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Social Report 2006/2007
Combating Illicit Trade and Counterfeit
British American Tobacco recognises it has a critical role to play in co-operating with governments and enforcement authorities across Europe to identify and agree practical and targeted measures which can combat and reduce the negative impacts associated with all forms of illicit trade in tobacco products.
Illicit trade in cigarettes is a huge global problem which is only expected to grow as future excise increases provide greater incentives for criminals and encourage consumers to switch to cheaper illegal products. Based on British American Tobacco estimates, global illicit trade volumes are approximately 300 billion cigarettes per year representing six percent of total world consumption.
The Company loses both from counterfeit and low price contraband in excess of Euro 525 million per annum. In Europe estimates are that approximately up to six percent of total consumption could be of an illicit nature recording estimated losses of Euro 100 million per annum to British American Tobacco in Europe (based on 2005 estimates).
Illicit tobacco products present the authorities with a myriad of significant problems. They are often of poor quality which may present additional health risks. They deny governments their rightful tax revenues and can be marketed uncontrolled and unscrupulously to minors. International organised crime syndicates have become heavily involved in the illicit trade of tobacco products attracted by the prospect of significant profits. Customs and law enforcement authorities have been forced to allocate ever more resources and taxpayers’ money in their efforts to control the phenomenon.
Illicit trade also has a major negative effect on legitimate tobacco manufacturers who find their brands targeted by criminals involved in contraband and counterfeit activities. Such illicit trade undermines the Company’s reputation as well as its brand equity with consumers, erodes reputation capital with governments in the countries where British American Tobacco operates and gives rise to unfounded allegations that the Company is responsible for illicit activities.
A secure supply chain (i.e. where the product follows a legitimate path from the producer to the consumer and does not evade legal fiscal and market regimes) is fundamental in the effort to reduce illicit trade. The legitimate trade channels need to be protected from infiltration by contraband and counterfeit and diversion of legitimate product into the illicit channel must be prevented.
Working with the authorities
This is a joint responsibility for the authorities and industry. British American Tobacco recognises it has a critical role to play in co-operating with governments and enforcement authorities across Europe to identify and agree practical and targeted measures which can combat and reduce the negative impacts associated with all forms of illicit trade in tobacco products.
The dialogue sessions conducted in the course of the EU social reporting process provided a valuable forum to exchange views on the common issues and to clarify the priority expectations of stakeholders. They have been helpful in ensuring that British American Tobacco continues to fulfil its role of being a best practice custodian of a secure product supply chain.
The dialogue sessions highlighted a number of areas raised by stakeholders as priority expectations:
- corporate visibility & engagement on anti-illicit trade co-operation/initiatives
- customs co-operation
- authentification & Track & Trace of product
- internal policy & procedures.
Our objective is to capture stakeholders' expectations accurately, to provide a clear and concise response, reinforced by a tangible set of commitments to be addressed over the next 12 months. The process of fulfilling the commitments will be communicated to stakeholders through bi-annual status reports.
Expectations
- Engage more in the issue of illicit trade including at CEO-level.
- Demonstrate more co-operation with industry players and with external parties.
- Contribute to cross-industry efforts to educate consumers on the risks of counterfeit and help to engage the media on the issue.
- Contribute to EU dialogues with countries such as Russia & Ukraine on the issue of border controls.
- Make specific cases available to BUSINESSEUROPE (formerly UNICE).
- Share intelligence and co-operate more effectively with Customs.
- Continue to contribute to customs training on identifying counterfeit product.
- Provide financial and other support to customs where appropriate.
- Demonstrate action on Track and Trace.
- Make readers of anti-counterfeit markers more widely available to customs authorities.
- Invest in new tracking technology.
- Show effective procedures are in place to avoid the over-supply of markets.
- Help prevent manufacturing equipment becoming available to counterfeiters and press for its destruction when counterfeiters are apprehended.
Expectation
- Engage more in the issue of illicit trade including at CEO-level.
- Demonstrate more co-operation with industry players and with external parties.
- Contribute to cross-industry efforts to educate consumers on the risks of counterfeit and help to engage the media on the issue.
- Contribute to EU dialogues with countries such as Russia & Ukraine on the issue of border controls.
- Make specific cases available to BUSINESSEUROPE (formerly UNICE).
Response
Anti Illicit Trade (AIT) is recognised within British American Tobacco as a priority business issue and it thus features as a key platform of our responsibility programme within Europe.
We have committed extra resources both in terms of investment and expertise allocation across the key markets in Europe affected by illicit trade.
An infrastructure is in place to support increased levels of engagement with authorities.
British American Tobacco has the following structure and AIT related resource in the Europe region:
- full time Global Anti-Illicit Trade Manager since 2003
- full time Europe Anti-Illicit Trade Manager since 2005
- dedicated Brand Enforcement Manager in Europe since 2006
- anti-illicit trade managers in all European Markets
- priority markets have full-time resource supported by cross functional teams; the majority of these teams are led by board members of the local operations; these are in place in Germany, Hungary, Poland and Romania
- cross-border project teams are also in place for central and south-east Europe areas.
British American Tobacco Board member representation on illicit trade issues has been demonstrated through high level engagement with the European Commission, OLAF*, GBLAAC, BASCAP. The CEO of British American Tobacco, Paul Adams has been very active on anti-counterfeiting issues. He was instrumental in setting up in 2002 the CEO-led fmcg (fast moving consumer goods) anti-counterfeit initiative known as the Global Business Leaders Alliance Against Counterfeiting (GBLAAC). This has now merged with the International Chamber of Commerce CEO-led initiative, Business Action to Stop Counterfeiting and Piracy (BASCAP). Paul Adams delivered the key-note speech on behalf of GBLAAC at the First Global Congress to Combat Counterfeiting hosted by the World Customs Organisation in Brussels in 2004. He also drives the issue higher up the public policy agenda at fora such as the World Economic Forum in Davos and the Transatlantic Business Dialogue.
We have been proactive in seeking co-operation with other members of the tobacco industry specifically in the area of anti-counterfeit consumer campaigns.
We are chairing an industry working group focusing on supply chain control issue. Engagement has also taken place to seek potential industry solutions to areas such as track & trace. British American Tobacco remains committed to playing a leading role in realising benefit from such co-operation.
With local embassy support, we have engaged with the Russian and Ukrainian authorities at technical and political levels to build awareness of the risk of outflow and of increasing counterfeit threats from both countries. Investment in intelligence in Ukraine identified a counterfeit manufacturer producing significant quantities of Pall Mall, a British American Tobacco cigarette brand. Legal actions have been initiated to stop the production of counterfeit products, however we have not been successful in ensuring local enforcement against the infringement of our intellectual property rights. We recognise that engagement at a higher level with both the EU and with industry is potentially a more productive approach.
Commitments
*The role of the European Anti-Fraud Office (OLAF) is to protect the financial interests of the European Union, to fight fraud, corruption and any other irregular activity, including misconduct within the European Institutions. More information can be found here.
Expectation
- Share intelligence and co-operate more effectively with customs.
- Continue to contribute to customs training on identifying counterfeit product.
- Provide financial and other support to customs where appropriate.
Response
British American Tobacco recognises the importance and benefits of strong co-operation with custom authorities across Europe as customs represent the enforcement resource to stem illicit trade. We focus on formalising our relations with local authorities through the signing and ongoing commitments associated with Memoranda of Understanding (MoU). We now have 16 such agreements in the priority markets in Europe, the latest in 2006 and 2007 being in Romania, Bulgaria, France and the UK. Within these agreements are set out clear commitments from British American Tobacco that support information exchange, intelligence transfer, training support and counterfeit analysis. We will continue to work with governments in providing this support and seek to reinforce resource allocation in the key markets (Ukraine, Germany, Romania) that may be at heightened risk.
Memorandum of Understanding / Co-operation
British American Tobacco has provided direct support to specific Customs Authorities within Europe through involvement in Customs & Excise Conferences over a number of years. The latest have been in Poland, Nordics and Czech Republic in 2006. Via this type of events we share the following range of information with external stakeholders:
- our anti illicit trade strategy, approach and focus
- key drivers & facilitators of illicit trade
- estimated stakeholder losses due to illicit trade
- MoU across Europe and co-operation
- illicit trade research findings and data
- estimated levels of illicit trade incidence by market
- country profiles of markets at risk
- pricing differentials across Europe
- Brand Enforcement Group activities across Europe
- Internal British American Tobacco controls in place
- case studies and learnings.
In 2006 the transfer of supply chain intelligence from British American Tobacco resulted in multiple seizures of counterfeit product. Global seizures of our product in 2006 equalled 585 million cigarettes including 77 million in Europe.
Commitments
Expectation
- Demonstrate action on track & trace.
- Make readers of anti-counterfeit markers more widely available to customs authorities.
- Invest in new tracking technology.
Response
British American Tobacco has been in sustained discussions with a great number of technology suppliers to establish the capabilities and functionalities that are available. This process has clearly identified the requirement to gain greater clarification and agreement of the criteria that need to be met by a track & trace system. We support the implementation of a track & trace system in the key markets that are at risk and where possible we are committed to formalise a set of core capabilities to ensure any system fulfils stakeholders expectations.
In 2004 British American Tobacco took the initiative to implement a unique covert solution at pack level which enables the product to be authenticated as genuine. The technology requires an infra-red reader to authenticate the product which currently is utilised by trained employees, to ensure correct implementation and to maximise the security of the solution itself. This technical approach has now been endorsed as a voluntary industry standard in the UK market as of March 2007.
This has required a multi-million euro global investment from the Company into product technology to build additional barriers for counterfeiters to overcome and post implementation there have been no instances of this authentication technology having been illegally copied.
British American Tobacco recognises that as technology evolves there will be an opportunity to further enhance track & trace solutions that may require further investment.
Commitments
Expectation
- Show effective procedures are in place to avoid the over-supply of markets.
- Help prevent manufacturing equipment becoming available to counterfeiters and press for its destruction when counterfeiters are apprehended.
Response
British American Tobacco has a critical role to play by taking commercially responsible measures to prevent our products entering the illegal supply chain. We have a clearly defined Group Standards of Business Conduct policy which includes trade in the Group's products. Employees are required to sign the standards annually and internal audits are in place to ensure compliance.
British American Tobacco actively encourages all other tobacco products manufacturers to have in place similar policies which seek to ensure that:
- employees do not knowingly engage in unlawful trade of product
- business practices are directed at supporting only legitimate trade in products
- compliance is promoted through effective Know Your Customer controls
- supplies to markets are consistent with legitimate demand
- supply agreements are terminated for those customers involved in illicit trade activities.
We are rigorous in reviewing our Standards of Business Conduct and supply chain policies and this has resulted in action where weaknesses have been identified, for example:
- Pall Mall production was ceased in Ukraine after an audit established that local production was not proportionate to local demand which was resulting in illegitimate outflow of the product into neighbouring countries.
- Research identified British American Tobacco product outflow as a problem, and appropriate action was taken in 2005/6 to reduce product outflow from Ukraine by an estimated 3 billion cigarettes. Unfortunately total outflow has not declined as products from other manufacturers have filled the resultant vacuum. Industry-wide co-operation and stronger border controls are required to mitigate the outflow from low excise markets that border the European Union.
- Our machinery destruction policy is consistently enforced. A good example is the recent closure of the Cyprus factory, which recorded the reallocation, storage and destruction of machinery.
Commitments
