Industry insider complaint threatens to upset Big Tobacco’s applecart

At first glance, a complaint recently filed in New York might seem nothing more than a dry legal dispute. However, closer inspection reveals that the document is filled with embarrassing allegations against tobacco giant Philip Morris International (PMI) stemming from one of its longtime collaborators, Israeli businessman Raoul Setrouk. Among other accusations, Setrouk alleges that PMI facilitated the theft of his intellectual property, involved itself in the illegal smuggling of its own products (including into the US-embargoed nation of Libya) and manipulated survey data underpinning widely cited KPMG reports in order to conceal its wrongdoing.

As well as shining a fresh spotlight on the serious problem of the parallel tobacco trade, the complaint serves as vindication for the public health campaigners who have long insisted there was something fishy about KPMG’s findings—and that, more broadly, tobacco manufacturers leave dirty fingerprints on any research and policy initiatives. The question now is whether the recent complaint will serve as a wake-up call to regulators across the globe, many of whom have sleepwalked into partnerships with the very industry undermining their tobacco control efforts.

A laundry list of allegations

After an unceremonious parting of ways, Setrouk is accusing PMI of appropriating intellectual property belonging to his company MSIntelligence (MSI), a longtime collaborator of the tobacco titan which provides data on consumption of illegal cigarettes in over 100 countries around the world. But the complaint has implications far beyond Setrouk’s personal beef with PMI. In his court filing, the businessman floated a number of serious allegations, unsurprisingly denied by PMI. In particular, the complaint claims PMI was complicit in the smuggling of their own cigarettes into multiple overseas markets, including Libya – a market that has been subject to US sanctions since 2011.

What’s more, Setrouk claims the tobacco giant directed accountancy firm KPMG to manipulate the data provided by MSI in order to obfuscate and obscure its own contraband. KPMG’s embroilment in the saga is not terribly surprising—the auditing giants have a long and checkered business history with the tobacco industry, including rebranding British American Tobacco (BAT) as a “responsible company” and producing unverified reports arguing against the introduction of plain packaging.

This latter tactic – churning out partisan reports which eschew transparency and forego external corroboration in order to promote a certain point of view – is KPMG’s favorite trick, and one that has been put to good use by PMI. Since 2004, PMI has commissioned KPMG to undertake an annual remit of the illegal tobacco trade under various monikers, including Project Star, Project Sun and, most recently, Project Stella. The problem? Whatever its title, those reports have been consistently criticized by academics, campaigners, and independent adjudicators for using unclear and unreliable methodologies, relying too heavily on data supplied by PMI themselves, exaggerating the scale of the illicit trade, and concealing PMI’s role in it.

Par for the course for Big Tobacco

Why would PMI resort to such underhand tactics, when they claim the illicit trade directly harms their business model? For the same reason their Big Tobacco counterparts continue to exploit the black market to sell their own cigarettes. Despite the tobacco industry’s claims, actual counterfeit smokes account for a small sliver of the parallel tobacco trade, with evidence showing contraband products manufactured by the major tobacco firms account for up to 70% of the global illicit trade.

In a word, the objective is profit. Since PMI and their rivals continue to earn the same amount from a distributor regardless of whether the product is taxed or not, it’s in their best interests to evade taxation where they can. This generates lower prices for the consumer and leads to greater sales, particularly among underprivileged and underaged audiences.

This parallel tobacco trade has become an issue not only because public coffers are being jilted and the fight against non-communicable diseases is being undermined, but also because ample evidence has suggested tobacco trafficking is a major source of revenue for organized criminal groups and terrorist organizations, particularly in Eastern Europe and Africa.

To combat this parallel trade, the World Health Organization (WHO) adopted its Framework Convention on Tobacco Control (FCTC) and associated Illicit Trade Protocol (ITP), which identified a track-and-trace (T&T) system monitoring products at every stage of the supply chain as crucial to cracking down on the black market for cigarettes. PMI responded by developing its own T&T software, named Codentify, then distancing itself from the technology by selling it off to a third party (allegedly for just one Swiss franc) and rebranding it as Inexto. Despite the name change, Inexto’s staff includes ex-top level PMI employees and links between the two companies—as well as with the rest of the tobacco industry— seem as robust as ever.

A long-overdue catalyst for change?

For any government to adopt a T&T system which has links with Codentify, PMI, or any other representative of the tobacco industry would go against the very objectives for which it is being implemented, and public health experts including FCTC head Dr. Adriana Blanco Marquizo have warned against allowing any industry interference in the strongest possible terms. Indeed, the FCTC explicitly states any industry interference in systems to control the illicit tobacco trade is unacceptable, but that hasn’t prevented dozens of countries from using Codentify or Codentify-inspired technology to date. That is not even including the European Union, who has allowed companies associated with Codentify to implement key components of the bloc’s track-and-trace system.

Big Tobacco’s attempts to hijack anti-smuggling measures are so evident that it should come as no surprise that leaked industry documents reveal that they, in their own words, wish to “proactively shape T&T regulations” going forwards. Hopefully, the allegations thrown up by Setrouk in his recent complaint – and the fact Setrouk is an industry insider with intimate knowledge of the sector – will help to finally change regulators’ attitudes towards Big Tobacco and illuminate the path towards an effective and impartial T&T system.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes