Delegates at the 2nd Tax Stamp Forum in London witnessed a rare spectacle, namely one tobacco giant endorsing a system developed by a rival.

This system is called Codentify™, details of which have been scant until now. PMI was invited to make a presentation about the system at the Forum, and originally chose to do so using Filtrona C&SP, a licensee of the technology and their systems integrator. But due to other commitments, Filtrona were unable to make it. So, to the surprise of many, Jeannie Cameron from BAT presented her company’s view of the system instead.

Essential Factors of Codentify™

Ms Cameron began by noting that $35 billion is paid annually in taxes to revenue authorities by BAT alone. Unfortunately, high taxation means that 6-10% of world cigarette consumption escapes taxation, resulting in a loss to governments of $20-40 billion per year. An essential factor in reducing the illicit trade consists in securing its legitimate supply chain, and three separate aspects of supply chain security can be thus identified.

• First is tracking and tracing products, so as to monitor the movement of goods through the supply chain.
• Second is tax verification of the stated volume of products manufactured to determine the excise tax due and /or paid.
• And third is authentication via the use of covert or overt identifiers so as to distinguish between genuine and counterfeit products.

All three are important; the first relates to knowing a point of product diversion, the second is critical to protecting tax revenue whereas the third relates to trademark protection

Tax collection is a domestic issue and therefore only of interest to one country, whereas track and trace is an international issue as it relates to cross-border trade. This distinction is crucial.

Ms Cameron heavily criticized paper tax stamps as antiquated, noting that they are only used in 80 countries and, because they are physical, they can easily be stolen or counterfeited. Even though they might be strengthened by holograms or security inks, it seems that BAT’s view is that, in a digital age, it is inevitable that paper stamps will be phased out over time and eventually will be consigned to the dustbin of history.

So, hard though it was to accept the digital technology invented by a competitor, BAT was now willing to embrace it. The system uses leading edge digital coding technology printed directly onto packs at point of manufacture - an overt, human readable, unique code that can also be used for overt authentication, and which can be verified by phone, through e-mail, SMS or a dedicated internet platform.

The codes are generated by the Code Generator (CoG), a component installed on each packing line. The CoG is also responsible for counting the number of packs produced and transmitting this information to the checker (ie the tax authority) via the Manufacturing Centre Gateway. The link between the checker, the manufacturer and the CoGs is automated through a secure communications network.

For example, a unique and securely encrypted code such as TG9 XJ3 DRD GOK is human readable and would contain information on machine of manufacture, date and time of manufacture, brand variant, pack size, pack type, destination market, price. Governments, meanwhile, can retrieve volume information via online reports by SKU, manufacturer,. manufacturing facility and machine, production date and batch and time, port of destination and importer.

Besides tax verification, these digital alternatives to tax stamps can be used for product authentication purposes without the need for training or special authentication devices as the code is overt. Authentication is fast and easy, said Ms Cameron. Every stakeholder in the supply chain (authorities, distributors, retailers and consumers) can benefit. Codentify uses a patented database-free and secure online coding technology that exponentially increases system security and integrity compared to other solutions available today, she said.

The protocol (on illicit trade) to the Framework Convention on Tobacco Control treaty (FCTC) covers supply chain security, and a track & trace regime (Article 7) is a significant part of it, while the little-noted Article 5 requires that any technology for such a regime should be licenced to anyone needing it. A report on the technical aspects of track & trace was commissioned by the FCTC Secretariat and this report, published in February, was mostly critical of systems that are only applicable to a domestic setting. According to this report, international serialiasation standards are not used, events are not tracked along the supply chain, and aggregation does not take place. Any track & trace system, it states, needs to be ‘aggregated’ – ie. it would allow for each carton (200 cigarettes) to be correlated with each master case (10,000 cigarettes) and with each corresponding pallet (normally 500,000 cigarettes). The Codentify system, according to Ms Cameron, does just that.

Multiple Benefits for Revenue Collectors

There are multiple other benefits as well, she said.

• It enables integrated and automated production volume verification and production authentication, and is significant easier for tax authorities to manage, with reduced administration costs.
• It is easy to integrate with existing systems – running on standard and off-the-shelf equipment, which is already in operation in most places.
• The unique codes can be authenticated by every stakeholder in the supply chain, while the codes cannot be stolen, or diverted, thereby removing the opportunity for theft or corruption.
• There is no physical handling, as with paper stamps, banderols or tear tape, reducing costs involved in production, storage and transportation.
• There is also minimal risk of theft or loss en-route between government supplier and tobacco manufacturer. The system also has a reduced environmental impact compared to some paper stamps.

It is, she said, is affordable for all to use, aligns with the move towards e-government and, last but not least, is highly secure – with the same level of security as western banking methods.

BAT ran a pilot track & trace project in Poland and the UK and is now, said Ms Cameron, ready with it to meet the Protocol’s track & trace requirements.