Conference of the Parties Intergovernmental Negotiating Body on a Protocol on Illicit Trade in Tobacco Products Third session Geneva, Switzerland, 28 June – 5 July 2009 Provisional agenda item 4
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Revised Chairperson’s text for a Protocol on illicit trade in tobacco products Expert review on the feasibility of an international track-and-trace regime for tobacco products Note from the Secretariat
1. At its second session (20–25 October 2008, Geneva), the Intergovernmental Negotiating Body requested the Chairperson and the Convention Secretariat to make arrangements for expert reviews on a number of elements of the Chairperson’s text. 2. In response to this request, the Convention Secretariat, in consultation with the Chairperson, identified experts in the relevant areas to draft technical documents. All the expert reviews were subjected to extensive peer review, which in one case included an expert meeting. 3. At its meeting on 5 February 2009, the Bureau of the Negotiating Body reviewed the progress made in the preparation of the expert reviews and provided further guidance. 4. The expert review on the feasibility of an international track-and-trace regime for tobacco products is annexed and herewith submitted to the Negotiating Body for information.
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ANNEX EXPERT REVIEW ON THE FEASIBILITY OF AN INTERNATIONAL TRACK-AND-TRACE REGIME FOR TOBACCO PRODUCTS
1. 1.1
Introduction Need for a feasible track-and-trace regime
A feasible, effective track-and-trace regime is needed because of the lack of adequate control on the international movement of tobacco products. The absence of a secure track-and-trace regime in international trade encourages the illicit market by giving smugglers access to a large supply of tobacco products free of taxes and duties. A track-and-trace regime would contribute to preventing the diversion of tobacco products into illicit channels and ensure better law enforcement. This paper outlines the feasibility of track-and-trace arrangements at international level; it does not cover the characteristics of national or regional systems. It does, however, cover the characteristics of a clearing house focal point at national level, which would be the interface linking national systems to the international regime. It is for this reason that the paper refers to an international track-and-trace “regime”, while the term “system” is used for arrangements at national and regional levels. The paper lays particular emphasis on the feasibility of an international regime for lower resource countries, as requested by the Intergovernmental Negotiating Body. It should be noted that the Convention Secretariat is undertaking assessments in selected countries, at the request of the Chairperson of the Negotiating Body, to assess the technological and resource requirements that will be needed to implement the regime at national level, particularly in lower resource countries. The results will be presented to the Negotiating Body at its third session. 1.2 Article 15 of the WHO Framework Convention on Tobacco Control
As the smuggling of tobacco products, both authentic and counterfeit, results in large economic losses to governments and in the availability of cheap tobacco products, it is of great concern to public health. Article 15 of the WHO Framework Convention on Tobacco Control accordingly obliges Parties to take all necessary steps to curb illicit trade in tobacco products. One step that is identified is a practical tracking-and-tracing regime. Article 15.2 requires Parties to adopt and implement effective measures to allow them both to determine the point at which tobacco products have been diverted from legal channels and to monitor, document and control the movement of tobacco products as well as their legal status. Parties are, however, given flexibility to develop either a tracking-and-tracing or any other system, as appropriate. 1.3 Obligations for tracking-and-tracing in other treaties and agreements
Few existing treaties and agreements contain obligations for tracking-and-tracing. For instance, the Protocol against the Illicit Manufacturing of and Trafficking in Firearms, Their Parts and Components and Ammunition, which supplements the United Nations Convention against Transnational Organized Crime, obliges Parties to require unique markings on firearms for the purpose of identifying and tracing them. This international instrument for tracing firearms was adopted by the United Nations General Assembly in 2001 and entered into force in 2005. A notable feature of the instrument is that it
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recognizes and allows Parties to have their own systems, as long as they agree to share the required information in the prescribed manner. With respect to tobacco, elements for a track-and-trace regime are contained in the agreements that the European Community has concluded with the Philip Morris International and Japan Tobacco companies. While a genuine, fully functional international track-and-trace regime, generally providing for universal rules and standards, remains to be developed, there has been substantial progress in areas such as narcotic drug control and postal shipments, described in section 4 of this paper. 2. 2.1 Possible objectives of an international track-and-trace regime Definitions
“Tracking” and its variants refer to the ability of competent authorities to monitor systematically the movement of tobacco products from the place of their manufacture, through the distribution chain to the intended market of retail sale, ensuring that all relevant duties and taxes have been paid. “Tracing” and its variants refer to the ability of competent authorities, at the time of an audit or seizure of a genuine product, to recreate the route taken by a tobacco product from the place of its manufacture, through the distribution chain to the point at which the product was diverted into illegal trade channels. 2.2 Purposes
The purpose of an international track-and-trace regime would be twofold: first, to allow authorities to monitor the movement of tobacco products internationally in order to avoid their diversion into illegal markets and to ensure that the relevant duties and taxes have been paid (tracking), and, secondly, to allow authorities to identify where the tobacco products were diverted into illegal channels (tracing). 2.3 Holistic approach
An effective international track-and-trace regime would address both tax revenues and law enforcement. In order to be really effective, however, it should be complemented by other measures at national or regional level, such as a licence or control system, customer identification and verification, record-keeping, security and preventive measures. Such measures are prerequisites for an international track-and-trace regime. Only after a national or regional system has been established and a Party has the necessary measures in place for information sharing internationally can that Party effectively join an international tracking-and-tracing regime. A holistic approach is therefore important in designing the regime. 3. 3.1 Possible preconditions for a feasible international track-and-trace regime Cost
In order to be cost effective and to take into account the situations of countries with low resources, it is essential that the regime not require any particular technology, method or system.
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Track-and-trace systems are usually based on a particular technology, or a particular method or system that meets the needs, means or legislation of a country. A feasible international track-and-trace regime should allow different systems at national or regional levels, which are secure and can be upgraded by Parties from time to time. In particular, countries would adopt or retain an available technology or method, provided they can share relevant information with other countries and competent authorities in a timely manner. The main costs of an international tracking-and-tracing regime would be for information-sharing tools and standards, the establishment of a clearing house facility at international level and focal points at country level, and ensuring the respective data flow. Examples of funding for most of the cost of such a system cover a wide range, from governments to the industry (based on voluntary agreements or government regulations). Another reference to possible funding mechanisms in a related area is given in the progress report of the working group on Articles 9 and 10 of the WHO Framework Convention on Tobacco Control, presented to the third session of the Conference of the Parties, which lists the following possible sources for financing tobacco product regulation programmes: designated tobacco taxes, manufacturing and/or import licensing fees, product registration fees, tobacco selling licences and non-compliance fees levied on the industry. 3.2 Global standards
While an international track-and-trace regime should not impose a particular system, it should nevertheless mandate certain essential elements, including the functional requirements and parameters that must be met to enable verification of the origin and authenticity of tobacco products. Global standards would be needed that clearly define the basic requirements and procedural modalities to be followed in designing and implementing a traceability system. They could include, for instance, the identification of Parties, items and events; labelling, marking or tagging products; the nature and type of data to be captured and collected; record-keeping, archiving and data storage; communication; and information sharing, retrieval and search. This minimum set of core global standards would allow for a common, cost-efficient, flexible approach to tracking-and-tracing, independently of the available technology. Countries with low resources would benefit from such an approach. While the full range of benefits to be derived from adopting such standards for tobacco products is still to be demonstrated at global level, some can be identified. For instance, it is technically feasible to build upon existing practices, thus eliminating the need to purchase, create or integrate new systems. In addition, such standards are normally expressed in a common language that is neutral and acceptable internationally. Developments in technology and methods should be anticipated, to ensure that the regime does not become outmoded and remains efficient, secure and cost-effective. Consequently, an international track-and-trace regime should be based on standards that are not “frozen” but open to further development and adjustment at international level. Examples of open standards are those set by GS1, an international standards organization. These standards have been endorsed by the International Organization for Standardization (ISO) and the European Committee for Standardization. Adoption of the GS1 traceability standard, which is
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compatible with ISO standard 22005, would ensure maximum interoperability among traceability systems throughout the supply chain. 4. Experience in other areas
A feasible international track-and-trace regime for tobacco products would be based on practices and experience in monitoring the physical flow of goods or services as well as information flow in other sectors. Thus, examining progress made in other sectors, such as food, postal shipment and health, could be useful. 4.1 Food traceability
The importance of promoting exchange of information on food safety among countries and improving collaboration among food safety authorities at national and international levels is widely recognized. WHO has thus launched an International Food Safety Authorities Network (INFOSAN), which will integrate a food safety emergency network (INFOSAN Emergency). The latter network complements the existing WHO Global Outbreak Alert and Response Network, which includes a Chemical Alert and Response component. While these are not in the nature of full tracking-and-tracing regimes, they provide useful examples for establishing central focal points in countries and a centralized database (in this case, WHO). Likewise, the European Commission is sponsoring a five-year project known as TRACE to increase consumers’ confidence in the authenticity of European foods by ensuring complete traceability throughout the “fork to farm” food chain. The objective of the TraceFood Framework is to enable traceability throughout the supply chain in electronic form. The project focuses on standardization, as information technology requires standardized words and grammar to structure information and communicate. The TraceFood Framework provides users with the necessary infrastructure, including electronic exchange of information in a standardized eXtensible Markup Language (XML) format and definition and unique identification of traceable units through GS1 codes. 4.2 Health and pharmaceuticals
WHO is presently developing an international mechanism for sharing viruses and benefits. Technical discussions on the scope and content of an influenza virus traceability mechanism have taken into account the specificities of different regions and of developing countries. The system will be owned and managed by WHO. The use of track-and-trace systems is also being considered in other health areas, such as the pharmaceutical sector and industry, which would use global traceability standards to tackle counterfeits. 4.3 Narcotic drugs control
The United Nations Office on Drugs and Crime has designed a national drug control system, to which approximately 50 countries were linked in 2008. This management information system enables exchange of information among commercial companies, national drug control administrations, customs offices and international narcotics control bureaux. The system is used by national administrations to keep track of all individual transactions and data ranging from issuance of licences, import and export authorizations, certifications and pre-notifications of international licit trade to domestic trade.
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This Internet-based system allows national monitoring of information on production, manufacture, consumption, confiscation and seizure and also offers electronic data interchange among countries and international narcotics control bureaux. The national drug control system can track and trace consignments and exchange data at national and international levels, even if different systems are used (with XML as the standard). The system can also be integrated with other online monitoring and tracking systems. 4.4 Postal shipment
Some progress has been made in the development of a global tracking-and-tracing system in the postal shipment sector. The Universal Postal Union (UPU) is setting up a global monitoring system to provide each participating designated postal operator with precise information on the quality of service performance results for inbound mail, which will be linked to remuneration of terminal dues. The UPU global monitoring system is based on radio frequency identification transponders inserted into each letter or parcel, which are automatically recorded by gates or readers installed at the office of exchange or air mail unit of each receiving designated postal operator. The system follows the basic principles of being customer-driven, globally applicable, affordable, transparent and fair, sufficiently accurate and reliable, external to UPU members, locally relevant, simple and continuous. 5. Technical feasibility of an international track-and-trace regime
The infrastructure for a track-and-trace regime would include: unique numbering of traceable products, a harmonized vocabulary, standard rules for electronic coding and transmittal of relevant data, common practice for measuring and collecting traceability data and appropriate track-and-trace guidelines. Effective implementation at national level might require enactment of appropriate legislation. An international tracking-and-tracing regime would have to include the following elements: 5.1 (a) Marking, coding or labelling Unique identification
A secure, unique product code or stamp that identifies the product is the main component of any tracking-and-tracing regime. Exact identification of a product is not possible only from the shipping or transport documents that might accompany the goods. In order for the regime to be effective, a product must be marked with information that will help determine where it is to be sold (the intended market of wholesale or retail sale) and when and where it was manufactured. Several large cigarette manufacturing companies already place unique identification codes on packs for product recall purposes. Marking tobacco products ensures the identification of each item (carton, packet and master case). This can be achieved by allotting a secure serialized number in a pseudo-randomized manner, so that serial numbers are not sequential but generated by an algorithm. The unique identifier should also allow for any additional information that countries might require for tracing shipments, such as the identity of the first purchaser and any known subsequent purchaser, as well as other shipping details.
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(b)
Level of marking
The level of marking that is possible might be a concern. While it may be technologically feasible to mark unit or retail packages, this would represent an additional cost, as the industry might not agree to changing production lines or the data matrix. It is to be hoped that the technology will evolve over the next few years to allow high-speed coding and scanning in most countries. (c) Level of security
Another concern might be the optimal levels of security and/or customization of tracking-and-tracing systems. A number of countries, such as Brazil, Malaysia and Turkey, have adopted proprietary integrated product authentication and secure track-and-trace systems. These applications give unique, secure codes for documents or products. Each encrypted code, visible, invisible or both, is computergenerated through a highly secure database. The technology applies to pallets, cartons, cases and individual packaging, either directly or on labels, including tax stamps. Each country, however, can decide which system to adopt, depending on its requirements, as long as the system is secure and capable of appropriate data flow and information exchange with the international tracking-and-tracing regime. The choice of technology may also be governed by costs. As part of their agreements with the European Community, major tobacco manufacturing companies, such as Philip Morris International and Japan Tobacco Companies, are marking master cases with a bar code that can be read by a person or by a computer. The bar code includes product description, date and place of manufacture, the machinery and the time of manufacture. 5.2 Scanning or recording capacity and electronic information flow
Transmission of the product code through scanning or recording, manually or with a machine (radio emission), is another important component of a tracking-and-tracing system. The cost of scanning or recording may vary, depending on the sophistication of the system. A device to capture the data can be installed at minimal cost on the production line itself. Whatever the technology, the objective is to ensure that each Party has a system for recording the markings and relevant information, as well as a system to retrieve the data. The feasibility of using an internationally standardized recording system has been demonstrated by the International Air Transport Association (IATA) with respect to boarding passes. Bar code boarding passes were introduced in 2005 and are expected to be used further by member airlines in the next few years. The minimum core elements of an international track-and-trace regime should include information that permits determination of tax status, the place of origin, the manufacturer, the production line, the first purchaser and the intended market of retail sale. 5.3 (a) Data recording and management system Management information system
Management of the data matrix is a crucial component of any track-and-trace system. The system for storing data on manufacture and distribution must be secure, facilitate remote verification of track-and-trace transactions and make it possible to reconcile data in real time.
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It would be feasible for country systems to share information at global level. This option would allow countries to build and customize their own models of tracking-and-tracing and at the same time ensure that the requisite data, in a standardized format, is shared at international level. (b) Interface of systems at international level
An international regime that coordinates and communicates with national systems would perhaps be the most appropriate strategy. For the regime to work at global level, however, countries would have to agree to international standards for information sharing, including the reporting format. It would be technically feasible to establish the interface with information technology. Active technical and information technology support and cooperation at global and national levels would thus become key elements. A software application would function at international level as a “generic” clearing house that would initially be the global clearing house. The software application could also be given and installed in countries to host their own clearing houses (focal points). These countries would then require basic information technology infrastructure, mainly an Internet connection, a server and staff. The interface could function on a basis of a “push and pool” system, in which all terminals send (directly or throughout local points) relevant information (composed of both data and a unique identifier) to the central house periodically in an agreed format (e.g. Excel, XML, comma-separated value). The central clearing house could be established and maintained in a manner decided by Parties, for example, there are instances of such clearing houses being maintained by the secretariats of respective international agreements, such as those mentioned in Section 4. The designated authorities and every possible user could then be given an access code or password to query the clearing house. The system could be queried on a restricted basis depending on the user’s authorization. 6. 6.1 Consistency of an international track-and-trace regime with World Trade Organization law What is permitted
There is no jurisprudence or decision by a competent World Trade Organization (WTO) body with respect to track-and-trace provisions. WTO rules allow countries to manage trade in goods and services in order to achieve their national health objectives. The introductory clause and paragraph (b) of Article XX (General exceptions) of the General Agreement on Tariffs and Trade 1994 (GATT 1994) permit countries to adopt and enforce the measures necessary to protect human life or health. Article XX(d) also allows Members to adopt the measures necessary to secure compliance with laws or regulations that are “not inconsistent” with WTO law, including those relating to customs enforcement and the protection of intellectual property. Members may invoke fiscal reasons, although this is not explicitly stated in Article XX(d), as the measure also serves to combat tax evasion. The Agreement on Technical Barriers to Trade allows countries to restrain trade for “legitimate objectives”, including health, as long as these are not discriminatory.1
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Article 2.2 of the Agreement on Technical Barriers to Trade.
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WTO Members are also free to set standards at the level they consider appropriate, as long as they are able to justify their decision within the WTO framework. WTO case law has clearly established that its Members have the right to determine the level of health protection they consider appropriate.1 6.2 What is not permitted
WTO rules and jurisprudence do not give countries a free hand. Under the Agreement on Technical Barriers to Trade, the technical regulations and standards, including packaging, marking and labelling requirements and procedures for assessing conformity with technical regulations and standards, must not create unnecessary obstacles to international trade. Technical regulations should not be more traderestrictive than is necessary to fulfill a “legitimate objective”. When a technical regulation is prepared, adopted or applied for one of the legitimate objectives explicitly mentioned in the Agreement and is in accordance with relevant international standards, it is presumed not to create an unnecessary obstacle to international trade. In addition, that Agreement lists “ineffective or inappropriate means” of fulfillment of “legitimate objectives”.2 Countries must respect the fundamental WTO principles of non-discrimination (in particular most-favoured nations treatment and national treatment). In order to clarify the coverage of the Agreement on Technical Barriers to Trade with respect to labelling requirements, its Committee decided that Members are obliged to notify all mandatory labelling requirements that are not based substantially on a relevant international standard and that may have a significant effect on the trade of other Members. Similarly, while the exceptions in Article XX could be invoked as a legal right, they should not be applied in such a way that frustrates or defeats the legal obligations of the holder of the right under the substantive rules of the General Agreement. Measures that fall under the particular exceptions must be applied reasonably, with due regard to both the legal duties of the Member claiming the exception and the legal rights of the other Members concerned. Countries are free to set standards at the level they consider appropriate, but they should be able to justify their decisions within the WTO framework if requested by another country to do so.3 Countries should determine whether there are ways of implementing the international track-and-trace regime that are less restrictive on trade. Other WTO agreements may be applicable, depending on the provisions in the international track-andtrace regime. For instance, provisions related to trademark protection and the disclosure of product information considered by manufacturers to be confidential should be consistent with the Agreement on Trade-related Aspects of Intellectual Property Rights.
The protection of human life and health against a life-threatening health risk was characterized by the WTO Appellate Body as “vital and important in the highest degree” (see European Community. Measures affecting asbestos and asbestos-containing products, report of the Appellate Body (WT/DS/135/AB/R), 12 March 2001, paragraph 172). 2 According to WTO case law, an “ineffective means” is a means that does not have the function of accomplishing the legitimate objective pursued, whereas an “inappropriate means” is a means that is not suitable for fulfilment of the legitimate objective pursued. 3
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The Agreement on Technical Barriers to Trade therefore strongly encourages the use of international standards.
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Conclusion
It can be concluded that an international track-and-trace regime for tobacco products would be technically feasible, including for lower resource countries. An international regime would build upon and complement national or regional track-and-trace systems. In order for an international regime to be feasible, it would interface with national or regional systems according to internationally agreed, core global minimum standards. The regime would not impose a particular technology at national or regional level, so that countries could build their own systems, according to their economic, technical, enforcement and legislative capacities. The paper also argues that such a combination of a minimum core standard for sharing information at international level and a flexible system at national or regional level would make it affordable, which is another important element of feasibility. The paper also reviews relevant experiences in other areas in which attempts to develop an international track-and-trace regime have shown some progress. The experience demonstrates the feasibility of standardized information sharing at international level, in principle, a core element for an international track-and-trace regime. The paper also demonstrates that an international regime would be consistent with WTO law, provided that the conditions described above are met.
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