Big Tobacco Fumes Over New EU Salvo in Cigarette Smuggling WarBy
Track-and-trace system in works to claim billions in taxes
Industry accuses European regulators of a ‘messy’ design
A European Union plan to crack down on cigarette smuggling has manufacturers such as British American Tobacco Plc up in arms about red tape, signaling that the bloc’s promise of more business-friendly regulation has clear limits when it comes to smoking.
The EU intends to track cigarette packages from the factory floor to the retail shelf using electronic codes, the latest weapon in a fight to stamp out illicit sales that deprive governments of more than 10 billion euros ($11.8 billion) a year in tax revenue.
The European Commission wants to let EU countries deviate from the current industry standard in Europe for serial codes on products, saying any extra costs for companies would be negligible. The discrepancy threatens to create technical hassles for cigarette makers and undermine “track-and-trace” technological investments that, in the case of BAT alone, total 60 million pounds ($79 million) since 2014, according to the company.
“It’s like saying Europe won’t measure distance in kilometers anymore just because the car industry supports that, so individual governments are free to devise their own measuring systems,” said Ronan Barry, BAT’s head of regulatory affairs in Brussels. “It gets very messy for no good reason.”
The EU cigarette market is a battleground between criminal groups long able to exploit open borders and lax law enforcement for lucrative smuggling and authorities are increasingly keen to give illicit tobacco trade the kind of high-profile attention traditionally devoted to drug trafficking. The value of the European market for tobacco this year is about 200 billion euros, according to statistics portal Statista.
Counterfeit and contraband accounted for more than 9 percent of EU cigarette consumption -- or 48 billion cigarettes -- in 2016, according to a study by KPMG. This caused a total tax loss of 10.2 billion euros, says the study commissioned by the London-based Royal United Services Institute.
“The proposed track-and-trace system has a potential to achieve multi-billion-euro benefits for society, while its costs are very moderate and will be mainly borne by the sector,” said Anca Paduraru, health-policy spokeswoman at the commission, the 28-nation EU’s regulatory arm.
The system will require electronic codes to be affixed to every cigarette pack sold in the EU. Tobacco companies already code cartons and cases as part of agreements with the bloc’s anti-fraud office, using the current coding standard in Europe followed by industries in general.
In that context, the commission is proposing to let each EU government come up with its own track-and-trace code of as many as 50 characters. This is more than the 38 characters that are applied in Europe and that the tobacco industry says are the limit for high-speed pack production.
Since taking office in late 2014, President Jean-Claude Juncker’s commission has pledged to apply a lighter touch to regulation by scrapping superfluous rules and screening new legislative initiatives more rigorously.
But the tobacco industry isn’t getting the benefit of the doubt, not least by a European health commissioner -- Vytenis Andriukaitis -- who is a heart surgeon. This reflects the extent of authorities’ concerns about cigarette smuggling, about manufacturers’ alleged past complicity in it and about the health damage caused by smoking.
Tobacco kills as many as 695,000 people a year in the EU, or one person every 45 seconds, according to the commission, which says a third of Europeans still smoke. Smoking is the largest avoidable health risk in Europe, causing more problems than alcohol, drugs, high blood pressure, high cholesterol or obesity, according to the commission.
The planned EU track-and-trace system for cigarettes stems from 2014 legislation that expanded warnings on packs. With that law setting a May 2019 deadline for the system to be up and running, the commission is pressing EU governments to approve its proposal by year-end.
The commission says its draft rules would strike a balance by creating an inter-operable set of identification codes for cigarette packs sold in the EU while leaving member countries room at a later stage to develop the coding so it can be integrated with tax stamps. Furthermore, national capitals could team up to use the same operator, according to the commission.
The tobacco industry, however, would prefer a one-stop shop for European codes in addition to a 38-character limit on them. It wants to avoid a non-harmonized ID format that would require different coding standards on the same packaging line.
While packs destined for sale in more than one national market in the EU are already differentiated for language and images, differing codes would further complicate production. The tobacco industry had expected its deals dating from 2004 to 2010 with the EU’s anti-fraud office to be the basis of the track-and-trace rules stemming from the 2014 legislation.
“Our member companies have already invested hundreds of millions of euros in voluntary cooperation with the EU anti-fraud office to anticipate the need for tracking and tracing,” said Alisdair Gray, secretary general of the Confederation of European Community Cigarette Manufacturers, which include BAT, JT International and Imperial Brands Plc.
“The commission proposal paves the way for a highly complex system in which each member state works in isolation from the other,” said Gray. “The system has been poorly thought through and may prove unworkable despite having over three years to establish it.”