Category: Illicit Trade

  • Package Protection

    Package Protection

    Packaging could help prevent issues such as EVALI by authenticating products and educating consumers.

    By Timothy S. Donahue

    Packaging is important. More than just a fancy box for holding goods, packaging is on the front lines of authenticating products and educating consumers on everything from quality and consistency to product use. Connected packaging (often called smart packaging), including active, interactive and intelligent packaging, can help prevent problems such as the recent outbreak of what has been called e-cigarette or vaping use-associated lung injury (EVALI), according to experts.

    Jacopo D’Alessandris

    “Packaging is one of the few ways in which you can communicate to your end consumer. Now, look at vapor and other highly regulated categories—like combustible cigarettes—you cannot do social media. You can do very little advertising,” says Jacopo D’Alessandris, CEO of E-Alternative Solutions (EAS), a major U.S.-based vapor and CBD manufacturer and supplier. “With limited communication avenues, packaging becomes an even more important aspect of the interaction and the kind of connections needed between the brand and the end consumer.”

    The U.S. Centers for Disease Control and Prevention (CDC) and the U.S. Food and Drug Administration (FDA) have labeled black market THC cartridges containing vitamin E acetate as the source for the EVALI outbreak. The tainted THC blend has been found not only in homemade and counterfeit name brand THC cartridges but also in “hacked” pods—products that have been broken open and filled with illicit THC liquid, according to media reports. These “fake pods sold in our name are a threat to public health and safety,” the chief financial officer of a company that fell victim to such practices was quoted as saying.

    Chris Crawley

    “Clearly, packaging is the main vehicle for brands to communicate advice, warnings and promotional messages at the point of use,” says Chris Crawley, manager of business development in the Americas for Parkside Flexibles, an international packaging company. “In the case of the EVALI situation, packaging can carry key messages around health and safety in [the] use and avoidance of counterfeit products to support consumers and avoid the problem in the future.”

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    Currently, there is little regulation in place for the packaging of marijuana and CBD products, notably at the U.S. federal level where THC remains illegal. However, the FDA requires companies that wish to remain on the market after its May 12 premarket tobacco product application (PMTA) deadline to meet certain packaging standards.

    “Packaging is a major part of the testing aspects of the PMTA,” explains D’Alessandris. “When we do our PMTAs, we want to make sure that the product doesn’t appeal to kids, to youth; we want consumers to know the product is authentic; and after people open the box, we want them to know how to use it. These are critical components that the FDA looks at from a behavioral standpoint.”

    One example of active packaging is the quick response (QR) code. Customers scan the code with their phones to bring up information about the product. Active packaging was one of the earliest forms of connected packaging. This technology is easy to use, and most consumers understand how QR and traditional bar codes work.

    D’Alessandris says that active packaging allows consumers to see required information prior to the point of sale, and QR codes can direct consumers to larger quantities of data that don’t fit on a standard sized package. Using QR codes allows the purchaser to be well informed and ensures the manufacturer is meeting all requirements.

    “The QR code allows us to give the most information on a limited amount of space,” says D’Alessandris. “Using a QR code allows the consumer to know that the product is in fact what it says it is on the packaging. You can scan it, and you can see that the CBD levels, for example, are what they say they are on the box. Plus, we need to let consumers know that the level of THC is below the 0.3 percent threshold. That is legally required on a federal level. That information is also available for each batch, and you can find the information by scanning the QR code.”

    However, the QR code can also be a source of fraud. There are several ways consumers can protect themselves, according to Crawley. “The QR reader app should always be downloaded from a reputable source. Where possible, the QR code should be checked that it has not been tampered with, e.g., a sticker over the code,” he says. “Customers should never enter personal or financial information into a website that they have been directed to, and if downloading security software, they should choose a smartphone or tablet that has a built-in QR code scanner to avoid problems.”

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    Some companies are incorporating more advanced technologies into their packaging to better connect with consumers. Interactive and intelligent packaging can collect information on consumer habits, behavior and other data. These can also include Bluetooth technology to send a text message when a battery is low and radio frequency identification technology (RFID) to potentially track vapor devices, including pods, even if it leaves the state it has been sold in, according to Crawley. RFID can also include buyer information, such as age, when captured at sale.

    Interactive and intelligent packaging interacts directly with customers, allowing them to make informed decisions, according to D’Alessandris. These forms of packaging can also add another layer of protection against counterfeit products. Other tools for consumers to check product authenticity are holograms, lot codes and serial numbers. Holographic packaging makes the product stand out on the shelf and is hard to copy. Lot codes identify when and where a product was manufactured. They are mostly used for quality control and tracing purposes in manufacturing. Serial numbers, however, are one of the best ways to ensure a product is legitimate, says D’Alessandris.

    “By using a serial number, you can do two things,” he explains. “One, of course, if there’s an issue with the product, there’s a recall. You can go and extract exactly that product and say, ‘Hey. There might be a problem with that batch. Let’s pull it out of the store so that there’s no risk.’ The serial number can tell you much more than a lot code. It can tell you the day it was made, what machine did it, and you can go back and see the liquid that was used. You can then trace it back to all the different components that were used in its production. So, if there’s an issue—which we’ve fortunately never had—you can always go back and isolate that batch and deal with it without risk for the consumer.”

    Identifying information (e.g., a lot number or serial number) is placed on the packaging and often etched onto the product itself, such as with the Leap pods used with EAS’ Leap Vapor products. Etching is expensive, which makes it nearly impossible for a counterfeiter to mimic, according to D’Alessandris. It can also be used to interact with the consumer on a more personal level.

    “Counterfeiters just don’t do it, and if they did, it would look different because they don’t have the same etching machine or the laser machine,” says D’Alessandris. “So, I think it helps in that regard. Plus there’s some regulatory, responsible things to do concerning traceability in your products. It’s a big differentiator, so we’re pretty proud of the fact that we have this. There’s also a double benefit for the consumer. They know that the product has been serialized, which means it’s uniquely done. We know it’s a legitimate product. Second, we just launched this rewards system. So, you can actually use this number to enter into a loyalty program. And then we know who you are and where you bought the product. And then we can engage with you on a consistent basis to reward you for your loyalty.”

    Despite the current lack of rules, regulation for the CBD and marijuana industries is coming. California Governor Gavin Newsom signed an executive order in September 2019 mandating additional warning signs for vapor product packaging and retail displays. It also includes enforcement of regulations against selling counterfeit products. In Massachusetts, regulators are requiring that cannabis brands disclose all components in vapor cartridges sold at retail. In Oregon, licensed dispensaries are being asked to read labels on vapor products themselves. If the labels “lack clarity,” retailers are required to ask manufacturers to provide additional information.

    EAS is using the various packaging options to create a database. The database can be used to better serve customers as well as provide information for future regulatory requirements. For example, the FDA requires post-market surveillance for any product it gives a marketing authorization.

    “We’re going to use it for a lot of things. We will use it for our rewards program and other consumer options. But more importantly for us and [the] FDA, we’re going to use these packaging options (and actual user data) in our post-market surveillance activities. And because we’re building a database early, we’re going to have a nice, robust group of people that we can always go to and continue to evaluate the likelihood of things like youth exposure,” says D’Alessandris. “Packaging is a great way to access an information highway. We’re getting what we need. The consumers are getting what they need. Packaging gives us the ability to do so many things.”

  • Underground factory

    Underground factory

    Authorities in Spain have found an illegal cigarette factory harboring six trapped Ukrainian workers during an operation to find a drugs gang in Costa del Sol, reports Al Jazeera.

    The men were trapped in the illegal underground facility and running out of air after a generator that pumped in fresh air was turned off. The entrance was covered with cargo and, initially, authorities could not hear the men shouting and banging on the roof of the soundproof factory.

    The factory was equipped with bunk beds and living quarters and was built 13 feet underground. The workers were blindfolded when being led to the facility and were not allowed to leave unaccompanied. The men worked there for two weeks at a time and were reportedly paid €7,000 ($7,574) a month. Police said the workers were exposed to toxic materials in conditions that were “dangerous.”

    Authorities said the factory produced at least 3,500 cigarettes an hour and generated profits of more than €600,000 per week. The facility had been in operation for a year.

    Twelve British suspects have been arrested after a series of raids last week where more than 3 million cigarettes, more than 17 metric tons of rolling tobacco, 20 kgs (44 lbs) of hashish and 144 kgs (317 lbs) of cannabis were seized. The suspects have been remanded to custody until trial.

    The suspects were reportedly smuggling the cigarettes into Britain.

  • Record Highs

    Record Highs

    Photo: KuyaAndy from Pixabay

    Malaysia struggles with unprecedented volumes of illicit cigarettes.

    It’s one of those rankings no one wants to lead. With 59 percent of total tobacco sales, Malaysia in 2018 had the world’s largest illicit cigarette market, easily outdoing the next four countries, Brazil (50 percent), Ecuador (41 percent), Panama (34 percent) and the United Arab Emirates (33 percent).

    The data stem from a study published by Oxford Economics last June, which had been commissioned by British American Tobacco (BAT). The report estimates that the number of black market smokes sold in the Southeast Asian country totaled the equivalent of 598 million packs of 20 cigarettes each, compared to an estimated consumption of about 417 million legal packs.

    According to the study, Malaysia’s contraband problem caused the country’s treasury to miss out on MYR5.1 billion ($1.24 billion) in tax revenues in 2018. This equates to more than 2.9 percent of the country’s total tax receipts during that period and is almost twice the tax revenue Malaysia’s government collected from legal cigarette sales, which Oxford Economics estimated at MYR3 billion that year.

    The situation has worsened since, as a more recent report, the long-term Illicit Cigarettes Study (ICS), carried out on behalf of the Confederation of Malaysian Tobacco Manufacturers for the past 15 years, suggests. Between June and August this year, an estimated 3.1 billion sticks (64.6 percent of the total market) were smuggled into the country, contributing to a record 12 billion illicit cigarettes to be consumed this year and an estimated loss in tax revenue of MYR6 billion, according to ICS. With approximately 66 percent of cigarettes sold in the market being smuggled, Malaysia reached a new high in July.

    While the size of Malaysia’s illicit tobacco sector has been considerable for years, it exploded after the government introduced an excise tax hike of almost 40 percent in 2015. In 2015, 22.8 percent of Malaysia’s roughly 32.77 million population smoked, with males having a significantly higher prevalence than females, according to the country’s National Health and Morbidity Survey. Since the Oxford Economics study, overall cigarette consumption, however, has increased by another 5 percent. The country ratified the World Health Organization’s Framework Convention on Tobacco Control in 2005, but has not signed the associated Protocol to Eliminate Illicit Trade in Tobacco Products.

    Between 2012 and 2018, the specific excise duty on cigarettes nearly doubled to MYR400 per 1,000 cigarettes. The government also implemented a minimum price of MYR10 per pack. In late 2019, the health ministry proposed to raise the minimum price to MYR15, a suggestion met with harsh criticism by the local tobacco industry in light of the country’s unabated increase in contraband cigarettes.

    Large price differences

    In 2018, the average price of a pack of 20 legal cigarettes stood at MYR15.87, the Oxford Economics report says, compared to MYR4.50 for the illicit equivalent. The vast price differential makes illicit cigarettes particularly attractive to households in the bottom 40 percent of Malaysia’s income distribution. In 2016, they had to spend more than 17 percent of their daily income to buy a pack of legal cigarettes, whereas a pack of illegal smokes at the average illicit price would have cost them only 4.8 percent of their daily income.

    The combination of affordability and easy availability of contraband tobacco products largely contribute to the thriving of the black market. Malaysia, whose territory is separated into two similarly sized regions by the South China Sea, has long coastal lines, isolated jetties and long, porous borders that facilitate smuggling. The country’s peninsular part shares a land and maritime border with Thailand and maritime borders with Singapore, Vietnam and Indonesia, whereas its eastern part neighbors Brunei, Indonesia, the Philippines and Vietnam. Almost three-quarters of illegal cigarettes come into Malaysia from its nearest neighboring countries, where weighted average prices of legal cigarettes ranked between $0.80 (Vietnam) and $2.40 (Thailand) in 2017, according to the Oxford Economics report. The notable exemption among source countries is Singapore, which boasts the region’s highest cigarette prices by a considerable margin. Of Malaysia’s 13 states and three federal territories, Sabah, Sarawak, Pahang, Kelantan and Terengganu are most affected by illegal cigarette sales, which in these regions account for up to 83.5 percent of the market.

    Illicit whites, i.e. cigarettes produced legally abroad for the explicit purpose of selling in a target market, in 2018 dominated the Malaysian tobacco sales with a share of 43.9 percent, followed by smuggled kreteks—Indonesia’s characteristic clove cigarettes—with 10.1 percent and cigarettes with fake tax stamps (4.9 percent), the study finds. The practice of equipping legitimate packs with counterfeit tax stamps, is a relatively new phenomenon, which, according to the report, has occurred for the first time after the excessive 2015 excise hike.

    Action needed

    In the face of policy loopholes, weak law enforcement and corruption, the smuggling of cigarettes in Malaysia continues to gather momentum. The country ranks 61st of 180 countries on the most recently published Corruption Perception Index, with Transparency International Malaysia estimating that 4 percent of the country’s gross domestic product has been lost annually to corruption since 2013. In the absence of political financing laws and corporate liability, Malaysia has seen numerous corruption scandals over the past years. The high level of corruption also makes the country less attractive to foreign direct investment.

    The increase of illicit cigarette trade is closely related to Malaysia’s corruption problem, the Oxford Economics report states, quoting sources that indicate that the large-scale smuggling in Malaysia relies heavily on the ability of traffickers to bribe officials to overlook contraband shipments. With hurdles for smuggling being low, the often transnational syndicates have been able to generate substantial profits, which they use for further contraband activities, attempts at wider corruption and other criminal activities, potentially even terrorism.

    The situation in Malaysia, which, according to Japan Tobacco International (JTI) Malaysia’s managing director, is now surpassing crisis levels, has also impacted on the legitimate cigarette industry. In 2017, British American Tobacco and JTI closed down their manufacturing facilities as a consequence of their business shrinking amid the growing illegal cigarette trade. According to the Oxford Economics study, which takes all tobacco supply-chain related occupations into account, the closures represented the loss of an estimated 5,750 jobs throughout Malaysia’s workforce, as well as a loss of 0.1 percent of the government’s total tax revenue annually. And there is more to come: In September 2019, JTI announced that under its transformation plan [see also article on page xx], the company would permanently close its shared service center for Asia-Pacific in Kuala Lumpur and lay off about 40 percent of 170-strong workforce.

    Malaysia has taken notice. Recognizing that the illicit cigarette trade and its association with criminals, contraband and cross-border syndicates is becoming a national threat, the government has announced plans to tackle cigarette smuggling to recover at least MYR1 billion. The tobacco industry has proposed a number of measures that would enable the government to curb contraband, including a multi-agency approach and a three-year moratorium on further excise duty hikes.

    Experts also recommend the creation heavier penalties for cigarette smuggling, including mandatory imprisonment terms. A special task force set up under the country’s home ministry should focus exclusively on illicit cigarette trade, thereby spearheading more effective coordination and collaboration among key law enforcement authorities.

    Technological equipment at customs checkpoints at ports and other borders and high-risk posts should be upgraded, while law enforcement agencies should prevent corruption by rotating officers in given jobs. Quick action is needed as the next challenge already looms on the horizon: According to JTI Malaysia, the country’s illegal vapor market stands already represent 10 percent of all sales and is growing rapidly.

    Picture of Stefanie Rossel

    Stefanie Rossel

    tefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal international, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.

  • Papers seized

    Papers seized

    Customs authorities seized about 15 million contraband cigarette papers in western Turkey, the country’s trade ministry said.

    Customs received a tip that a shipment of illegal filter-tipped cigarette papers would be brought into the country through the Kapikule border gate in the Edirne province bordering Bulgaria.

    Officials found 14.75 million filter-tipped rolling papers and 120 cigarette rolling machines in two trucks that were flagged for X-ray.

    The market value of the contraband product is about TRY2 million ($340,000).

  • Illicit Trade Conference

    Illicit Trade Conference

    The Institute of Law Studies of the Polish Academy of Sciences will hold a conference on Dec. 12 in Warsaw, Poland, about the illicit trade in tobacco products.

    During the conference, participants will present the outcome of a research project conducted under the PMI Impact initiative, which identified trends, mechanisms and required changes in the control of the illicit trade in tobacco products in the EU.

    Delegates will discuss issues such as the role of criminal law and intellectual property law, the impact of Brexit and the role of public-private partnerships in the combating illicit tobacco trade.

    The provisional agenda is available here.

  • Track-and-Trace Guidance

    Track-and-Trace Guidance

    The Framework Convention Alliance (FCA) has unveiled the Guidebook on Implementing Article 8: Tracking & Tracing.

    The World Health Organization Framework Convention for Tobacco Control Protocol to Eliminate Illicit Trade in Tobacco Products came into force in September 2018 and aims to minimize the volume of illicit tobacco products smuggled across borders.

    By making tobacco products more accessible and affordable, illicit trade negatively affects public health and healthcare expenditure, according to the FCA.

    Among other requirements, the protocol calls for the creation of a cross-border tracking and tracing system for tobacco products.

    The guidebook provides an overview and historical context of the protocol and offers guidance on how policymakers can choose an appropriate track-and-trace system for their jurisdiction.
    Source: Framework Convention on Tobacco Control

  • Out of Control

    Out of Control

    Illicit cigarettes now account for nearly two-thirds of the Malaysian tobacco market, according to research commissioned by the Confederation of Malaysian Tobacco Manufacturers (CMTM).

    The study showed that the share of illegal cigarettes sales went from 59.7 percent from March to May to 64.6 percent from June to August.

    The government lost an estimated MYR6 billion ($1.45 billion) in tax revenue this year due to the illegal import of cigarettes.

    Japan Tobacco International Malaysia’s managing director, Cormac O’Rourke, said rise was deeply worrisome for Malaysia.

    “To think that any legitimate industry can be corroded to this extent to the benefit of criminal gangs casts Malaysia in a poor light on the international stage,” he said.

    Malaysia requires tobacco companies to sell cigarettes at a minimum price of MYR10, but contraband varieties are available at MYR3 to MYR7 a pack.

    The government plans to increase the minimum price of cigarettes to MYR15, a policy O’Rourke described as “reckless.”

  • Illicit Influx

    Illicit Influx

    The Philippine Bureau of Customs (BOC) is concerned about an influx of illicit cigarettes and cigarette manufacturing equipment from China, according to a report in The Philippine Daily Inquirer.

    Speaking to reporters, BOC Commissioner Rey Leonardo B. Guerrero said he would raise the issue with his Chinese counterpart when they meet this month.

    On Oct. 27,  authorities seized 2,727 master cases of smuggled Canon and Fort cigarettes worth about PHP95 million ($1.88 million) from a vessel in the waters of Siasi.

    Two days earlier, the Bureau of Internal Revenue raided a warehouse in Binondo, Manila, which yielded 145 master cases containing 1.45 million sticks of Chinese-branded cigarettes.

    Revenue officials acknowledged that recent tax hikes could be factor the proliferation of illicit cigarettes and fake tax stamps.

  • Guidelines issued

    Guidelines issued

    To encourage compliance with the World Health Organization’s (WHO) Protocol to Eliminate Illicit Trade in Tobacco Products, the International Tax Stamp Association (ITSA) has produced an advisory note that analyses the different stages of a full track and trace system.

    It also explores the extent to which governments are required to interact with the tobacco industry at each stage.

    The report analyses the key technical and governance requirements related to track and trace under the WHO’s Framework Convention on Tobacco Control (FCTC), specifically considering the requirement to interact with the tobacco industry only where “strictly necessary.”

    Of the 14 stages identified in the report, only six were deemed to need active input from the tobacco industry, mainly those in the warehousing and distribution part of the process.

    The ITSA guidelines build on previous work carried out on the implementation of a tobacco track and trace system compliant with the FCTC Protocol. The Protocol entered into force in 2018 and requires countries to establish by 2023 a track and trace system for all tobacco products manufactured in or imported into its territory.

    “The FCTC Protocol is widely recognized as an international blueprint for the regulation of tobacco production and distribution, one that will help to drive down illicit tobacco trade providing that countries comply with it,” said Nicola Sudan, general secretary of the ITSA.

    “Governance requirements to determine roles and responsibilities for the establishment of a track and trace system are set out in the Protocol and are driven primarily by the need to prevent conflicts of interest and to reduce the risk of fraud in the tobacco industry.

    “While certain information for the system, such as shipment and invoicing data, can only be supplied by tobacco companies, many other tasks should be carried out by the relevant authority to protect tobacco policy from the vested interests of the industry.

    “In practice, however, this does not happen. The EU Tobacco Products Directive falls short of security industry best practice and the WHO standards, allowing the tobacco industry and its allies to perform tasks which could and should be done independently by the relevant authorities.”

    ITSA has called for greater investment in security solutions that could ultimately drive down fraud and help governments around the world to collect additional excise revenues and control tobacco consumption. Currently more than 150 jurisdictions around the world use tax stamps to tackle smuggling, counterfeiting and tax evasion on tobacco products.

    The ITSA promotes the benefits of tax stamp programs and best practice within the sector.

     

     

     

     

  • Taxing balancing act

    Taxing balancing act

    Indonesia is to follow a policy of foreshadowing cigarette excise increases in such a way as to limit smoking while lessening the impact of any cigarette-sales reduction on tobacco-industry jobs, according to a story at en.tempo.co.

    Finance Minister Sri Mulyani Indrawati said the Government had to address two concerns before issuing a regulation on cigarette excise: its impacts on health and the industry.

    Sri Mulyani said that the use of tobacco by smokers, especially children, would badly affect their health in the future; so the Government imposed excise on tobacco products in a bid to lessen its consumption.

    However, on the other side of the coin, the tobacco industry employed a large number of workers, including tobacco and clove farmers.

    Speaking before millennials at a Youth Engagement event at Balai Sarbini, Jakarta, Sri Mulyani implied that, given these circumstances, it was difficult for the Government to decide whether to prioritize individual physical health or economic health.

    Therefore, she said, the Government planned to gradually increase taxes based on the roadmap of tobacco excise, which would provide “a signal to the tobacco industry and regional administrations”.

    At the same time, Sri Mulyani said, the Finance Ministry, through the Customs and Excise Directorate General, would strive to reduce the illegal trade in cigarettes.

    In 2017, the illegal trade was said to have accounted for 10.9 percent of the cigarette market, a figure that fell in 2018 to 7.03 percent.