Tackling illegal trade

The illegal cigarette trade fuels modern slavery, organized crime, and terror groups. It causes harm to society and consumers (The word, consumers, used in the context of the tobacco business means adult consumers. Minimum legal age for smoking varies in accordance with the legislation in each country.), 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.


Aspirational goal

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.

Target

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.

Progress

In 2021, our Anti-Illicit Trade team provided 1,627 intelligence reports to law enforcement agencies, and advised 2,238 law enforcement officers on counterfeit recognition.

Read more about our latest progress on the JT Group's tobacco business sustainability strategy.

Other key wins in 2021

  • Over 3.27 billion illegal cigarettes seized thanks to intelligence reports provided by our team to law enforcement.
  • There was a 41% decrease in seizures of our genuine products resulting from our efforts to ensure the security of our supply chain.

Our approach

Our global Anti-Illicit Trade team investigates the illegal tobacco trade. This vital work helps to protect our business reputation as well as consumers and society, from criminal elements. The team 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, these experts work with our markets to secure our supply chain and assist law enforcement in removing illegal tobacco from the marketplace. They maintain a robust dialogue with governments and law enforcement agencies on the threat of illegal tobacco through public-private partnerships and provide 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 own compliance and purchasing departments. It carries out due diligence checks to ensure we are entering into contracts with trustworthy suppliers, and helps 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 track containers suspected of transporting illegal goods.

A perfect storm

The COVID-19 pandemic has blunted rather than extinguished the production and supply of illegal product. Some decrease in supply and production was evident in more strictly controlled economies during the pandemic. Western markets in particular saw relatively little reduction in the production and availability of illegal product. This is despite criminal groups initially finding it difficult to source technicians and skilled workers to work on illegal production.

During the pandemic, heightened EU border controls and regulations made it more difficult for criminals to bring illegal cigarettes to their markets of choice – usually those with high taxation policies, such as the U.K. and Ireland. By moving illegal production and supply chains inside the EU, criminals avoided border controls and reduced the risk of seizures or detection. More recently, lifting of COVID-related travel restrictions and opening of borders, the supply of illegal product globally, has started to increase exponentially.

The resourcefulness of criminals is such that the flow of illegal product was still viable even when traditional sales outlets were out of action. Technology was and still is increasingly being deployed throughout the pandemic to enable sales of illicit product to continue. This is a trend that’s likely to persist. With sales opportunities unavailable during the pandemic, the online world has become the environment of choice for criminals to sell illegal tobacco products.

We are responding to these new challenges through initiatives such as Project TALON. Read the Project TALON case study to learn more about our response to this rapidly changing digital landscape.

Read more about 'The gathering storm'

Emerging global trends

  • Seizures of genuine JTI products remain very low, continuing the trend from the past two years. However, the threat remains from counterfeit production, which makes up more than 98.5% of the global notified seizure volume. This highlights both the security of our supply chain and the determination of criminals to continue selling products that imitate JTI brands.
  • In the EU, the presence of illegal cigarette factories continues to grow.
  • Smuggling from state owned Grodno Tobacco factory Belarus continues to have a negative impact on the EU and Russian markets.
  • Illicit whites from the United Arab Emirates being smuggled into Russia.
  • Illegal trade is growing in France due to recent tax rises, and is now estimated at 36% of the country’s total consumption, with 19% of NDP being counterfeit.
  • A new transportation trend has emerged in Asia as a result of targeted law enforcement actions in the coastal ports of Taiwan, Philippines, and Malaysia. Criminals now often use mother vessels, anchored out at sea, and a series of smaller vessels to facilitate smuggling outside of controlled areas (ship-to-ship transfers).
  • In 2021, we observed that Ukraine continued to evolve from a source or transit market to a destination market. The key contributors to illegal trade are local producers who are not fully compliant, as well as smuggling from Belarus. In the third quarter of 2021, the Duty Not Paid (DNP) level was estimated at 15.9%.
  • Kyrgyzstan has become a major entry point for various non-taxed commodities, including cigarettes, which are smuggled into the Eurasian Economic Union (EAEU). This development affects Kazakhstan and Russia in particular.

Case study

Public private partnerships in support of sustainable business

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

Progress in 2021

The task force we set up in 2018 continued to tackle illegal trade in our Russia, Ukraine and Belarus priority markets.

Our information led to the seizure of over 3.27 billion cigarettes (or equivalent in tobacco).

We provided 752 forensic evidence statements to law enforcement agency requests.
We proactively shared 1,627 information reports on illegal trade to law enforcement agencies.
We are fully compliant with all our legal obligations such as OLAF under Memorandum of Understanding.

We advised 2,238 law enforcement officers on counterfeit recognition.

Target

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.
  • * ’Illicit whites’ refer to tobacco products manufactured legitimately but without any product flow control measures afterwards, and smuggled and sold in another market.

Protecting consumers and government revenue

In 2021, our Anti-Illicit Trade team provided 1,627 intelligence reports to law enforcement agencies, leading to the seizure of more than 3.27 billion illegal cigarettes. Based on our information, as a result of JTI info, law enforcement raided more than 20 counterfeit tobacco factories and 33 illegal storage locations.

As a direct result of our work to tackle illegal trade, notified seizures of counterfeit products in the EU have remained consistently high over the past five years (over 98% of products seized are counterfeit). During the same period, notified seizures of our own genuine products in the EU decreased by 90%, 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 Europol and many law enforcement agencies including 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 few 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 Ireland, which are target markets for criminals due to high taxation. It marks a shift away from the traditional sourcing of counterfeit products in China.

In 2021, over 98% of the JT Group branded products seized globally were counterfeit. We had already established a Counterfeit Task Force in March 2019 to counter this threat.

The objectives of the task force are to:

  • Coordinate our investigations into global counterfeit production
  • Ensure that knowledge is shared between different regions
  • Pass on meaningful and evidential 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. The objective is to provide reliable and usable information to law enforcement in order to locate and seize the illegal facilities.

The threat from counterfeit production

The presence of counterfeit production facilities continues to be a significant threat around the world. In Europe, 98% of seized JTI brands in 2021 were found to be counterfeit. Seizures of genuine JTI brands are small in number and quantity. Counterfeit production is also an ongoing threat in other regions.

A Counterfeit Task Force (CFTF) was established in 2019, led by AITO and involving Quality Assurance, Intellectual Property and key market representatives. The CFTF’s main focus is tackling counterfeit production in Europe. In 2021, information disseminated by AITO to law enforcement contributed to the seizure and closure of 20 illegal factories globally, of which 15 were in EU countries. Law enforcement agencies in Europe seized and closed down 17 illegal storage facilities in 2021*.

In 2021, we continued to observe an increase in the production and storage of illegal cigarettes. In many instances, the working environment and conditions can be considered as modern-day slavery.

Heightened EU border controls and regulations make it more difficult for criminals to bring illegal cigarettes to their markets of choice – usually those with high taxation policies, such as the U.K. and Ireland. By moving illegal production and supply chains inside the EU, criminals can avoid border controls and reduce the risk of seizures or detection.

In addition, combating the illegal production and distribution of cigarettes is often not a high priority for law enforcement agencies. Historically, if criminals are caught, the penalties are low. To support law enforcement, our international tobacco business is raising awareness of the social and economic consequences of illegal trade. We are doing this by providing counterfeit awareness programs and quality information on criminal activities.

  • * Open source information. The actual number of illegal tobacco factories raided by law enforcement agencies may be higher.

Case study

In 2021 there were several raids on illegal production and storage sites which were dispersed geographically. Belgium and the Netherlands featuring prominently. Here are just a few examples of cases where JTI contributed information:
Country Number of illegal factories raided in 2021
Belgium 4
Greece, Jordan, Poland, Spain 2 each
Dominican Republic, Latvia, the Netherlands, Romania, Slovakia, Ukraine 1 each

Illegal tobacco factories raided by law enforcement agencies (LEAs) with our contribution (2020-2021)

We also provided information that contributed to:

  • 421 seizures
  • 18 illegal factory raids
  • 29 illegal storage depots raided
  • 1,120 suspect arrests

Case study

Project Green: fighting illegal tobacco production from outer space

Project GREEN is a unique Anti-Illicit Trade program, developed by our international tobacco business. It combines a state-of-the-art technical solution, proactive cooperation with government agencies, and the promotion of sustainable tobacco farming. In short, with the support of an external service provider, we are able to arrange the legal satellite screening of tobacco fields in Serbia.

Working in close cooperation with government agencies, we compare the satellite data with state registries. This enables us to separate and exclude authorized tobacco growing parcels and detect illegal plantations. We verify all of the digital information and gather concrete evidence (photos and/or video) before sharing our findings with government agencies for enforcement actions. The tobacco plantations that have not been registered and authorized for tobacco growing can then be destroyed.

The accurate and actionable information we have shared with the authorities in Serbia has made a significant contribution to the prevention of illegal tobacco production. Our actions even help to promote sustainable tobacco farming in the country.

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).

In accordance with the European Union Cooperation Agreement signed in 2007, JTI ensures it supplies 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 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 applicable 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 Tobacco Products Directive, the WHO Framework Convention on Tobacco Control (FCTC) Illicit Trade Protocol and numerous national legislations.

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.

Since 2019, Track and Trace has been a legal, mandatory requirement in the following national and regional jurisdictions: United Arab Emirates, Saudi Arabia, Russia, Kazakhstan, Kyrgyzstan, the United Kingdom and the whole European Union. In 2021, Qatar, Bahrain and Oman are expected to implement their own Track and Trace systems.

As with all other regulations, we put all our efforts into complying with these obligations, while limiting any negative impact on our business operations. 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 authorities and sanctions for those involved in illegal trade. Governments must also implement further measures to address products which will, by nature, escape those obligations, such as counterfeits or illicit whites*.

  • * ‘Illicit whites’ refer to tobacco products manufactured legitimately but without any product flow control measures afterwards, and smuggled and sold in another market.

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 64 Parties (November 2021).

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 this 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 system within 5 years for cigarettes and within 10 years for all other tobacco products respectively after the entry into force of the Protocol for them. 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.

The other provisions covered by the Protocol, such as Free Trade Zones oversight or Assistance and Cooperation mechanisms, are equally crucial. These represent an area for public-private cooperation, with the common goal of defeating the illegal trade of tobacco products across the globe.

Taking the fight to the digital world

The fight against the illegal tobacco trade seems never-ending, as criminals seek to use tried-and-tested and innovative new methods of exploiting others. The internet – and social media in particular – continues to provide opportunities for individuals and organized crime groups to sell illegal tobacco products. During the COVID-19 pandemic, with other sales opportunities unavailable, the online world has become the environment of choice for criminals to sell illegal tobacco products. But as criminal gangs become increasingly sophisticated, so do our own efforts to fight them.

Our projects to tackle internet-based crime are well established and continue to make progress, through the removal of links and social media posts such as Facebook which illegally advertise our products, or their counterfeits.

The scope of our projects to tackle internet-based crime have expanded both in scope and size, to include activities in France, Malaysia, Romania, Russia, Serbia, Singapore, Spain, Taiwan, the U.K., the U.S., and CIS+ region.

We also identify criminal gangs using social media sites which offer larger volumes. In addition, following ‘test purchases’ of the JT Group products, we supply law enforcement with the evidence needed to take action.

Case study

Project TALON: fighting illegal trade in the digital world

Incredibly, organized crime groups across the globe often publish details of their illegal activities online for millions of people to view. Our international tobacco business has been at the forefront of tackling this phenomenon since 2015, when we launched Project TALON.

Project TALON focuses on taking down links and social media posts that illegally advertise our products, or their counterfeits. To date, we have identified and removed more than 30,000 online adverts for illicit tobacco, representing 3.9 million U.S. dollars’ worth* of potential product losses.

The global pandemic has driven an increase in illicit trade online, as well as the associated scams and identity fraud. In the U.K. alone, over 6,350 posts were identified and taken down between August 2019 and January 2022, representing 1.25 million U.S. dollars’ worth of potential product losses.

In 2021, Project TALON was extended to Romania, with excellent support from our local team and from law enforcement. This led to the identification of more than 5,300 listings.

This project continues to evolve, as we develop and implement new review methods to further improve productivity, especially across emerging platforms such as Telegram and TikTok.

We have also improved our reporting methods and created workflows to gather actionable information and monetary data for law enforcement agencies. Towards the end of 2021, local teams carried out a two-week research trial in France and the Netherlands to investigate the anecdotal increase in online illicit sales.
  • * the value of the advertised product

Focused on the future

Although criminal groups continue to adapt and diversify by moving onto new platforms, we have managed to stay one step ahead by expanding and enhancing our software.

In addition to website takedowns, our toolkit includes JTI AITO investigations, test purchases, private prosecutions, and sharing information with law enforcement agencies. This gives us the ability to swiftly target specific areas of a market with a high prevalence of illicit online sales.

The business is planning to re-launch Project TALON in France and other European countries in 2022.

Read more about how we tackle the illegal tobacco trade online.