preparation is particularly important so that the European Parliament and the European Commission can work together for the 2021 review in a collaborative approach, free from tobacco industry influence. Cristian Bușoi has proposed that the working group will meet on a regular basis every two months, starting in November 2019. He has also suggested that the group should be able to interview as many representatives from the Commission, EU member states, national parliaments, antitobacco associations, specialists, external personalities, lawyers, and tobacco industry executives as necessary in a democratic, public and transparent manner.

IN THE NEWS | VOLUME 11 – NO 11|NOVEMBER 2019

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Pakistan Tender Award Faces Multiple Legal Challenges in High Court (continued) The yes/no technical evaluations were subsequently finalised within a few days – an impossibly short time to evaluate the large amount of documentation provided by each qualifying bidder. Then followed the opening of the price envelopes, where National Radio & Telecommunication Corporation (NRTC) was found to be the cheapest – although it was subsequently disqualified for using an incorrect method of expressing its price (it had quoted Rs 0.731 per 1,000 stamps instead of Rs 731, mistakenly thinking that it was supposed to be quoting for single stamps). The next two cheapest bids were also disqualified on the basis of technical grounds that appeared spurious, leading the companies concerned to file further formal complaints. In the meantime, the decision to disqualify NRTC was reversed, allowing the company to re-enter a playing field that had been emptied of its closest competitors, and to ultimately win the five-year contract. This reversal of decision was then challenged by the NIFT consortium, which was the cheapest tender not to have been disqualified, following which the Islamabad High Court (IHC) pronounced a hold order against NRTC until the next hearing on 10 December. According to brecorder.com, the IHC has now directed the FBR to submit a report on the granting of the tender to NRTC, as well as to submit comments on the subject before the hearing. As far as the FBR is concerned, the contract was awarded in complete compliance with the law. FBR Chairman, Syed Muhammad Shabbar Zaidi said it had been awarded to the lowest bidder as ‘we are bound to follow the rules framed by Public Procurement Regulatory Authority (PPRA) for awarding this contract.’ Fair enough, but it nevertheless seems questionable that the emphasis shifted to price so swiftly after the FBR’s meeting with the tobacco industry.

The Inexto problem

Another FBR spokesperson, Hamid Ateeq Sarwar, is quoted as saying: ‘NRTC may not have the experience but it is partner of Inexto, which has vast experience in establishing, maintaining and operating the track and trace system in the tobacco sector.’ And here lies what many see as the biggest problem: ie. Inexto. Because hasn’t the WHO Framework Convention on Tobacco Control (FCTC) consistently warned countries against using the Inexto system for tobacco track and trace purposes?

4 TAX STAMP & TRACEABILITY NEWS | IN THE NEWS

Indeed, one such warning was delivered just a couple of weeks ago by the Head of the FCTC Secretariat, Dr Vera Luiza da Costa e Silva, at the inaugural track and trace working group meeting set up by parties to the FCTC Protocol to Eliminate Illicit Trade in Tobacco Products. In her address, Dr Da Costa e Silva reminded the parties (of which Pakistan is one) that ‘… the industry pretends to be part of the solution. The industry has developed and promoted its own tracking and tracing mechanism, Codentify or Inexto, that is far less transparent than the tool required by the Protocol’ (see page 3). This statement is supported by a recent report commissioned by the Framework Convention Alliance (and written by Sovereign Border Solutions) – entitled FCTC Protocol to Eliminate Illicit Trade in Tobacco Products, Guidebook on Implementing Article 8: Tracking & Tracing – which states: ‘… the tobacco industry’s solution, known as Codentify (and later re-branded as Inexto) is not fit for purpose to meet the obligations of the Protocol for several reasons. First, the software used was developed by the tobacco industry, and is currently deployed in some of their production facilities; and second, it is totally controlled by the industry, with almost entirely opaque business rules. It simply does not come close to meeting the obligations of Article 8.12 of the Protocol that states that ‘obligations assigned to the Party shall not be performed by or delegated to the tobacco industry.’

Has Pakistan breached Protocol?

So does this mean that Pakistan (which is obliged to follow the Protocol’s directives) has in fact failed to comply with the Protocol in awarding the track and trace tender to NRTC? According to Haider Bajwa, a spokesperson for NRTC, this means no such thing. In an interview with a local newspaper, he confirmed that contractual agreements and arrangements were in place to guarantee that no other parties, including Big Tobacco, could influence the design, solution or project. Mr Bajwa said that NRTC was using the Inexto track and trace technology as a solution that was 100% independent from the tobacco industry. ‘There is no ownership of Inexto shares directly or indirectly by any tobacco or tobaccorelated companies,’ he said, adding, ‘in addition, all checks and information will be available to the FBR control rooms for review and analysis.’

‘The whole process is designed to comply with the FCTC Protocol of the World Health Organisation (WHO),’ he affirmed. If this is true, then why are the FCTC Secretariat, other public health bodies and independent and academic experts, so dead set against parties using Inexto to meet their Protocol obligations?

Still lacks transparency

Maybe the answer to this question was best summed up by Dr Da Costa e Silva, in 2016, when the Codentify solution was sold by the tobacco industry to Inexto. At the time she told euobserver.com that even if the track and trace system was independent, it would still lack transparency. ‘If the new company’s purpose is to continue to promote Codentify as a track and trace system allegedly in compliance with the Protocol, then this independence is irrelevant, since... analyses of Codentify have found it to not be compliant with Protocol recommendations on track and trace,’ she said.

What does ‘independence’ mean?

One also needs to question what is meant by the term ‘independence’ in this context. Mr Bajwa of the NRTC refers above to the question of ownership, but there is also a financial question of how much of Inexto’s revenue is generated from tobacco industry clients – with the answer being ‘almost all of it’. So although NRTC does not depend on the tobacco industry for its income, Inexto does, and Inexto is the one providing the track and trace solution (through NRTC) to the FBR. The FBR has defended its choice by claiming that it is almost impossible to find a company that has never worked for the tobacco industry. However, the fact that Inexto depends almost entirely on this industry, combined with the transparency concerns described above, has led many stakeholders to conclude that what we have here is a clear case of Protocol transgression. And now an even bigger concern is that if this transgression is allowed to pass and Pakistan, as a party to the FCTC Protocol, is able to implement the Inexto system via the NRTC, this runs the risk of setting a precedent for other parties to the Protocol to follow suit. And then one can really wonder what the point of the Protocol is.

India Needs Comprehensive National Policy to Tackle Alcohol, Declares ASPA In November, the President of the Authentication Solution Providers Association, Mr Nakul Pasricha, was interviewed by Ambrosia (a magazine for the alcoholic beverages industry) on the impact of illicit trade on India’s alcohol market. Here’s what he had to say: Q: What is the impact of the spurious liquor industry on the government, people and the legitimate industry? A: Illicit trade in alcohol undermines sustainable economic growth. Collectively, it affects all the stakeholders in society to various degrees. While the industry and government lose revenue, it is the consumer who is impacted the most as illicit trade in liquor poses a serious threat to consumer health. Poor quality or spurious liquor can cause death and serious illness, as seen in connection with several tragic incidents involving hooch (bootleg alcohol) in India. According to various media reports more than 250 people died in India due to hooch tragedies in 2019 (editor’s note: some of the states where these tragedies occurred had opted to use plain, barcoded tax stamps with no security features, making the task of introducing illicit product into the market much easier). Excise duty, which is an important source of revenue, is continually under threat from the practice of illicit trade. A considerable amount of money, which could be used to benefit the government services of a country, are being diverted to the pockets of criminals participating in illegal trading. However, it’s not just about a loss of tax revenue, but also about a loss of consumer confidence in the government. A case in point is the hooch tragedies, which eroded the image of state governments and made it difficult for them to restore consumer trust. Q: How can the government streamline the industry to allow the poorer section of society to obtain affordable liquor at a price which will deter rampant drinking? A: There is a direct link between price and consumption. After the hooch tragedy in Uttar Pradesh, the government set up a committee which found that poorer sections of society were using smuggled liquor, as it was available at almost half the price of some domestic legal brands. This will continue to be an area where careful thought is needed in order to preserve a balance. Q: What are the challenges of fighting the illicit liquor trade? How can the FSSAI (Food Safety and Standards Authority of India) regulate the quality of liquor sold?

A: Illicit alcohol is prevalent in both developed and developing countries, with no country immune to this threat. For example, the UK government lost £1.3 billion in excise tax revenue in the period 2015-16, and Dutch authorities estimate the annual revenue losses from illicit trade in alcohol to be €100 million. Liquor bootlegging in New York City alone is estimated to have cost the city $1 billion in lost taxes over the past 15 years. The illicit alcohol products in these cases are either unlabeled or sold as counterfeits of genuine brands (source: www.traceit.org). When producing counterfeits, the forgery goes beyond the product label, often extending to bottle designs and caps.

them as an opportunity for consumer and industry empowerment. That said, the existence of cheaper, less sophisticated, less effective stamps and marks could potentially dilute the value proposition around their use as platforms to implement global guidelines.

In India, state excise departments (editor’s note: alcohol excise tax in India is levied at the state level, with most states and provinces issuing their own tax stamps) face various challenges, including: how to combat smuggling and illicit liquor; how to ensure a fool-proof supply chain and labeling system; how to ensure consumer confidence; how to increase excise revenue; and – the most important – how to differentiate fake liquor bottles from genuine?

Q: Can liquor manufacturing companies create a fund to help families affected by alcoholics?

The FSSAI last year issued a regulation on alcoholic beverages requiring all liquor bottles to carry a statutory warning that ‘consumption of alcohol is injurious to health; be safe – don’t drink and drive.’ So far, this regulation has been primarily regulated by excise commissioners and they are only looking at alcoholic content and the toxic substances in alcohol. But far more elaborate standards are now being implemented, which have been benchmarked against global standards while still taking the Indian context into consideration. And food safety commissioners will likely also become involved in the enforcement of these standards, alongside the excise commissioners. Q: What role can excise departments play to boost revenue to ensure a win-win situation for the government, the consumer and the industry? A: Excise departments face various challenges, with the main ones relating to revenue enhancement and protection, and ensuring people receive genuine products. Anti-counterfeiting solutions like tax stamps play an important role. We believe that state excise departments need to study the importance of tax stamps in the global context and apply such solutions in India. They need to stop thinking about tax stamps as merely tools for tax collection and start thinking about

On the other hand, new generation tax stamps with technological innovation in security printing, serialised coding, data processing and mobile communications, have the capability of taking on additional roles related to product authentication, supply chain security and data intelligence. This will help state excise departments to build their policy towards reduced consumption and increased revenue.

A: Yes, it can be done in partnership with the state excise departments and various NGOs. But before this happens, there is a need to raise awareness at the mass population level, and to take preventive as well as long-term strategic steps. Preventive steps include the building of an ecosystem where consumers can be assured of receiving genuine, legal products and are themselves involved in the authentication process. And at the longer-term strategic level, a lot of work needs to be done with regard to liquor standardisation, monitoring of ethynyl alcohol, etc. Q: Is the prohibition of liquor the way forward? A: Prohibition is not the only answer. In fact, in many cases, prohibition has led to an increase in illicit liquor trade. For example, liquor is prohibited in the state of Gujarat, but, according to a recent study, 38% of youths in Gujarat consume alcohol, and 12% of the general population consume drugs such as cannabis. In the last two years, police have seized liquor valued at Rs 254 crore ($35.4 million). The Gujarat state government has confirmed that prohibition has led to increased smuggling from neighbouring states and is demanding compensation from the central government to cover Rs 15,000 crore ($2 billion) in annual losses. Similarly, in another prohibition state, Bihar, the sale of drugs has increased significantly, to the extent that, according to the Narcotics Control Bureau, Bihar tops the charts in the consumption of opium and hashish. Rather than prohibiting liquor, therefore, India needs a comprehensive national policy to tackle alcohol and other addictive substances.

ON THE RECORD| VOLUME 11 – NO 11|NOVEMBER 2019

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New Tobacco Track and Trace System Bestows ‘Digital Enforcement Powers’ on Chile Revenue Authority biggest share going to Philip Morris International with 4% (although this is essentially composed of imports). Mr Villalón commented that from a technical point of view, with just two main players in the industry, the implementation of a track and trace system would seem relatively easy. However, whatever the number of players involved, the efforts required to counter inevitable industry resistance on the political, operational and contractual front would always need to be factored into any implementation plans.

Not new to tax stamps During the recent Tax Stamp Forum™ in Budapest, Victor Villalón, former Head of the Chilean Internal Revenue Service’s Tax Compliance General Department, described the ‘digital enforcement powers’ bestowed on the service, in the shape of a new cigarette tax stamp and traceability programme implemented in March this year. The new powers are underpinned by the country’s landmark tax reforms of 2014, described by some Chileans as the largest in 40 years. The reforms included significant changes in income tax and VAT levels, as well as a substantial increase in specific taxes on tobacco products. In particular, the enforcement powers bestowed on the revenue service – the official name of which is Servicio de Impuestos Internos (SII) – included the power to conduct remote audits on taxpayers’ systems, as well as request taxpayers to install automated monitoring controls on production lines, and mandate the use of track and trace mechanisms, not only in relation to excise tax programmes but other programmes as well, if required. Hence, a large number of projects were put into motion between 2014-18, as a result of the landmark tax reforms.

Chilean cigarette market

1.2 billion tobacco packs are produced every year in Chile, of which 800 million are for internal consumption and 400 million for export to 17 different countries, said Mr Villalón. In addition to this domestic production, another 22 million packs are imported. Therefore, most of the tobacco products consumed in Chile are manufactured on Chilean soil – on 20 fully automated production lines. The main domestic producer is British American Tobacco Chile with a whopping 95% share of the market, with the second

6 TAX STAMP & TRACEABILITY NEWS | CASE STUDY

Tax stamps are nothing new to Chile. Indeed, the country used to have a tax stamp programme in place, back in the 1980s, but it was abandoned because: • It was based on a simple paper stamp with a serial number but without any secure elements and therefore easy to replicate; • Other taxes were raising more significant revenue for Chile´s fiscal budget and were therefore commanding more attention. However, this would all change as a result of the 2010 global subprime crisis, which would render the collection of all taxes important (even the 3% share collected from tobacco products), in the face of Chile’s growing budget deficit. In addition to this was the issue of growing tobacco tax rates, which had increased three times in the space of six years (including the increase under the 2014 reforms). This, combined with the effects of the 2010 crisis, led to a rise in illicit tobacco trade levels. Whereas, in 2010, the tobacco industry was claiming that 6% of production in Chile was illegal, that claim had risen to 12% by 2018, said Mr Villalón, who also referred to studies showing that an average of $500 million was being lost to tax evasion every year. The time was therefore right for implementing effective counter-illicit trade mechanisms, including secure track and trace technologies and strengthened enforcement powers.

Defining the system’s characteristics

The required characteristics of the track and trace system were defined in a 2015 Ministry of Finance regulation stipulating that the system needed to identify, mark and trace taxed tobacco products, and that the company providing the system needed

to be independent from the tobacco industry. A subsequent amendment to the law, as a result of civil pressure, led to further regulations preventing any direct tobacco industry involvement in the track and trace system. However, the choice of whether to use paper-based stamps or directly printed codes, as well as the nature of those stamps or codes, was left to the SII.

High-level committee and tendering process

The planning and design process of the track and trace system was overseen by a high-level committee headed by the SII Commissioner himself, together with a design task force made up mostly of engineers. The task force was given the mission of visiting other countries and learning from their experience in terms of processes, systems, data transmission, interface best practices and relevant performance indicators. Such high-level involvement was in part due to the realisation that no domestic companies would be experienced enough to provide the type of track and trace system needed for this market, and that it would therefore be necessary to look beyond Chilean borders for a service provider, explained Mr Villalón. The quest to find suitable providers was conducted through the issuance of a number of RFIs (Request for Information), which allowed the SII to be more precise with regard to its desired operational model, as well as to put into place guidelines for the preparation of technical documents, including processes, system requirements and regulations. In 2017, the SII issued an RFP (Request for Proposal) for the track and trace system, and the contract was ultimately awarded to SICPA.

Three-part model

Mr Villalón described the three main aspects of the system’s operational model: track and trace, data and risk analysis, and control mechanisms. Regarding the scope of the track and trace system, the SII decided that the entire tobacco market needed to be monitored, including domestic production, imports and exports. The system is based on a secured 2D barcode, which is unique to each individual tobacco pack, containing information on the product, producer, destination, relevant dates, and specific tax to be paid.

Domestically produced cigarettes for domestic consumption carry a directly printed secured code applied on the production line; therefore no paper stamp is used on these products. Imported products, however, do carry a paper tax stamp, which can be affixed either before the products arrive in Chile or at the moment of import. Exported products, meanwhile, carry neither a direct code nor a tax stamp. The only requirement is for the products to be counted and information pertaining to the products to be captured. The directly printed codes and paper stamps carry multiple levels of security. The direct code is printed with security ink containing covert and forensic authentication elements, while the tax stamp on imported products carries various authentication elements at overt, covert and forensic level, in addition to the unique identifying code. Although the stamps are referred to as ‘tax’ stamps, the direct codes and stamps do not serve as tax payment tools as such, but rather as tools for track and trace only. The respective excise tax is instead declared and paid by means of regular lodgment processes.

Verification and control

There are three different verification devices used within this new programme: 1. A wireless, mobile, validation device for tax inspectors, which can both authenticate the code by detecting a covert marker embedded in it and retrieve the traceability information in the code to determine the product’s origin and compliance status; 2. A validating card with two polarising filters to allow tax inspectors to authenticate the tax stamp. When the filters are placed over the SII logo on the stamp, the logo is seen to change colour or even disappear – depending on which filter is being looked through; 3. A smartphone app for the general public, called e-Verifica – the SII launched this ‘in house’ app to allow consumers to verify and report cases of taxpayer non-compliance. The app even allows consumers to upload pictures of noncompliant products.

Project timing

Data and risk analysis

All the data produced during the direct marking or stamping process is fed into a dedicated central data system, as well as integrated into other relevant SII platforms, such as electronic invoicing and risk assessment systems and a smartphone app for consumers. The field controls carried out by tax officials are also linked to the risk assessment system. As soon as risk levels are detected that are higher than established tolerances – or if certain anomalies are detected in cash flows, inventory levels, cost indicators or products in transit – this triggers a flag alert which feeds risk assessment tools and treatment processes, allowing the SII to decide if risk reviews or audits on producers and importers, or even on their providers or clients, should be conducted.

Mr Villalón advised that, once the regulations had been put in place, back in 2016, it took three years to design and implement the track and trace system: one year to define the technical requirements, a second year to go through the bidding process, and a third year to implement the system and render it operational. The system finally went live on 18 March 2019, on all three domestic production plants plus imported goods. ‘By far the most exhausting aspect of the project related to the elaboration and approval of the three core documents involved in it: the ministerial decree, the technical regulations, and the bidding and contractual regulations. This was because of the level of interaction required with other internal and external actors, including customs, health, general audit, some of the taxpayers themselves and many potential track and trace service providers,’ commented Mr Villalon. ‘And probably the most sensitive aspect of the implementation was the intervention and preliminary tests required on taxpayers’ lines of production, which took us almost six months,’ he added.

Performance targets

He described how the SII had identified a performance target for the new system, based on an estimated annual tobacco tax loss of $500 million a year and also based on the tax recovery levels experienced in other countries that had implemented similar systems. In considering these factors, the SII agreed that a recovery rate of 20-30% of the $500 million tax gap would be achievable and would render the track and trace system profitable. In addition, there would likely be revenue impacts on VAT and income taxes, which had not as yet been measured, and which weren’t considered when the project was approved and launched in 2016.

Early successes

After five months in operation (ie. as at end August 2019), Mr Villalón was happy to report that 60 million codes had been applied and activated on cigarette packs for domestic consumption, 30 million packs of export products had been ‘accounted’ by the SII, and 3 million tax stamps had been applied and activated on imported products. Furthermore, product and import levels were being monitored, 150 control devices for field inspections had been delivered to the SII and customs, the consumer app had been downloaded 10,000 times and all consumer alerts had been analysed. So, no major issues to report. The SII even had two unknown cigarette importers showing up for registration into the programme. Although it is currently too early to launch risk reviews or audits, these should be activated by the first semester of 2020.

Personal perspective

In closing, Mr Villalón commented that from a personal perspective the most relevant outcomes of the track and trace project were twofold: 1. That the SII now had the track and trace know-how to be able to expand the system to other products; 2. That by becoming better equipped to protect tobacco taxation the Chilean tax administration had in turn strengthened its ability to protect the integrity and stability of the entire tax system.

CASE STUDY |VOLUME 11 – NO 11|NOVEMBER 2019

7

SICPA Launches its ‘Brightest Star’ QUAZAR is delivered in the form of secure labels that are customised to meet the design specifications and colour precision of the most demanding prestige brands and products, claims SICPA.

If you ask an astronomer what a ‘quasar’ is, they’ll tell you it’s an extremely bright celestial object emitting an immense amount of energy in the form of, say, light or infrared radiation, from a compact source. Recently, SICPA launched its own ‘brightest star’ – QUAZAR® – which it describes as an optical security technology offering vibrant colours and engaging visible effects that are quick and easy for end users to authenticate, without the need for prior training. The new technology has been created for the purpose of securing strategic and prestigious brands and products, as well as for integration into tax stamps to protect government excise systems.

The labels can be designed to feature visible messages, company logos or motifs that appear and disappear when the labels are tilted, motifs that turn on and off, or embedded text that can be revealed or hidden. QUAZAR commands a unique position in the security labels market, says SICPA, as it is a complete security concept with a combination of security components. The very high security level of customised QUAZAR labels is created through the combination of smart design techniques with IP-protected security pigments and inks, and proprietary printing equipment, all encased within a fully controlled supply chain. QUAZAR labels can be produced on various types of paper substrate as well as on PVC, PET and BOPP.

Overt security and more…

by customs officials or inspectors using handheld devices, or involving certified analysis by specialised laboratories, QUAZAR optical labels can incorporate additional security properties at semicovert, covert and forensic levels. These include: • Machine-readable SICPAGUARD®, which encompasses a security marker integrated into the ink and a handheld detection device for on-the-spot authentication; • UV fluorescence; • SICPA OASIS®, a security ink solution based on liquid crystal pigments, which produces a colour-changing design effect when viewed under a dedicated polarising filter; • Forensic taggants for certified analysis by specialist laboratories. This results in a multi-layered solution that combines the attention-grabbing, curiosityarousing properties of QUAZAR with the more discreet features required for optimum security and authentication by different stakeholders.

When further security checks are required

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8 TAX STAMP & TRACEABILITY NEWS | TECHNOLOGY NEWS

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VOLUME 11 – NO 12 / DECEMBER 2019

Tanzania Records 34% Increased Revenue on Liquor

Between February and October 2019, Tanzania Revenue Authority (TRA) recorded an increase of 34% in excise duty on local and imported spirits and wine, following the launch in January of Phase 1 of the authority’s Electronic Tax Stamp (ETS) management system on tobacco, alcohol and beer products. Dailynews.co.tz has reported that according to TRA’s Deputy Commissioner General, Mr Msafiri Mbibo, the TRA collected TZS 77.8 billion (almost $34 million) during the period under review, compared to TZS 58.2 billion ($25.3 million) for the same period last year, translating to an increase of just under 34%. Similarly, the collection of VAT for alcoholic drinks has jumped by 30.6% during the past ten months, to TZS 23.5 billion ($10.2 million). There has also been an 8.7% surge in excise duty – and a 19.5% increase in VAT collection – on locally produced and imported carbonated soft drinks, juices and bottled water, which were introduced

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into the ETS system, along with DVDs and CDs, in August this year. Mr Mbibo was highly optimistic of additional revenues coming in as a result of the so-called ‘digital’ stamps – which are referred to as such because of their unique identifying code, which allows products affixed with the stamps to be traced back to their origin. The ETS also enables the TRA to obtain real-time production data from manufacturers and to determine in advance the amount of tax to be paid as excise duty, VAT and income tax. The implementation of the ETS system involved the installation of electronic stamp devices in the manufacturing sites of all four cigarette companies in the country, as well as seven beer brewers and 12 wine and spirits producers. In addition, another seven producers apply the stamps manually under the supervision of the TRA, since they still use old technology that cannot support the ETS system. And 14 importers of cigarettes and alcoholic beverages have also joined the system (see TSTN July 2019).

FDA Advances Plans for Food Traceability Back in April, the US Food and Drug Administration (FDA) announced plans to develop a ‘Blueprint for a New Era of Smarter Food Safety’ (see TSTN May/June 2019). Since then, the FDA has closed the period for the public to comment on its proposal, and it will be ready to unveil its plans in the new year. The FDA’s intention is to move away from the manual, paper-based system currently used to track food from the farm to the customer’s plate, and replace it with new technologies that can automate the process, reports rfidjournal.com. One of those technologies is RFID, but other Internet of Things technologies, including RF sensors, could also play a role in linking physical goods with digital information systems. The FDA plans to align its food traceability efforts with other track and trace efforts, such as pilot programmes focused on tracking medicines through the supply chain, as part of the Drug Supply Chain Security Act. According to AIM North America (which represents the country’s leading providers of automatic identification and mobility solutions), rather than pushing a particular technology onto the food industry, ‘the federal government should adopt standards to set the baseline content needed to facilitate a food supply chain that is both visible and actionable. These standards should require such baseline content to be physically tied to each item entering the food supply chain in a manner that can be digitally captured. By establishing universal baseline requirements, each supply chain participant should be able to collect and share the same information (eg. unique identifier, lot/batch) regardless of the technology or platform used.’

STOP Issues Policy Brief on Protecting Track and Trace Systems from Tobacco Industry By Telita Snyckers – International Tax and Customs Transformation Consultant The global tobacco industry watchdog Stopping Tobacco Organisations and Products (STOP) has published a global policy brief for countries on protecting their track and trace systems from undue influence by the tobacco industry. The brief is based on a simple premise: that the latest evidence suggests that the tobacco industry, including the big tobacco companies, remains involved in smuggling, and therefore has a vested interest in trying to control track and trace systems. The brief summarises the most recent research, as part of its programme to empower regulatory agencies and government departments to ensure that functional, independent track and trace systems are implemented. The brief is structured to cover three key sections: evidence exposing the tobacco industry’s more recent involvement in smuggling its own products (and explaining why it would do so); how the major tobacco companies have sought to both create confusion about and control over track

Inside this Issue 1 Tanzania Records 34%

Increased Revenue on Liquor

1 FDA Advances Plans for Food Traceability

2 STOP Issues Policy Brief

on Protecting Track and Trace Systems from Tobacco Industry

3 FCA Issues Guidebook on

Implementing Article 8 on Track and Trace

4 The Cost of Security 7 Headlines of 2019 8 Smuggling Rates Rise After Tax Increases

2 TAX STAMP & TRACEABILITY NEWS | REPORT

and trace programmes meant to keep them in check; and what governments can do to better safeguard their track and trace programmes against undue tobacco industry interference.

documents showing they fear both the cost and a lack of control over track and trace systems, particularly enhanced tax stamp systems run by independent solution providers.

Industry’s ongoing involvement in supplying the illicit market

Tactics used to create confusion and secure control

The first part of the policy brief outlines the evidence of the industry’s involvement in tobacco smuggling, both past and present, and its motivations for controlling tobacco tracking and tracing. Much of this is a useful summary of evidence that has been in the public domain for some time, including how overwhelming evidence from the major tobacco companies’ own documents showed they had been orchestrating the smuggling of their own cigarettes in vast quantities across the world. A third of global cigarette exports were ending up on the illicit market. But importantly, these illicit practices are not simply relegated to historical events: there is growing evidence that the tobacco industry, including the major companies, remains involved in and benefits from the illicit tobacco trade. Indeed, the brief suggests that independent analyses of diverse data consistently show that the majority – approximately two-thirds – of the illicit cigarette market today is made up of tobacco industry cigarettes. As the report notes, this illicit trade can take many forms, including oversupply, under-declaration and ‘round tripping’. It also involves tobacco companies trying to avoid culpability by outsourcing distribution to third parties, when they could be far more closely controlling their distributors and supply chain – as other fast-moving consumer goods companies are doing – but seemingly choose not to do so. If a proper track and trace system were implemented, tobacco companies would face increased tax payments, fines and possibly further litigation related to tobacco smuggling. And, as all cigarettes that are now being sold in the illegal market would eventually be fully taxed under a proper system, tobacco consumption would inevitably fall, further decreasing the industry’s profits. The report consequently argues that the tobacco industry has a clear incentive to control and undermine tracking and tracing programmes, with leaked industry

The second part of the report describes the tactics used by the major tobacco companies to both create confusion about and control over track and trace programmes, and how they have hoodwinked governments, regulatory agencies, the media and the public. Since the late 1990s, tobacco companies have worked to convert a public relations disaster into a success story, claiming that they are no longer perpetrators but now victims of new forms of illicit tobacco, particularly counterfeiting, and arguing that governments should work in partnership with them, which many governments now do. Leaked industry documents referenced in the report help spell out the industry’s plan to create this confusion and divert attention from their own activities, including a tactic to continuously stress the existence of counterfeits and ‘cheap whites’ – because these are forms of illicit trade for which the major tobacco companies are not held responsible and which eats into their market share. In fact, as the report explores, counterfeits and cheap whites actually comprise a small proportion of the illicit cigarette market, with research suggesting that tobacco industry illicit trade comprises 40%-70% of the illicit market, counterfeit products make up only 5%-8%, and cheap whites somewhere between one fifth and one third, depending on the datasets used. Confusion around the prevalence of cheap white (or ‘illicit white’) cigarettes is further exacerbated by wrongly labelling certain brands as ‘illicit whites’ when they in fact have their genesis in the major tobacco companies. An example of this is labelling the brand Classic (consistently one of the most seized brands in the illicit market) as an illicit white brand when it is in fact an Imperial Tobacco brand manufactured in Ukraine. Continued on page 6 >

FCA Issues Guidebook on Implementing Article 8 on Track and Trace The Framework Convention Alliance (FCA) has commissioned a guidebook on implementing Article 8 of the Protocol to Eliminate Illicit Trade in Tobacco Products (the Protocol) relating to the tracking and tracing of tobacco products. One of the challenges in implementing the Protocol lies in the fact that it was predominantly developed by health experts with little experience in illicit trade, customs administration, supply chain security or traceability programmes. Furthermore, the Protocol needs separately to be implemented by customs agencies who are typically not traceability experts and who may not have developed deep domain expertise in dealing with tobacco in particular (and who, frankly, often seem to view the Protocol as largely a health-related instrument, not attaching the necessary importance to pursuing its implementation, as is evident from the relatively poor implementation rates of traceability across the globe).

Approach of the guide

Article 8 sets out broad requirements for Parties to implement a tracking and tracing system, but does not specify business requirements or technological options that are immediately actionable or implementable. Therefore, interpretation of the requirements and translation into operational and technical specifications is required. The guidebook was intended to be a simple, introductory overview for implementing agencies – and to a lesser degree perhaps also for those administering the Protocol in the FCTC itself – to better understand the key concepts, principles and terminologies used in traceability solutions, and to position agencies to better engage with potential solution providers. In that sense, the guidebook is intended to be a resource for policy makers that need to implement the Protocol. It provides an overview and historical context of how the Protocol came into being, before providing an overview of the main elements of tracking and tracing and offering guidance on how policymakers can choose an appropriate system for their particular context. At 81 pages it makes for hefty reading, but in the process provides practical guidance on a broad range of issues and options agencies are likely to encounter.

The guide does not prescribe a specific system or approach, but rather sets out options and considerations to form a basis from which Parties can make strategic decisions in relation to implementing their obligations under the Protocol, given the current state of track and trace technologies. The guidebook is a first instalment, with the intention to publish additional, more detailed chapters in the future, including possibly a section on dealing with illicit tobacco in free trade zones.

What the guide contains

The first part of the guide is structured around a number of introductory sections, including: the Protocol’s objectives and key requirements; an overview of the illicit trade in tobacco in broad terms; key components, benefits and country successes achieved from the marking of tobacco products; supply chain events explained in simple terms; exploring the key components of a track and trace solution including unique identifiers, serialisation, aggregation, security features (types, layering and application methods), and tamper evident non-removable marks; authentication; data management; and other supply chain security measures that agencies should consider, beyond just tax stamps and secure marks. The second part of the guide focuses on practical considerations in the journey towards implementing a track and trace and secure mark solution: ie. the types of planning and analysis that is required upfront, estimating the size and prevalence of illicit trade, and understanding the agency’s customs capability gaps; designing a solution around a governance framework and considering the stakeholder universe; building considerations, including whether to use a straight tender or a publicprivate partnership model; assessing the extent to which the agency’s legislative paradigm allows for the introduction of stamps and marks; and aligning the traceability programme with a broader enforcement strategy. Finally, the guide includes a series of other practical implementation considerations around independence, engagement with the tobacco industry, understanding key arguments advanced by the tobacco industry against track and trace, how to convert existing tax stamp programmes into full traceability programmes, and measuring

the outcomes and impact of traceability programmes. Importantly, throughout the guide, practical checklists are included for a range of issues, along with key questions agencies should ask themselves on the various aspects of implementing a secure mark and tax stamp programme, making the guide less academic and more concrete.

How solution providers can use the guide One of the key constraints in implementing track and trace programmes lies in the fact that customs agencies – who are typically responsible for implementing these programmes – are not traceability experts, and often tend to find it difficult to develop suitable tender specifications, or to engage appropriately with solution providers. This guide is primarily aimed at these implementing agencies, and with this audience in mind is written in a relatively accessible, simple style.

Although it was not intended for subject matter experts who already have deep domain expertise, it should form a valuable weapon in any solution provider’s arsenal of tools in demystifying track and trace for potential client agencies, and has the potential to contribute towards closing the knowledge gap between vendors of traceability systems and governments seeking to procure a track and trace regime for tobacco products in order to fulfil their Protocol obligations. This can only mean more successful programmes being implemented! FCA Guidebook on Implementing Article 8: Track and Trace Key concepts Illicit Trade

Protocol

Track and Trace Benefits

Authentication Data management

Supply chain events

Other supply chain security measures

Components UID, serialisation, aggregation, security features (types, layering), application methods, non-removability Practical considerations in implementation journey Plan and analyse Illicit trade – size and nature Agency capabilities

Design Governance model Legislative model

Build Straight procurement / PPP Elements of cost

Implementation Independence, engagement model with industry, understanding key industry rhetoric, converting existing tax stamp programs intro traceability programs, linking with an enforcement program, measuring the impact of traceability programs

Key questions agencies need to ask; implementation checklists

The guidebook – which was written by Sovereign Border Solutions and Dr Hana Ross of the Economics of Tobacco Control Project at the University of Cape Town – can be downloaded at http://www.fctc. org/wp-content/uploads/2019/11/ITPGuidebook-.pdf.

REPORT | VOLUME 11 – NO 12|DECEMBER 2019

3

The Cost of Security By Géza Imre, Document Security Expert, ANY Security Printing Company, Hungary At ANY Security Printing, we have been providing tax stamps to Hungary’s National Tax and Customs Administration for nearly 20 years. As a consortium leader, we currently provide about 800 million tobacco and alcohol stamps annually to the administration.

To analyse the cost of different paper, we used a model tax stamp of 20mm x 44mm, printed from three plates using non-security inks, and with no other security devices. The costs in Figure 1 are given in arbitrary units for the same ordered quantities for comparative purposes.

Like any other supplier, when preparing for a new tender we regularly face the challenge of reducing our prices while maintaining security standards. As a security designer I am committed to recommending the best possible solutions in order to reach the highest possible security for a document.

The first column in Figure 1 shows that with standard offset paper and non-security inks, the cost is at a minimum but the paper provides no security at all.

Although requirements such as carrier type, document size, dominant colours, text colours, required design elements like logos and coat of arms, and data content, are all very important, at the end of the day it is probably cost that trumps them all. This being said, I decided to analyse some of the costs involved in the production of tax stamps in order to test the beliefs held by my colleagues and myself as to what was cheap and what was expensive. Since ANY has been producing tax stamps for many years we have a huge amount of tax stamp production data available. The data presented here is thus based entirely on our experience and is therefore not representative, but I trust that it will serve to illustrate the relative cost of different security features. I must also emphasise that our data relates to a range of a few hundred million tax stamps annually, and that producers with smaller or larger production capacities will most probably have different costs. For the purpose of this exercise, I have narrowed my focus to the cost of the carrier (substrate), the hologram and the security inks, as these are the most important cost influencers of the security designer’s work as far as the tax stamps we produce are concerned. This analysis does not, however, include costs such as wages, energy consumption and serialisation costs, which, although important, are outside of the designer’s responsibility.

Carrier analysis

Tax stamps can be printed on several different materials, using many different technologies. If the selected carrier is paper, for those experienced in the security printing industry it is obvious it should be UV dull, chemically protected, and unique (in that it incorporates a specific combination of features such as security fibres and particles). But how does such paper fare in a cost/security analysis?

4 TAX STAMP & TRACEABILITY NEWS | SPECIAL FEATURE

The second column belongs to a paper free of optical brightener. It gives a certain level of security but I would not call it a security paper. So the security is weak while the cost is significantly higher. Column 3 shows the security paper which we found to be optimal for tax stamps, which is not only free of optical brightener but contains chemical protection and security fibres. The price of such paper is roughly twice as much as offset paper but it meets security standards. The last column in Figure 1 shows a model case which, in my opinion, is somewhat over-designed, in that it incorporates a watermark. For a tax stamp, even a two-tone, non-positioned watermark is excessive because checking it when the tax stamp is on the product is a cumbersome process. Furthermore, adding such a ‘luxury’ to the paper triples its cost compared to non-security paper (and this doesn’t even include the origination cost of the watermark). Cost (AU)

200

Paper

150

2.7% 3.5%

5%

100

97.3%

7% 50 93% 0

Print

Offset paper

96.5% 95%

OBA free paper

“Tax Stamp paper” “Document paper” (+ chemical (+ two tone waterprotection and mark) security fibres)

Figure 1 – paper analysis (‘AU’ stands for arbitrary units).

Hologram analysis

From a cost viewpoint, the most sensitive security features are, in my opinion, the overt features. Although other suppliers may find other overt security features more appropriate, our experience is based on the use of holograms (or DOVIDs, to be more precise). In my opinion, holograms are one of the best overt security devices available – even though they usually carry a significant weight in terms of cost.

The first column in Figure 2 shows the material cost of a model tax stamp using tax stamp paper, non-security inks, and a relatively simple hologram comprising four security features. The second column shows the same variables but using a more complex hologram. The price comparison is based on similar ordered quantities, without considering the origination costs. The covered area is 5mm x 20mm. As you can see in Figure 2 there is no big price difference between higher or lower security holograms. Therefore, given that it is obvious that a good quality hologram is much more challenging to a counterfeiter, and that in a well-designed hologram, overt, semicovert, covert and forensic elements can be used simultaneously, I would, without doubt, recommend using the more secure hologram. Cost (AU)

350

Paper

Print

Hologram

300 250 200

55.1%

59.1% 1.4%

1.6%

150 100 50 0

43.3%

39.5%

Hologram with 4 security features

Hologram with 8 security features

Figure 2 – hologram analysis.

Security ink analysis

Moving to ink-related security features, I see the greatest opportunities for cost-effective security solutions in this area. Currently, the offset printing process is the most cost-effective (or at least the fastest) technology for really large quantities, thus our solutions are focused in this area – although we must not forget that digital printing is becoming increasingly more widespread. Figure 3 presents the cost of five different model stamps. In all five models, the paper and hologram are constant. The paper is the so-called tax stamp paper shown in Figure 1, and the hologram is the higher quality option identified in Figure 2. The first column refers to a model situation where all the inks come from the most expensive range. This model is obviously not viable – 68% of the cost comes from the security ink, but the most effective inks are not necessarily the most expensive ones. Using medium-priced inks, we get much better results, as shown in the second column, although the ink price ratio is still around 40%.

By using cheaper security inks we can reduce the ink ratio to 15% (column 3) but this solution could increase security risk. And if we use standard, non-security inks, the price ratio of the ink falls to 1.4%. But from a security point of view, this solution is much too risky. The fifth column in Figure 3 shows a possible solution that is both secure and cost-effective: the security print, which has 10% coverage in the model is calculated with a high-security ink; the text, with 15% coverage, is calculated with a cheap security ink; and the background print, which has the highest coverage, is calculated with a non-security ink. This results in a 17% ink price ratio that is comparable with the ‘cheap’ solution in Figure 3, while providing a good security level. ANY has developed a range of security inks and toners to meet the solution defined in column 5. Our inks are in different price ranges, but our main goal is to use highsecurity inks with a price ranging between medium and expensive.

Latest developments and future projects

The latest development in our spectral layers approach is a penta-fluorescent offset ink which comprises the following five semi-covert/covert/forensic features in one single offset ink: 1. 254nm short wave UV fluorescing greenish yellow; 2. 313nm medium wave UV fluorescing pink; 3. 365nm long wave UV fluorescing blue;

4. 580nm visible to near-infrared fluorescence (anti-Stokes upconverting feature); 5. 980nm near-infrared fluorescence. We have developed two simple devices that are able to detect the presence or even spectral properties of the penta-fluorescent security print without requiring specialised knowledge or lab equipment.

Paper

Cost (AU)

Text

Sec. Print

8% 10%

800 600

50%

400 200 0

4.7% 6.3% 31%

0.2% 2.9% 13.4%

0.2%

0.2%

19%

35%

50%

59%

13%

23%

33.5%

39.6%

Very expensive Medium priced security inks security inks

“Cheap” security inks

13.3% 1%

2.7% 1%

50% 33%

Non-security Combination of inks security levels

Figure 3 – security ink analysis.

As for future projects, we are looking at further development of our spectral layer approach, with our research taking two main directions. The first is to explore the possibilities in spectral analysis. We see great potential in the analysis of materials with complex and characteristic fluorescence spectra. These materials could be easily and reliably identified by an appropriate device, even in the field, while the security print would appear as a normal fluorescent print. Our second approach is based on the time resolution of different spectral effects. The application of time-dependent features may provide new possibilities for affordable security devices.

Conclusion

important to evaluate the security value of a given device. On the one hand, the most expensive device isn’t always the most secure. But on the other hand, a slightly more expensive device can enhance security value. Finally let’s compare the cost of the three security elements of our analysis and the overall value of the excise taxes covered by the tax stamp programme. I think that Figure 4 speaks for itself in this regard: while it is important to rationalise costs as much as possible, these costs represent, at the end the day, much less than 1% of total excise revenues, which means it isn’t worth risking the security of a valuable product for the sake of a cheaper solution. Cost (AU)

Even this short analysis that is based entirely on our own data, processes and experiences, shows clearly that careful thinking with regard to security design gives the possibility to rationalise costs. It is important to create a good balance between cost and security. It is also

2500000 2000000 1500000 1000000 500000 0

43.3% Cost of security materials

Excise tax

Figure 4 – cost of security materials versus overall value of excise taxes.

580 nm VIS-IR

254 nm

313 nm

Backgr. pr.

Ink coverage: background 35%, text 15%, security print 10%

1000

Penta-fluorescent ink – 5 in 1 solution

365 nm UV

Hologram

980 nm IR

ANY Security Printing Company was originally known as the Hungarian State Printing House, a state institution first established in 1851. The printing house was subsequently privatised in 1993 and then listed on the Budapest Stock Exchange in 2005. In 2013, it changed its name to ANY Security Printing Company PLC. The company has three sites in Hungary, as well as joint ventures in Romania, Bulgaria, Slovakia and Moldova, making it one of the leading security printing companies in Central and Eastern Europe.

SPECIAL FEATURE| VOLUME 11 – NO 12|DECEMBER 2019

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STOP Issues Policy Brief (continued) Other research suggests that some ‘illicit white brands’ are also owned by the major tobacco companies: the trademark for the ‘illicit white’ brand Premier is owned by a BAT subsidiary in Peru, by a JTI subsidiary in Russia and by a PMI subsidiary in Uruguay. As a result, the prevalence of ‘illicit whites’ is most likely significantly overstated in estimates, and the contribution of the major tobacco companies to the illicit market is likely understated. Getting the data to tell a story that is sympathetic to the major tobacco companies is made easier with the tobacco industry controlling most of the data on tobacco smuggling, and using that data to generate misleading media coverage, with numerous reviews showing that the data the industry funds routinely exaggerate the level of illicit trade. Tobacco companies combine the data and narratives with other public relations efforts to create further public confusion and ingratiate themselves with governments as partners in reducing illicit trade. This includes training border patrol and customs officials, funding sniffer dogs, sharing data from tracking devices (placed illegally on the vehicles of competitors) with authorities to enable raids on those competitors, and promoting ineffective memoranda of understanding with law enforcement and customs agencies. This helps to ingratiate the companies and paint themselves as both the victim and the solution. Research piecing together leaked industry documents shows that the major tobacco companies have been working collaboratively to gain control of the global track and trace system envisaged in the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products (thereby undermining its independence requirement), with a four-pronged strategy: 1. Creating and promoting their own track and trace system, initially known as Codentify; 2. Actively opposing alternative tax stampbased systems; 3. Disguising their links to Codentify by using a growing number of third parties to promote it and by renaming it Inexto Suite; and 4. In their own words, ‘proactively shap(ing) T&T regulation’. Perhaps not surprisingly, the report is quite critical of Codentify/Inexto-related solutions. It notes that experts have criticised these solutions as inefficient and ineffective, and refers to how – despite the solutions reportedly having been used in somewhere between 50 to 100 countries worldwide – illicit trade remains high, which the report

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argues is further proof of Inexto’s failure to sufficiently secure the tobacco supply chain. Ultimately, the report notes that, ‘in light of the growing evidence of the tobacco industry’s ongoing involvement in illicit and reluctance to control its supply chain, the evidence that it is also seeking to control track and trace systems is very worrying. This would leave the major tobacco companies able to continue such practices without external scrutiny, thereby avoiding tax payments and fundamentally undermining the ITP (Protocol).’

What governments can do

The third part of the report contains guidance for governments on what to expect and what they can do to safeguard their track and trace programmes against industry interference. It notes that the major tobacco companies can be expected to: change the name of their track and trace product (already changed from Codentify to Inexto Suite); actively adapt their product to fit with tender requirements; and continue using third parties to promote their digital track and trace system. Identifying the industry’s front groups, spokespeople, linked companies or coalitions will likely become increasingly difficult. The report proposes the following tactics for governments to use: 1. Governments must ensure that their implementation of a track and trace system is fully in line with Article 5.3 of the FCTC and the requirement that obligations assigned to a party ‘shall not be performed by or delegated to the tobacco industry.’ The report includes a series of practical recommendations on how governments can safeguard themselves against industry-associated solutions that could otherwise crowd out more independent solutions; 2. Governments must ensure that they maintain direct control of their track and trace system via their contractual relationships and governance model; 3. Governments should aim to include the following important technical elements in their track and trace systems: the use of generally accepted international standards pertinent to secure track and trace (like ISO 12931:2012, which details a process to identify appropriate security features, ISO 22382:2018, which provides guidance in relation to the implementation of tax stamps and track and trace programmes, and ISO/ IEC 15459-1&4:2014, which pertain to the generation of unique identifiers and aggregation); the use of independently

sourced solution components such as unique identifiers, anti-tampering devices that establish security of the system within the manufacturing environment (eg. cameras, seals, counters), authentication devices, and security features designed to deter counterfeiting/ imitation, similar to those used for tax stamps, passports and banknotes; 4. Governments are advised not to take the European Union system as an example of good practice given evidence of industry influence on its development; 5. Small countries, in particular, should consider cooperating as regional groups during the tendering process, possibly via regional economic integration organisations; 6. Parties should remember they have until 2023 to have their track and trace systems operational. Countries worried about tobacco industry interference should ask for help, rather than sign up with a system the industry might control; and 7. Parties must remember that while track and trace is a crucial element in the fight against illicit trade, it is not a silver bullet.

How solution providers can use the guide

The policy brief provides useful insights for the developers of independent track and trace systems in positioning their solutions. The key challenge now for solution providers is using the arguments and evidence in the report to develop robust media and client briefs to ensure that the discussion – which is currently largely being dominated by the tobacco industry – is better balanced, empowering implementing agencies to make informed decisions about which solutions potentially offer them the best possible way of securing the tobacco supply chain. The STOP policy brief can be downloaded at https://exposetobacco.org/wp-content/ uploads/2019/11/STOP_Track-andTraceBrief.pdf The mission of STOP is to expose the tobacco industry strategies and tactics that undermine public health. STOP is funded by Bloomberg Philanthropies and is a partnership between the Global Center for Good Governance in Tobacco Control, based in Thailand, the Tobacco Control Research Group at the University of Bath, UK, the Union’s Department of Tobacco Control, headquartered in New York, USA, and Vital Strategies, also from New York.

Headlines of 2019 That Was the Year That Was… January 2019 Tax Stamp News becomes Tax Stamp & Traceability News™ (TSTN); International Tax Stamp Association (ITSA) becomes a code issuing agency under EU Tobacco Products Directive (TPD); governments need holistic solutions, not just tax stamps; medicines traceability – a global overview of a chaotic situation; what is this thing called traceability – a back-to-basics overview of what secure track and trace actually means. ™

February 2019 World Bank recommends tax stamps and track and trace; three months to go… and where are we on TPD track and trace implementation? FDA looks to pilot projects to enhance pharma track and trace; PragmatIC announces first products in ConnectIC® family of flexible circuits; the latest from Ghana – textiles and fertiliser; Ashton Potter releases ProLinc™ traceability solution; conference feedback – emerging print technologies.

March 2019 De La Rue wins new contracts in Middle East and Europe; Spectra Systems receives first order for smartphoneauthenticated taggant signature; what exactly is a blockchain-based excise stamp replacement system? Nepal signs MoU with France to set up state printing works; Indian government to work on seed traceability mechanism; Nigeria becomes 51st party to WHO FCTC Protocol as West Africa gears up for track and trace; ITSA to host tax stamp and traceability seminar in Costa Rica; the state of illicit cigarettes in Sri Lanka; India’s recent hooch tragedy confirms TSTN’s concerns; seeing is not believing – how criminals are already finding ways to circumvent 2D barcodes used in product traceability; conference feedback – emerging smartphone technologies; news from East Africa: Kenya wins praise, Tanzania rolls out new programme… and Uganda is next.

April 2019 Concerns raised over EU traceability system missing deadline; SICPA awarded new Massachusetts tax stamp and traceability contract; legal and illegal tobacco trade often intertwined, claims research; WHO addresses lack of global guidance on healthcare track and trace; Authentix plans for its SPS acquisition;

Bureau of Internal Revenue probes recycled tax stamps in Philippines; how Georgia reduced illicit tobacco from 50% to 3%... while still increasing taxes.

May/June 2019 Ireland to introduce new tax stamps on tobacco products; perspective on new South African track and trace tender; competing bid stalls Nepal’s security printing press deal with France; EU criminal network linked to illicit tobacco is busted; Dominican Republic set to launch new tax stamp and traceability system for cigarettes and alcohol; Bruce DeBoer returns to US cigarette stamping machine industry; unique codes – beyond authentication; US Food and Drug Administration announces new era of smarter food safety; global food traceability market expected to grow to $22.27 billion by 2025; Ashton Potter enhances ProLinc solution; programme announced for Tax Stamp Forum™; where do strange words like ‘contraband’ and ‘banderol’ come from?

July 2019 Tanzania to roll out second phase of tax stamp programme; ITSA challenges EU court ruling on tobacco laws; happy 10th birthday Tax Stamp News! EU tobacco traceability should not be considered blueprint, warns FCA; the new Luminescence; coming in 2020… new Tax Stamp & Traceability Report; Kenya sets stage for new water tax; security print software and digital print open doors in tax stamp production; Arjo Solutions expands into Latin America; the rise of public-private alliances in Latin America; UAE to impose tax stamps on e-cigarettes.

August 2019 Philippines to introduce alcohol stamps and enhance tobacco stamps; ITSA urges Costa Rica to adopt secure track and trace; tax stamps and secure marks – four avenues to a strategic advantage; cannabis and smoke-free alternatives take centre stage at US Federation of Tax Administrators meeting; latest developments in India; from the archives – identifying counterfeit spirits and wine: comparing ten years ago with today; counterfeit or forgery? – exploring the origin of these words.

September 2019 Tax Stamp Forum goes back to where it all began; UK to suspend tobacco track and trace if no-deal Brexit; the 9th Tax Stamp Forum in quotes and photos; the SARS tender – can an agency in turmoil be both agile and prudent? human and/or digital interrogation of tax stamps; ITSA appoints three new board members; cannabis news – KushCo enters exclusive agreement with De La Rue, nearly all California cannabis businesses in system by end October, Maine cannabis regulators address seedto-sale tracking confusion.

October 2019 Uganda launches tax stamps on six different products… all in one go! controversy reigns over Pakistan tender award; tobacco industry interference index – what it means for secure track and trace; Graphi Mecc’s serialisation equipment offerings; INCM – from art to machine readable coding; how countries around the world charge excise taxes.

November 2019 SICPA signs cooperation agreement with Kazakh telecoms company; Pakistan tender award faces multiple legal challenges in high court; save the date for the 2020 Tax Stamp & Traceability Forum; track and trace working group for FCTC Protocol launches in Panama; India needs comprehensive national policy to tackle alcohol, declares Authentication Solution Providers Association; new tobacco track and trace system bestows ‘digital enforcement powers’ on Chile revenue authority; SICPA launches its ‘brightest star’ for secure labels.

December 2019 Tanzania records 34% increased revenue on liquor; FDA advances plans for food traceability; ANY Security Printing analyses the cost of security; FCA issues guidebook on implementing Article 8 of the WHO FCTC Protocol relating to track and trace; STOP issues policy brief on protecting track and trace systems from tobacco industry; tax differences across US states continue to cause significant smuggling, says new Mackinac report.

HEADLINES 2019 |VOLUME 11 – NO 12|DECEMBER 2019

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Smuggling Rates Rise After Tax Increases Each year, the Mackinac Center for Public Policy publishes a report on estimated smuggling rates for each US state. Its most recent report, using 2017 data, finds that smuggling rates generally rise in states after they adopt cigarette tax increases. Furthermore, smuggling rates have dropped in some states, often where neighbouring states have higher cigarette tax rates.

Policy responses in recent years have included banning common carrier delivery of cigarettes, greater law enforcement activity on interstate roads, differential tax rates near low-tax jurisdictions, and cracking down on tribal reservations that sell tax-free cigarettes. However, the underlying problem remains: high cigarette taxes amount to a ‘price prohibition’ of the product in many US states.

The report finds that New York is the highest net importer of smuggled cigarettes, totalling 55.4% of total cigarette consumption in the state. New York also has one of the highest state cigarette taxes ($4.35 per pack). Smuggling in New York has risen sharply since 2006 (+55%), as has the tax rate (+190%).

While buying cigarettes in low-tax states and selling in high-tax states is widespread in the US, other methods for evading taxes are also popular. One way in which criminals grow their profits is by avoiding the legal market completely. They produce counterfeit cigarettes with the look and feel of legitimate brands and sell them with counterfeit tax stamps. Many of these products are smuggled from China, with one source estimating that Chinese counterfeiters produce 400 billion cigarettes per year to meet international demand.

The report notes that smuggling comes in different forms, including ‘casual’ smuggling, where smaller quantities of cigarettes are purchased in one area and then transported for personal consumption, and ‘commercial’ smuggling, which is large-scale criminal activity that can involve counterfeit state tax stamps, counterfeit versions of legitimate brands, hijacked trucks, or officials turning a blind eye.

Global focus on counterfeit cigarettes has forced the criminals to innovate. A growing global problem is the so-called illicit whites or cheap whites. These products are produced legally in low-tax jurisdictions, but often intended for smuggling.

And another growing problem could be one of vapour products, observes the report. Most users of these products were also cigarette smokers, and one can therefore imagine the behaviour of vapers mirroring that of smokers. Throughout the latter part of 2019, both federal and state lawmakers were calling for cigarette-level taxation of vapour products. But as the data from cigarettes shows, the risk of creating a new black market or fuelling an existing one with operators willing and able to supply nicotine products to consumers is significant. There are already reports of nicotinecontaining liquid coming into the US from questionable sources, warns the report. In addition to tax evasion – costing states billions in lost tax revenue – black market e-liquid and cigarettes can be extremely unsafe. Therefore providing vapers with a well-regulated legal market will help to limit the distribution of these illegal and unsafe products.

https://taxfoundation.org/cigarettetaxes-and-cigarette-smuggling-bystate-2017/

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