Albania Risks Costly Failure in Illegal Tobacco War

A multi-million-euro tax stamp scheme, intended to fight Albania’s illegal tobacco and alcohol trade, could be costly and ultimately ineffective, according to an investigation by Balkan Insight.

The new fiscal stamps system, supplied by the Swiss-based SICPA Securities, is not in line with international agreements on combating the illicit trade in tobacco products.

Moreover the system has no track record of reducing smuggling in the countries where it has been applied and whether it is the right solution for the local market remains also open to question.

SICPA has been awarded an exclusive concession to supply revenue stamps for the Albanian government, potentially worth tens of millions of euro over 35 years.

The stamps are printed on an item as proof that government tax has been paid. They contain technology that should ideally allow them to be tracked after leaving the factory in all steps of the supply chain.

The government says this “track and trace” technology will help fight contraband trade in cigarettes, spirits and other products, bringing in much needed revenue.

However, tobacco companies have complained that the tender to award the exclusive contract was not transparent.

Contacted by Balkan Insight, SICPA has declined to comment on the allegations. The Albanian Ministry of Finance has also not answered several requests for comment.

Added Costs, Unclear Benefits:

On February 27, 2005, Albania became one of 160 countries to ratify the World Health Organization’s, WHO, Framework Convention on Tobacco Control, FCTC.

Broad obligations under the treaty include marking all units and packages of tobacco products to help countries detect their origins; considering a tracking and tracing system; passing stronger laws against illicit trade; and ensuring the destruction of confiscated tobacco-manufacturing equipment.

Parties to the FCTC agreed in 2007 to negotiate a supplementary treaty for curbing illicit trade. Negotiations on this protocol started in 2008 and could be completed by the end of next year.

Luk Joossens, an international expert on cigarette smuggling, said a proper track and trace system allows authorities to conduct a thorough investigation once contraband cigarettes have been seized, giving investigators the tools to find out who produced and eventually sold them.

“The purpose of the protocol is to control the supply chain and control the big consignments when they travel around the world,” Joossens said.

Appropriate for Albania?

SICPA claims it has developed a fully functional tracking and tracing system called SICPA Secure Trail.

This system uses a two-dimensional data matrix, printed on product packaging with inks invisible to the naked eye, read by a pocket PC-based scanner. It includes the name and address of the distributor affixing the stamp, the date the stamp was affixed and its denominated value.

However, a February 22, 2010 WHO-FCTC confidential report, whose talking points were obtained by Balkan Insight, states that “upon closer examination the system only covers some aspects of authentication,” determining whether the product is counterfeit or real and how much has been produced.

According to the same report, SICPA’s marking system does not fulfill minimum tracking requirements under the FCTC regime because its codes are not “humanly readable… and not in line with international coding serialization standards”.

SICPA’s stamp security is directly dependent on the “establishment of a tight and highly secure distribution chain, which constitutes a security risk even in highly developed countries and will inevitably face massive challenges in less developed areas of the world,” the report says.

It says that the system “is not cost effective” and appropriate for the limited resource of developing countries.

“The World Health Organization’s expert report on track and trace says very clearly that the system being used by SICPA in other markets such as Turkey is not a proper track and trace system,” said Janine Cameron an International Advocacy Manager on Illicit Trade for British American Tobacco, BAT,

“This is because it does not have aggregation, which means the linking of a [tobacco] master case to a carton and then to a pallet.”
[A master case holds usually 50 cartons or 10,000 cigarettes, while the amount of cigarettes in pallet depends on the manufacturer.]

According to Anshu Banerjee, WHO representative in Albania, although the guidelines of the protocol have yet to be finalized, and signatory countries will have an ample timeframe to fulfill them, the obligation would eventfully become mandatory for Albania at some point during SICPA’s long exclusive contract.

“My understanding is that they have to start with a track and trace system, but they have about five years before the actual mechanism that has been put in place fulfills the criteria [under the FCTC protocol on Illicit trade in tobacco products],” Banerjee said.

California implemented the SICPA system in 2005 and is often cited by proponents of encrypted fiscal stamps as a success story, because annual excise tax revenues were said to have increased by $100 million in real terms after its installation.

However, a 2009 study by the Indiana Department of Revenue, IDOR, which was also considering the SICPA system, reported that such claims were largely incorrect, because encrypted stamps were easily counterfeited.

“Within a month of launching the encrypted stamp programme in California, the US Bureau of Alcohol, Tobacco and Firearms reported discovering counterfeit encrypted stamps in retail establishments throughout the state,” reads the IDOR report.

Revenues in California increased by 0.5 per cent in 2005 and 2006 after the implementation of encrypted tax stamps and other enforcement measures, according to the IDOR report.

However, from 2006 to 2008, revenues fell steeply by 6.8 per cent, or $72 million, because of the continued trade in illegal tobacco products that was not brought to a halt, it added.

According to the IDOR report, a stamp application machine will cost $125,000 -$150,000 for manufacturers or large wholesalers and a scanner for retailers around $800– all costs that will eventually be passed on to consumers.

Joossens, who has seen SICPA’s system in place in Brazil and California, says the technology works well on national level, clamping down on the illicit sale of tobacco product from local manufactures.

But it works less well on the international level, when smuggling is going on across borders. This is because other countries cannot read the codes printed on them in order to retrace who produced or sold the contraband cigarettes.

“In Brazil, SICPA’s system could not stop the illicit trade coming from other countries such as Paraguay,” Joossens said.

In Albania, where all the 200 million plus cigarettes currently being consumed annually are imported, SICPA’s system would give no added advantage to investigators to trace the manufacturers and traders once a seizure of contraband cigarettes is made.

Complaints about the tender:

Illegal cigarettes command a large share of the Albanian market. According to the 2008 Euromonitor International Illicit Trade in Tobacco Global Report, duty was paid on only 45 per cent of cigarettes sold in the country in 2006.

The public health system, the government treasury, public safety and security and honest businesses are among the many casualties of this illicit trade.

On September 2, 2009 following an unsolicited proposal from SICPA, the Council of Ministers opened a tendering process for a 35-year concession for a track and trace system of revenue stamps.

On December 23, parliament amended the excise duties law that had made fiscal stamps a “state monopoly,” allowing their outsourcing to a private company upon parliamentary approval.

Tender offers opened on February 2, when the selection commission from the Ministry of Finance disqualified the only competitive bid against SICPA.

British-based De La Rue Security’s bid was lower but was disqualified because the company did not provide timely documentation that it was liquid and had paid its taxes.

De La Rue, a public company listed on the London Stock Exchange, prints the British pound and provides technology and secure papers for some 150 other currencies. It has previously been awarded several contracts by the Albanian Central Bank to print the Albanian currency, the lek.

The tendering commission also said that De La Rue could not prove that it had direct experience in implementing a track and trace system for revenue stamps.

De La Rue appealed the decision to Albania’s Procurement Advocate who upheld the decision of the Ministry of Finance, opening the way for SICPA to be awarded the contract, which is now awaiting parliamentary approval.

A spokesperson for De La Rue, Paul Miller, declined to comment on the process, saying “the company had already moved to new projects.”

However, tobacco companies like Philip Morris, British American Tobacco and Japan Tobacco have complained that the tender was not transparent, that SICPA’s expensive system will not dent the sale of illicit products, while in the Albanian market cigarettes are often sold without stamps or with revenue stamps from other countries.

They have raised their concerns through the Albanian-American Chamber of Commerce, the Ministry of Finance and to the Prime Minister, Sali Berisha. In its periodical publication The Advantage the chamber wrote that the companies had received an “unsatisfactory response”.

In written response to the chamber, the Minister of Finance, Ridvan Bode, wrote that the new scheme aimed not only to produce fiscal stamps but to create a computerized system that “would track the product from its manufacture to its retail, guaranteeing the origin and its quality to consumers”.

The cigarette companies argue that SICPA’s track and trace system will increase the price of local stamps several fold, a cost that they will be forced to pass on to consumers, because the encrypted stamps are more expensive than the regular stamps now in circulation.

Negotiations are underway between SICPA and the Ministry of Finance to determine the price of the stamps.

The current hologram-imprinted fiscal stamps cost only the equivalent of one cent if a euro. According to a source in the Ministry of Finance, the cost of a SIPCA stamp would be around three cents, paid by tobacco companies together with excise duties.

The tobacco companies argue that they already have an internal tracking and tracing systems, which they offer at no cost and are better and cheaper than SIPCA’s system.

The Philip Morris Codentify system, which uses a bar code printed on cigarette packs, is already offered free of charge in EU countries like Germany and Portugal, and Japan Tobacco also has a similar system in place.

Jeanine Cameron, from BAT, says that before a government makes a decision on what technology to use in order to monitor its market, it should first be clear on what the problems are.

“If the problem is that the genuine product leaks out of the supply chain or any product leaking out of the supply chain, the solution would be a tracking and tracing system,” she said, “but if the government has a problem with taxes and duties not being paid, it needs to look at verification and we would recommend digital stamps.

“In the case of BAT, we have a track and trace system, which is very accurate and meets exactly the requirements of the FCTC,” Cameron added

However, Joossens, the tobacco smuggling expert, underlined that despite what’s on offer from cigarette companies a public track and trace system is a must in order “to control the industry data”.

Contacted by Balkan Insight, SICPA declined to comment.

“SICPA’s policy is to share limited information concerning either our business or our customers,” said spokesperson Floriane Jacquemet.

The Albanian Ministry of Finance did not respond to Balkan Insight’s request for a comment on the tendering process, the cost of the stamps, or the decision to award the contract to SICPA.

In Indiana, the IDOR, following its evaluation, concluded that it “cannot in good conscience show ample benefit to the state, nor can this agency in good judgment justify the expense an encrypted-stamp program would impose on the taxpayers of Indiana and the wholesalers who do business here”.

In Albania, where the national assembly is expected to discuss SICPA’s proposal in the coming weeks, it remains to be seen if its deputies will show similar judgment.

By Besar Likmeta and Gjergj Erebara. This article was made possible through the support of the National Endowment for Democracy.

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