Traceability of tobacco products: call for tenders rejected by Pakistani courts, Inexto clearly linked to the tobacco industry

The Karachi Administrative Court in Pakistan has just overturned the tender that had allowed a Pakistani military company, in partnership with the Swiss software provider Inexto, to win the contract for the traceability of tobacco products in the country. This association would have made the consortium the main player in the fight against parallel trade – a global scourge, particularly present in Pakistan. This judgment comes at the end of a long procedure – nearly 18 months – and controversial – because what happened in Pakistan is a summary of the worst practices affecting the fight against parallel tobacco trade. But this time, the tobacco manufacturers and Inexto seem to have gotten themselves into a tangle: corruption, a call for tender procedure modified at the request of the tobacco multinationals, evidence that the latter itself fuels parallel trade, discovery of an apparent link between Inexto and the tobacco industry... There is no doubt that Pakistan will become a textbook case at a time when the World Health Organization (WHO) is working on implementing the WHO Protocol " to eliminate the illicit tobacco trade »[1].

In Pakistan, as elsewhere, it is the cigarette companies that fuel the parallel tobacco trade.

In a article highly commented and widely cited published in March 2020, OCCRP[2] (“Organized Crime and Corruption Reporting Project”), showed how police and the regional tax office in the northern Pakistani city of Mandra successfully conducted a flagrante delicto investigation in mid-2017 against an unregistered warehouse producing cigarettes. It was owned by Philip Morris International (PMI), and involved machines that were “officially” scrapped. Another clandestine Philip Morris International factory had been discovered a few months earlier in the mountains near the Afghan border. In total, the quantities clandestinely produced by Philip Morris International must have been extremely large, given that the illicit tobacco trade rate in Pakistan is estimated at 44%. Hana Ross, a researcher at the University of Cape Town who specializes in tobacco control, said that while underreporting of cigarette production is a problem in many countries, the level in Pakistan is “abhorrent.” A similar problem of clandestine manufacturing is also strangely emerging in the European Union, as evidenced by some reportsInvestigators who uncovered the fraud believe that the machines used could only come from the tobacco industry.

A discreetly hushed-up legal procedure

Surprisingly, the legal action brought against Philip Morris International after this flagrant offence was stifled. The management of tobacco control by tobacco companies and corruption seem common in Pakistan. A situation reminiscent of Italy (where a legal action against Philip Morris International was also strangely stifled) and many other countries in Africa. However, the situation changed in mid-2019, when the International Monetary Fund (IMF) demanded that Pakistan, when it negotiated a US$6 billion bailout, set up a tracking and tracing system to combat the parallel tobacco trade. The aim of this demand was to allow the country to recover the tax revenues thus lost (see box).

A market awarded to Inexto but the dice were loaded

Pakistan responded to the IMF’s demand by issuing a tender. The OCCRP article tells us that this is not Pakistan’s first attempt at a traceability system, but that until now the tobacco companies had always successfully opposed it. Very quickly, the dice proved loaded: first, the tender document had been drafted by two former employees of British American Tobacco. Then it was modified after a meeting that took place on September 12, 2019 with the tobacco companies. Finally, the Pakistani government allowed the consortium composed of the Pakistani military telecommunications company National Radio and Telecommunications Corporation (NRTC) in tandem with Inexto to rectify its price after the submission: the offer made by NRTC-Inexto was 1,000 times lower than it had expected (0.731 rupees, or less than a penny, for a thousand revenue stamps, instead of 731 rupees, or $4.74). One explanation would be that NRTC submitted a price that had no relation to market practices, fueling suspicions that a company with no knowledge of the market had applied to offer coverage to Inexto. The latter's offer would necessarily have been refused given the monitoring of the file by international institutions (International Monetary Fund and WHO). Another is that the price was deliberately set well below those generally practiced, which allowed the NRTC consortium to know the competitors' prices after the opening of the bids. This gave it the opportunity to subsequently increase them to match market practices because of the "privileged" links between the cigarette companies and the Pakistani tax authority. In both cases, the court could only annul this call for tender.

What is the purpose of a tobacco product traceability system?

Each year, six trillion cigarettes are manufactured and consumed worldwide. Outside the Chinese monopoly, four tobacco majors share the market: Philip Morris International, British American Tobacco, Imperial Tobacco and Japan Tobacco International. The WHO estimates that 12% of these cigarettes fuel parallel trade. This rate can go up to nearly 50% depending on the country. Many studies show that parallel trade is made up of between 70 and 99% of cigarettes leaving directly or indirectly from cigarette factories. Tobacco product traceability systems aim to mark, count and track all cigarette packs produced by tobacco majors so that all related taxes are paid by them, and prevent them from feeding parallel networks that aim to find new smokers. To be effective, these systems, as recommended by the WHO Protocol, must be independent of cigarette manufacturers and their partners. The latter, on the contrary, want to control all or part of these systems in order to be able to continue to circumvent the law, which is what they succeeded in doing in Pakistan, and what they have succeeded in doing up to now in the EU.

 

From conflict of interest to corruption?

The court, seized by one of the bidders, considered that it was necessary to cancel this call for tenders with its incredible unfolding, tailor-made for the friends of the cigarette manufacturers, NRTC and Inexto. With this decision, the Pakistani judges ensured that the new call for tenders would comply with the requirements of the WHO Protocol. The international organization is in fact demanding a traceability system that is completely independent of the cigarette manufacturers. In the long term, such a system should benefit Pakistani taxpayers, because more transparency allows for more tax revenue. But the court's sanction is also a condemnation of the corruption that links Syed Shabbar Zaidi, chairman of the Federal Board of Revenue (FBR), the Pakistani tax authority, and the cigarette manufacturers. It was the latter who modified the call for tenders document at the request of the cigarette manufacturers, and it was he who allowed NRTC-Inexto to change its price after the submission of the bids. As OCCRP points out, the relationship between Syed Shabbar Zaidi and the tobacco industry is not new. Before being appointed chairman of the FBR in May 2019, he was a senior partner at the accounting firm AF Ferguson & Co, a Pakistani firm that is a member of the PricewaterhouseCoopers network, which worked in various capacities for Philip Morris and the Pakistan Tobacco Company. More broadly, it is regrettable that this affair illustrates the regular interference of the tobacco industry in public policies and in particular in this area of controlling parallel markets. Actions that are in blatant contradiction with the goodwill discourse of the cigarette companies, who today claim to be active in the fight against tobacco.  

What is Inexto?

Inexto is a Swiss company incorporated in 2016 by Impala, the holding company of financier Jacques Veyrat. The company is domiciled in a residential building a stone's throw from the headquarters of Philippe Morris International in Lausanne. It is managed by many former executives of the tobacco giant, the main ones of whom were also directly involved in the creation and implementation of the Codentify® system, the cigarette traceability system intended to combat illicit tobacco trafficking, and therefore contrary to the WHO international treaty. Inexto acquired the patents related to Codentify for 1 Swiss franc. Despite Inexto's overall communication policy claiming to be independent of the tobacco industry, the WHO, anti-tobacco organizations and experts consider that it is not independent of the tobacco industry, of which it is the avatar for tobacco traceability. This position was confirmed by the publication of confidential internal tobacco industry documents, showing regular meetings of the 4 main tobacco manufacturers and Inexto to align their strategy.

Author: Christophe Nourissier, with the contribution of the National Committee Against Smoking. Christophe Nourissier is a political analyst, strategy advisor and president of the association France et le Monde, Christophe Nourissier has been the pen of several personalities in Europe and French-speaking Africa. He is now a political commentator and actively campaigns for ecological causes. In this capacity, he contributes to several online media and writes regularly on international news.   ©Generation Without Tobacco   https://www.lejdd.fr/Societe/tabac-les-fumeuses-manoeuvres-de-philip-morris-pour-controler-la-tracabilite-des-cigarettes-3710306 [1] It entered into force on 25 September 2018 and the European Union (EU) must soon make its own traceability system compliant with this international treaty. [2] OCCRP is a nonprofit organization founded in 2006 that provides a platform for investigative reporting for members of its network of 45 investigative centers in 34 countries.

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