Protecting public health and reducing the availability of illicit tobacco products through the establishment of an EU-wide supply chain control system

Tobacco use is extremely harmful to health and its illicit trade causes billions in tax revenue losses each year. The EU Tobacco Products Directive (TPD) provides for the establishment of a tracking and tracing system that enables the authorities to follow the movements of every packet of the 26 billion or more sold or produced in the EU, along every step of the supply chain, via real-time reporting by industry. The system is a tool for authorities in implementing their tobacco control policy.

Innovation Summary

Innovation Overview

An estimated 1 in 10 cigarettes and tobacco products sold worldwide are illicit, making it one of the most significant types of illicit trade. Its impact on society is huge. Duty evasion deprives governments of billions in tax revenue each year. Illicit products are typically sold at lower prices, with evidence of increased youth consumption, while the income derived from such sales is often used to fund other criminal activities.

Opportunity

Illicit trade is a global problem that individual countries are not effective in fighting alone. The EU TPD is an ambitious initiative aimed at protecting citizens’ health, especially young people, by tackling illicit trade in tobacco products through an EU-wide traceability system. Given its scope (26 billion packs a year, 50 thousands wholesalers and 1.2 million outlets across the EU), it is the world’s largest tracking system of this kind, capturing data for every pack of tobacco products and providing competent authorities with visibility of all activity along the supply chain.

To target illicit trade, authorities need to understand where illicit activity happens and identify those responsible. The traceability system equips authorities to monitor the movement of legal tobacco products (tracking), enabling them to determine at which point the product was diverted into, or appeared from, the illicit market (tracing). With this data, authorities can tell how the illicit products entered the supply chain and address the problem or target suspicious activity. Closer observation of the legal part of the market can also provide important insights into its shadow part.

Innovation

The innovation lies in applying the track and trace system to the entire EU tobacco supply chain. This entails real-time tracking of billions of individual products at every step, from manufacturer to distributor down to retail outlet.

In line with the WHO Framework Convention on Tobacco Control Protocol, the EU TPD requires that all tobacco packs produced in, destined for, or placed on the EU market must carry a traceability marking known as a ‘unique identifier’ (UI).

The UI is embedded in a data carrier (e.g. barcode) that allows authorities to read the information (including in the field with scanners or smartphones). All product movements are checked, validated, and recorded at each step. Every single actor in the supply chain (manufacturer, importer, distributor) must report data into a first-level storage system called a ‘Primary Repository’ (PR). A copy of all data is then sent to a central storage system, called the ‘Secondary Repository’ (SR). Dentsu Aegis Network AG (DAN AG) was awarded the contract to design, operate and manage the SR.

The system is more rigorous than any other due to the regulatory requirement for online enforcement, meaning data is not just being passively stored but at each step there is a process of data reporting, validation, and authorization, all happening in less than sixty seconds. Non-compliant products are flagged in near real time. Economic operators receive automatic reporting errors and are obliged to address the source of the error before the affected tobacco products can be moved further.

Benefits

The system benefits all EU citizens as a solution to tackle illicit trade and protect public health. Other jurisdictions are considering deploying comparable systems, not only for tobacco products, but for other excise products (alcohol, beverages, etc.). The system provides high-quality data as it covers all movements of tobacco products, sets timelines for reporting, and has a specific format for individual reports - enabling authorities to control the supply chain.

The system uses international standards, thereby driving innovation and ensuring interoperability. Independent providers can offer their services, which further strengthens the checks and balances. The system currently has 21 ID issuers, i.e. independent entities entrusted with generating UIs, and 10 providers of PRs. Several other IT providers deliver various components of the system, such as scanners or cloud-based reporting solutions.

Future applications

It is anticipated that it will take 12 to 18 months before the real value of the data captured can be appreciated, as more links and patterns emerge over time and the market exhausts legacy products. Enforcement agents on the ground should benefit from real-time data and intelligence, leading to tangible results. The future impact could be significant.

Innovation Description

Innovation Development

Innovation Reflections

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Status:

  • Implementation - making the innovation happen
  • Evaluation - understanding whether the innovative initiative has delivered what was needed
  • Diffusing Lessons - using what was learnt to inform other projects and understanding how the innovation can be applied in other ways

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