A recent article in Tobacco Asia, titled Tobacco Leaf Track & Trace Laborious but Indispensable, discussed the importance of tracking and tracing tobacco leaf. The article provides detailed examples of track and trace efforts with regard to tobacco leaf across the globe.
As the nature of illicit tobacco continues to change, tobacco leaf track and trace will become more important. As discussed during previous Tax Stamp Forum™ events and as published in prior editions of Tax Stamp News™, the illicit trade landscape continues to shift and transform.
Illegally manufactured products, such as counterfeit, illicit whites and other unlicensed tobacco products are becoming more prevalent in the illicit trade world. This shift to illegally manufactured tobacco products will require new approaches to combat illicit trade. While tax stamps for finished tobacco goods are a useful tool to combat the diversion of legitimately produced products, new tools will be needed to suppress the production of illegal tobacco products. One of those tools could be the tracking and tracing of tobacco leaves or raw tobacco.
Tracking raw tobacco from farm to manufacturing, in this author’s opinion, will be an important tool to disrupt the illicit trade in illegally manufactured tobacco products, such as counterfeit and unlicensed tobacco products. As noted in my article for the July edition of Tax Stamp News, titled Illicit Tobacco Trade in Canada – The Next Chapter, tobacco products and cigarettes are relatively simple products to manufacture, requiring only a handful of inputs or raw materials, including tobacco, acetate tow (industry-standard filters) and cigarette paper. Without these direct materials, no illegal tobacco products can be manufactured.
The Tobacco Asia article reports on three different track and trace efforts for tobacco leaf, by Alliance One International (AOI), Contraf-Nicotex-Tobacco GmbH (CNT) and the Burley Tobacco Growers Cooperative Association (BTGCA). The three systems vary in their approach to tracking tobacco leaves, from fully integrated comprehensive systems to more simplistic recording and reporting requirements.
AOI – seamless integrated process
leaf merchants, with trading operations across the globe, providing leaf to leading manufacturers on all continents.
As Tobacco Asia reports, AOI placed an emphasis on track and trace right from the beginning, in order to combat production and smuggling of illicit tobacco products.
The AOI track and trace system is an integral part of its operation rather than a stand-alone system. The system integrates all of AOI’s information systems, including the International Farmers Accounting System (IFAS), the company’s proprietary Grower Management System (GMS), as well as other internal tracking systems, and the company’s SAP operations system (see graphic). This holistic system allows AOI to build a profile of each grower and to track data across seasons.
Tracking and tracing for AOI starts as soon as the tobacco is harvested by AOI-contracted tobacco growers. According to Tobacco Asia, ‘tobacco bale traceability then continues through every aspect of AOI’s business operations, from the leaf department to sales and accounting, and up until ownership finally changes on the finished product’.
This is enabled through a unique ID for each grower, which links and tracks contracted volume and actual purchases. This allows AOI, from early on, to ‘identify any potential red flags related to the growers’ practices,’ according to Tracy Purvis, Vice President Global Information Services AOI.
AOI issues barcoded tags and bale IDs to identify and link growers and tobacco leaf at the time of purchase. Once procured, bale IDs are scanned and tracked in AOI’s tobacco processing system (ToPS). The unique ID stays with the bale throughout processing and up until it is consumed into the production of finished goods. Finished goods data is then integrated into the company’s SAP system for documentation.
To augment these system capabilities, AOI also implemented a rigorous and comprehensive Know Your Customer programme in 2010 to ‘minimise risk that it will end up in illegal products’. As part of the process, every new customer is required to undergo a comprehensive due diligence review and must be approved by the company’s compliance department.
The review includes verification that the customers are legal entities and authorised manufacturers of tobacco products. To ensure this, AOI includes site visits, inspects and verifies business registrations and conducts background checks on the customer, their principals and key contacts. AOI repeats this due diligence process periodically.
CNT – German thoroughness
The German family-owned CNT has taken a different approach to tobacco track and trace. While the AOI system is clearly fitting for a multi-billion dollar global player, CNT required a system more suited to its size and process.
CNT’s Marcus McKay, Head of Corporate Responsibility and Communications, in his interview with Tobacco Asia, did not elaborate on all of the details of their track and trace system, but explained that the CNT system uses a bespoke data management and reporting tool to track bale barcodes and unique farmer IDs. The unique farmer ID gets associated with a unique bale ID, into a unique ID code, which gets tracked to the customer.
The system appears to be more stand-alone and less integrated than AOI’s system, which integrates with all of the company’s information systems. However, CNT is currently developing an RFID tagging system, to further increase security.
BTGCA – fighting a billion dollar illicit leaf industry
The BTGCA represents 4,000 US burley farmers in Kentucky and four neighbouring US states. Burley tobacco is a light air-cured tobacco used primarily in American blend cigarettes. In the United States burley tobacco is produced in an eight-state belt with approximately 70% produced in Kentucky. Other burley-growing states are Tennessee, Indiana, North Carolina, Missouri, Ohio, Virginia, Maryland, Pennsylvania and West Virginia. Burley tobacco is also produced in many other countries, with major production in Brazil, Malawi and Argentina.
According to Tobacco Asia, while BTGCA only purchases burley tobacco from certified growers that allow traceability from the farm to the consumer, it appears the association does not track and trace through unique grower and bale IDs, but rather through recording and reporting requirements of purchases for growers.
While BTGCA General Manager Steve Pratt stresses that the association ‘places high priority on traceability of the tobacco we purchase from our growers’, he does concede that illicit trade of burley occurs.
While growers, according to Steve Pratt, are ‘the weakest point (in the supply chain)’, the US only supplies 4% of all tobacco leaf worldwide. In 2011, China, India and Brazil supplied over two thirds of all tobacco leaf used globally for production.
Trafficking of tobacco leaves continues to be a growing issue. To cite just two recent examples: in 2015, the Australian Border Force seized 71 tons of illicit leaf tobacco, valued at US$30 million, in three shipments alone. The Cornwall Regional Task Force in Canada, responsible for patrolling the Saint Lawrence River, seized 2.5 tons of fine-cut tobacco during the month of August alone.
These are just a few examples of the multi-billion dollar illicit trading scheme in tobacco leaf. Comprehensive track and trace systems for tobacco leaf, through grower IDs and unique bale IDs will be an important tool to combat this billion dollar illicit trade issue.
Individual country/company efforts not enough
Due to the global nature of the trade in tobacco leaf however, individual country or company efforts will not be enough to combat this issue. This will necessitate a coordinated effort across countries and governments to require and implement such a system.
The WHO’s Protocol to Eliminate Illicit Trade in Tobacco Products, negotiated under the auspices of the Framework Convention on Tobacco Control (FCTC), provides a natural framework for such a requirement. While consensus could not be reached during prior negotiations on these issues, the Protocol stipulates that the issue of licensing key material used in the production of tobacco products needs to be revisited within three years of its ratification.
Since the conclusion of Protocol negotiations in April 2012 and its subsequent approval at the FCTC COP5 in Seoul in November 2012, Interpol and the World Customs Organisation have started to focus on the control, tracking and enforcement of tobacco leaf. Further, individual companies are also attempting to institute solutions to address these issues, as detailed in the Tobacco Asia article.
Once the FCTC has achieved ratification, it is this author’s opinion that this issue should be revisited. Tobacco growers, importers and purchasers of tobacco leaf across the globe should be subject to stringent licensing, record-keeping and reporting requirements, underpinned by a track and trace system, which tracks unique IDs for raw leaf tobacco bales across the supply chain and links it to the licensed entities involved.
The landscape of illicit tobacco is ever-changing and ever-evolving. Therefore our tools to combat this issue also need to be ever-evolving. The tracking and tracing of tobacco leaf will be an innovative new tool to combat the emerging and growing threat of illegally manufactured products, which move completely outside the legitimate distribution chain. Tracking, monitoring and restricting the access to raw materials will be an important tool in the future fight against illicit tobacco.
Sven Bergmann is a Managing Partner at Venture Global and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies.