August 2019: 460,000 illegal cigarettes were seized from a cargo vessel in the Port of Zamboanga, based on intelligence shared by our Anti-Illicit Trade team. The cigarettes were found mixed in with a shipment of tropical fruit.
Tackling illegal trade
- For the latest information, please see Integrated Report 2020. Information below is for FY2019. FY2020 online content will be released in June 2021.
Experts estimate that over 10% of all cigarettes sold globally (excluding China) are illicit, with approximately 45 billion U.S. dollars in global tax revenue lost each year. This illegal trade fuels human trafficking, organized crime, and terror groups. It causes harm to consumers, as uncontrolled products circumvent regulations and quality controls, and undermines legitimate tobacco businesses. Tackling illegal trade is a top priority for us, and our Anti-Illicit Trade team is recognized as the industry leader in combating this problem.
We will ensure the Company is included in policymaking leading to fair and balanced regulation, and enhance our cooperation with governments to combat illegal trade.
We will engage in dialogue with law enforcement agencies, with the goal of exchanging intelligence regarding illegal tobacco products, in order to support the reduction of illegal tobacco products.
In 2019, our Anti-Illicit Trade team provided 1,129 intelligence reports to law enforcement agencies, and advised 2,687 law enforcement officers on counterfeit recognition.
Other key wins in 2019
- Over 3.2 billion illegal cigarettes seized thanks to intelligence reports provided by our team to law enforcement.
- There was a 34% decrease in seizures of our genuine products resulting from our efforts to ensure the security of our supply chain.
Our global Anti-Illicit Trade team investigates the illegal tobacco trade and protects consumers and society, as well as our business and reputation, from criminal elements. It is made up of dedicated professionals with many years of public service in law enforcement, regulatory bodies, and governments.
As a key part of our business, the team works with our markets to secure our supply chain, and assists law enforcement in removing illegal tobacco from the marketplace. It maintains a robust dialogue with governments and law enforcement agencies on the threat of illegal tobacco through public-private partnerships and provides counterfeit awareness programs for law enforcement, globally.
Our Anti-Illicit Trade team also supports other areas of our business with research on illegal tobacco and raises awareness of the problem among our business partners, consumers, and society in general. The team protects the JT Group’s business and reputation, supporting our long-term, sustainable future.
Increasingly, we are examining ways to tackle illegal trade across our entire value chain. This is resulting in a more transparent and collaborative relationship with suppliers of items such as tobacco leaf and cigarette filters. We have regular meetings with these suppliers and manufacturers to try to help them prevent their products from falling into the hands of criminal networks and support their compliance training initiatives.
Our Anti-Illicit Trade team also supports our compliance and purchasing departments by carrying out due diligence checks to ensure we are entering into contracts with trustworthy suppliers, and by helping these departments to implement corporate policies and procedures.
We continue to closely monitor changing trends in smuggling, including the way in which organized crime groups use shipping routes. We are working with various law enforcement agencies across the world, such as the World Customs Organization, Interpol, and Europol, to help them track containers suspected of transporting illegal goods.
Positive progress continues in the Philippines
There were a number of challenges to face, notably in relation to locally made counterfeit packs, imported counterfeit products from China, packs of local brands with reused tax stamps, and illicit whites with no tax stamps at all.
For our acquisition to make a positive impact to the business, we set up several tailor-made anti-illicit trade projects in late 2017. Working together with JTI Philippines and various government agencies, our Anti-Illicit Trade team successfully established processes for reporting illegal activity to law enforcement, who in turn took the necessary action against illegal trade.
Through this new system, in 2018 we were able to pass on information about illegal factories, storage areas, and even large retail markets where illegal sales were taking place. The results have been very positive, with figures suggesting that illegal trade dropped by around 50% from September 2017 to the end of 2018.
Our work continued in 2019, as the following results show:
- There were over 140 million illegal cigarettes seized in 2019
- They included 57 million counterfeit JT Group branded cigarettes, and 83 million other cigarettes
- The majority of seizures that were reported to law enforcement were from six factories and 22 storage depots
- A total of 42 machines used in the production of illegal cigarettes were removed from factories (crucial to reducing future production capabilities)
- These efforts reduced the illegal cigarette level to approximately 6% in 2019, vs. 12% in 2017
September 2019: Our Anti-Illicit Trade team provided information that led to the seizure of 12 million illegal cigarettes, including approximately five million counterfeits of our Marvel brand, from a warehouse in Bacolod City.
September 2019: Our Anti-Illicit Trade team shared intelligence that led to a raid on a storage depot in Iloilo City, where 143,000 counterfeit Camel, Winston, and Marvel cigarettes were seized.
Late September 2019: Officials in Subic Bay shut down a tobacco factory producing cigarettes without tax stamps, after our Anti-Illicit Trade team and other sources had passed on information several months earlier.
- * ‘Illicit whites’ refer to tobacco products manufactured legitimately but without any product flow control measures afterwards, and smuggled and sold in another market.
Supporting business performance through anti-illicit trade programs
Our global anti-illicit trade programs create the opportunity for public-private partnerships to combat highly organized criminality. They are also designed to support our business performance by fulfilling all legal requirements, securing our supply chain, safeguarding and creating opportunities for volume and profit growth, while protecting our Company’s reputation.
We measure their effectiveness against the following KPIs:
- The number of seizures based on information we share with law enforcement
- The level of illicit trade in our top markets through analysis of empty pack surveys, and the reduction we help achieve
- Implementation of our compliance programs
- Strengthening partnerships with law enforcement agencies, especially through illegal tobacco awareness programs
Protecting our business
In 2019, our Anti-Illicit Trade team provided 1,129 intelligence reports to law enforcement agencies, leading to the seizure of more than 3.2 billion illegal cigarettes. Based on our information, law enforcement raided more than 70 counterfeit tobacco factories and storage locations.
As a direct result of our work to tackle illegal trade, and based on seizure statistics, notified seizures of counterfeit products in the EU have remained consistently high over the past four years (approximately 90% of products seized are counterfeit). During the same period, notified seizures of our own genuine products in the EU decreased by nearly 50%, thanks to our markets’ efforts in securing our supply chain, with the support of the Anti-Illicit Trade team. This has been acknowledged by both the EU and the U.K.’s HM Revenue and Customs, which recognized our international tobacco business as an industry leader in the fight against illicit trade.
Fighting the rise of counterfeiting in Europe
Over the last three years, organized crime groups have established numerous illegal factories in Europe producing counterfeit cigarettes, including the JT Group brands. This has brought illegal production closer to destination markets, particularly the U.K., and marks a shift away from the traditional sourcing of counterfeit products in China.
In 2019, 94% of the JT Group branded products seized globally were counterfeit, and we established a Counterfeit Task Force in March 2019 to counter this threat. The objective of the task force is to coordinate our investigations into global counterfeit production, ensure that knowledge is shared between different regions, and ultimately pass on meaningful information that will assist law enforcement.
So far, the task force’s work has focused on locating the illegal production facilities used to produce counterfeit cigarettes. These illegal facilities may comprise of different manufacturing components including leaf processing, cigarette makers and packing machines, and often storage of large quantities of finished illegal product. Our Counterfeit Task Force compiles and assesses various pieces of information obtained from different sources with the objective to provide reliable and usable information to law enforcement in order to locate and seize the illegal facilities.
Ensuring anti-illicit trade compliance
Legitimate market demand program
Companies worldwide seek to understand the demand for their products in their markets but there is a clear distinction between market demand, and ‘Legitimate’ Market Demand (LMD).
We must comply with our obligations under the European Union Cooperation Agreement signed in 2007. This means supplying tobacco products only in volumes that correspond with the legitimate demand of the intended market of retail sale.
With a commitment to doing the right thing, in the right way, our Anti-Illicit Trade Research team has developed a global methodology to assist our international tobacco businesses’ markets with a consistent and accurate approach to annual LMD calculations. Our markets perform the LMD exercise in conjunction with their annual plan. This creates a proactive supply chain control mechanism to make sure that the planned sales volumes are in line with LMD.
The components and parameters of the LMD estimation vary depending on each market’s unique characteristics and our product portfolio in that market, but the global methodology provides a logical and defendable standard.
One common factor among these varying calculations is that our demand estimations comply with all laws and regulations.
Track and trace
Our Track and Trace program has been an important element of our compliance policy for more than a decade. It helps our global efforts to support law enforcement agencies and has been developed with many of the biggest technology companies across the world, as part of our obligations within the EU Cooperation Agreement.
A highly technical and complex process, our Track and Trace program requires markings on all individual and aggregated levels of products. It helps us to track the movements of the products along the supply chain and supports our supply chain analysis. As a result, when seizures are brought to our attention, we can identify the source of diversion of the seized products and implement preventative measures.
In 2019, Track and Trace became mandatory in several jurisdictions. In addition to the United Arab Emirates, Saudi Arabia, and Russia, the first regional system applicable in all member states of the EU went live on May 20, 2019, as per the European Tobacco Products Directive (TPD2). Despite the challenging timelines to implement such complex systems, we complied with the regulations as of entry into force, with minimal disruption in the countries where we operate.
A global response to illicit trade
The Protocol to Eliminate Illicit Trade in Tobacco Products is the first protocol to the WHO Framework Convention on Tobacco Control (FCTC). It entered into force on September 25, 2018 and has so far been ratified by 58 Parties (January 2020).
This international treaty aims to eliminate all forms of illicit trade of tobacco products, through several provisions that are binding on its Parties. We support the Protocol, as it provides a global response to the global problem of illicit trade.
One of the main requirements is that the Parties must implement a Track and Trace regime by 2023 (for cigarettes) and by 2028 (for all other tobacco products). In order for this regime to be effective, we support the implementation of an architecture based on ‘open standards’ and interoperability for every actor in the supply chain, while taking into account existing systems such as the new EU-wide Track and Trace system.
We also firmly believe that the fight against illicit trade can only be effective if measures such as Track and Trace are implemented along with proper enforcement by the authorities, deterrent sanctions applicable to those involved in the illegal trade, and government measures to address products that are not covered by the Protocol, such as counterfeits or illicit whites.
Taking the fight to the digital world
Our project to tackle internet-based crime is well established and continues to make progress, through the takedown of links and social media posts which illegally advertise our products.
In 2018, we took down:
- Over 5,960 posts
- Over 65,300 items
In 2019, we took down:
- Over 3,100 posts
- Over 1.2 million items
We also identify those using social media sites to offer larger volumes and following ‘test purchases’ of the JT Group products, we supply law enforcement with the evidence to take action. We have also taken the opportunity, in the U.K., to convict other Facebook sellers through private prosecutions.
Since it began, the project has expanded both in scope and geographically, and was rolled out in Russia, Singapore, and the U.S. in 2019. Facing threats from the illegal sale of Logic products, the U.S. project was extended to cover internet sales of Reduced-Risk Products (Products with the potential to reduce the risks associated with smoking.) , with over 7,100 online listings of illegal products detected in 2019 alone.
We will continue to expand the reach of this project, to fight the illegal trade of tobacco and e-cigarettes across digital channels.
Read more about how we tackle the illegal tobacco trade online.