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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

What Makes Your Project Innovative?

The EU system is a new benchmark in supply chain traceability. It allows for real time collection and verification of data from the entire supply chain. It is unique in its scale and volume as the world’s largest traceability platform for tobacco products.

Dentsu Aegis Network designed the technical controls necessary to give effect to the EU TPD and its secondary legislation. The company collaborated with the EC to design a solution in line with the applicable rules.

The final innovation involves a cutting-edge solution for scalable and secure data access, with automatic controls for data validation at each step. It provides authorities with an unprecedented level of visibility over the supply chain of tobacco products.

The European project is proof that a centralized repository solution is both possible and can be successful as a solution for supply chain traceability. Building on open standards and interoperability makes it highly applicable to other regions or industries.

What is the current status of your innovation?

The EU system of tobacco traceability for cigarettes and roll-your-own tobacco products was successfully launched on 20 May 2019.

It was an exceptional achievement to kick start a system of this scale, i.e. tracing over 26 billion objects a year, registration of over half a million economic operators and over a million facilities, within the prescribed deadline and with all the core functions operational from day one. It was thanks to the concerted efforts of all actors involved in the system, notably the European Commission, EU Member States, Dentsu, other IT providers and economic operators.

By 19 May 2020, the market will have exhausted all legacy product categories covered currently by the system.

On 20 May 2024, the system will be expanded to include all other categories of tobacco products.

Innovation Development

Collaborations & Partnerships

The legal framework for and the overall design of the system were provided in the legislative acts prepared by the European Commission (EC) in collaboration with EU Member States, for which there were extensive consultations with civil society and sector stakeholders.

For the operational implementation of the central storage unit and router, the EC awarded a contract to DAN AG. The EC also approved further primary repositories proposed by the sector, while Member States appointed ID issuers.

Users, Stakeholders & Beneficiaries

The system provides a new innovative tool for enforcement agencies to combat illict trade in tobacco products.

Data-driven enforcement translates into improved tax collection and has been shown to protect young and other at-risk groups from artificially low-cost tobacco products. The economic and social benefits of the system were estimated at about EUR 4 billion a year (https://ec.europa.eu/health/sites/health/files/tobacco/docs/tt_ia_en.pdf).

Innovation Reflections

Results, Outcomes & Impacts

To target illicit trade, authorities need timely access to all relevant information. The traceability system is truly unique in that respect as, for the first time ever, it provides authorities full visibility of the entire supply chain for tobacco products.

Near real-time data is available to measure the system’s performance thanks to the user interfaces provided by DAN AG.

The Impact Assessment predicted a potential reduction in illicit trade in tobacco products of around 20%, which could be attributed to the introduction of the traceability system.

Challenges and Failures

Challenges encountered included meeting the ambitious timeline set for the rollout of the system coupled with the sheer scale of the undertaking, as previously noted it is the largest tracking system of its kind in the world, capturing data for every pack of tobacco products and providing competent authorities with visibility of all activity along the supply chain. It was a steep learning curve for economic operators responsible for reporting product movements into the system.

To address these issues, the EC produced educational materials for economic operators and stakeholders, while DAN AG disseminated information through a data center, workshops and webinars, which together went some way to bridging any knowledge gaps. In parallel, there was a gradual tightening of the technical validations built into the system to ensure compliance with the legislative acts.

Conditions for Success

A key condition for success was having a well thought through legal framework, which, while being precise in terms of general reporting rules and individual responsibilities, allowed flexibility in terms of the technological solutions to be adopted. The legislation also clearly assigned responsibility for costs associated with both setting up and operating the system, as well as clearly defining how revenue would be generated for ID issuers, which ensures the ongoing sustainability of the system.

The decision to use existing international open standards also contributed to driving innovation and ensuring interoperability.

Another key enabler was the fostering of an environment where healthy competition was allowed to develop between IT service providers. Independent providers are allowed to offer their services, which further strengthens the level of checks and balances.

Replication

Other jurisdictions are considering deploying comparable systems, not only for tobacco products, but for other excise products (alcohol, beverages, amongst others). Illicit trade is a global phenomenon that many countries and regions are grappling with. The EC shares the experience of establishing the EU-wide supply chain control system for tobacco products with other Parties to the WHO FCTC Protocol on Illicit Trade and as well as relevant international organizations. Through a dedicated webpage, (https://ec.europa.eu/health/tobacco/tracking_tracing_system_en), information about the traceability system, and other relevant developments, is disseminated.

Lessons Learned

This is a very specific innovation due to the sensitivity of the subject matter concerned. Avoiding any vested interests was of paramount concern. Introducing new ways of combatting fraud, in this case illicit trade, is challenging but dealing with the tobacco industry added an additional dimension of complexity.

The decision to use existing international open standards proved well-judged in that it contributed to driving innovation and ensuring interoperability.

Since the system became operational, it has been possible to monitor the quality of the data inputted into the system by reporting parties. The legislative acts clearly defined the requirements in terms of data inputs – both in terms of the content of the messages to be notified at various steps in the supply chain but also the timelines for such reporting – and this has provided valuable framework for ensuring compliance.

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

Innovation provided by:

Date Published:

7 July 2020

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