With the UK signing on to the WHO Framework Convention on Tobacco Control (FCTC) Protocol to Eliminate Illicit Trade (the Protocol), last week, the Protocol finally achieved the threshold support needed for it to enter into force.[i]

This is a significant milestone in the fight against illicit trade in tobacco, specifically; and it’s a strong signal that the international governance community has an appetite to rally its forces against illicit trade generally.

Tobacco is perhaps the most widespread and well-documented sector vulnerable to illicit trade[ii] and the WHO reports that one in every 10 cigarettes consumed globally is illicit.[iii] Like virtually all forms of illicit trade, this illegal activity robs governments of tax revenue, fuels corruption and terrorism, and expands the global illegal economy, which hampers competition and free trade and subsidizes other forms of criminality, including drugs, arms and human trafficking.[iv]

For legal businesses operating in the tobacco sector, damages include trademark infringement, lost market share and increased supply chain costs associated with monitoring infrastructure and implementing trace and trace technologies. For the consumer, it means exposure to unregulated and adulterated products.

The Protocol contains several measures that should prove effective for improving security in the legal supply chain, including the establishment of a global tracking and tracing system and stricter penalties for offences, liability and seizure payments. Moreover, it includes several measures aimed at promoting international cooperation, including on information sharing, technical and law enforcement, cooperation, mutual legal and administrative assistance, and extradition. 

While the entry into force of the Protocol is an important step in itself, this really is just the starting point. For the Protocol to effectively address the problem, many more countries will need to become parties to it.  And, it will be crucial for those parties to live up to their formal engagements and set up the envisaged institutional, regulatory and legislative measures without delay. 

Beyond tobacco, TRACIT believes that the Protocol holds enormous potential to support and leverage efforts to combat other forms of illicit trade that similarly exploit regulatory controls supply chain vulnerabilities. For example, the requirement to “implement effective controls on all manufacturing of and transactions in, tobacco products in free zones” will ramp up attention to suspect manufacturing processes in the zones. Similarly, national measures adopted under Article 18—calling on Parties to allow for the use of special investigative techniques—can be applied to a broad range of illicitly traded goods across sectors.

Other tools can be applied to fight illicit trade more broadly, such as requirements to establish a licensing system for supply chain actors and shaping effective customer due diligence processes. These measures can all serve as benchmarks for policy-makers intent on tackling illicit trade in other sectors.

The First session of the Meeting of the Parties to the Protocol will take place in Geneva, Switzerland, from 8-10 October 2018. Meetings of the Parties are expected to be convened at regular intervals of time in order to review and promote the implementation of the Protocol. The October meeting will be a particularly interesting event as the first testing ground of the willingness of its Parties to turn words into deeds. 

​Notes
[i] World Health Organization Framework Convention on Tobacco Control. (2018, June 28). The Protocol to Eliminate Illicit Trade in Tobacco Products is live! [Press release]. Retrieved from: http://www.who.int/fctc/mediacentre/press-release/protocol-entering-into-force/en/
[ii] Melzer, S. and C. Martin (2016). "A brief overview of illicit trade in tobacco products", in Illicit Trade: Converging Criminal Networks, OECD Publishing, Paris. Retrieved from: http://dx.doi.org/10.1787/9789264251847-8-en
[iii] World Health Organization Framework Convention on Tobacco Control. (2018, June 28). The Protocol to Eliminate Illicit Trade in Tobacco Products is live! [Press release]. Retrieved from: http://www.who.int/fctc/mediacentre/press-release/protocol-entering-into-force/en/
[iv] US State Department. (2015, December). The Global Illicit Trade in Tobacco: A Threat to National Security. Retrieved from: https://2009-2017.state.gov/documents/organization/250513.pdf

​Illicit trade has a particularly debilitating effect on legitimate business, in terms of lost market share, slower growth, damage to business infrastructure, reputational harm and rising supply chain compliance, security and insurance costs. For governments, illicit trade has an extensive destabilizing impact on global security due to its central role in facilitating transnational organized crime and illegal flows of money, people and products across borders. This in turn undermines the rule of law, giving rise to a hostile business environment that discourages investment.
​

In addition to distorting markets and draining public revenues, illicit trade undermines society’s efforts to achieve the United Nations’ Sustainable Development Goals (SDGs) with negative impacts on consumers, workers and the environment. 

The world needs sustained G7 stewardship 
Representing the world's seven most industrialized economies, the G7 has shown leadership in curbing several illicit trade issues. At the 2006 St. Petersburg Summit, Leaders agreed to strengthen individual and collective efforts to combat piracy and counterfeiting,[3] and six years later at Camp David they underscored the role that high standards for Intellectual Property Protection (IPR) and enforcement have in combatting illicit trade in pharmaceuticals.[4] At their 2013 Lough Erne Summit, Leaders affirmed commitments against the illicit trade in endangered wildlife species, corruption, transnational organized crime and human trafficking.[5] They also expressed their commitment to support responsible, conflict-free sourcing of minerals and precious stones.  The 2015 Lübeck Foreign Ministers' Statement on Maritime Security,[6] and the subsequent 2016 Hiroshima Statement,[7] also saw the G7 pledge to step up efforts to prevent illegal, unreported and unregulated (IUU) fishing. And at the 2016 Ise-Shima Summit, Leaders pledged to tackle illegal logging.[8]

These initial steps and commitments address significant areas of illicit trade and admirably demonstrate the clout of G7 Leaders to address major, cross-border socio-economic challenges. Nonetheless, there is a pressing need for sustained G7 leadership to address the persistent and multiplying threat of illicit trade to economic growth and prosperity. While globalization has brought with it many benefits, the massive volumes of international trade and the proliferation of supply chain nodes have increased complexities and vulnerabilities to the benefit of transnational organized crime. Here are some astonishing facts:

• According to the OECD, international trade in counterfeit and pirated goods has grown from $250 billion annually in 2008, to more than $461 billion in 2013, an increase of more than 80% in less than 5 years. Counterfeit goods now represent more than 2.5% of world trade – including 5% of all imports into the European Union.[9]

• The growth of illicit digital trade of copyrighted works – not included in the OECD figure – constitutes a significant portion of the value of global illicit trade.[10] The value of digital piracy in music, movies and software in 2015 alone was estimated to more than $200 Billion.[11]
• After years of decline, illegal logging is on the rise again.[12]
• Incidents of human trafficking in U.S. rose by 36% in 2016,[13]with an estimated 25 million people globally trapped in forced labor according to the International Labor Organization (ILO) and the Walk Free Foundation.[14]
• It is estimated that $133 billion of oil and fuels are illegally stolen, adulterated, or defrauded from legitimate petroleum companies every year,[15]with equally significant losses to governments through subsidy abuse and tax evasion.[16]
• The global illicit trade in tobacco has grown to more than $35 billion annually,[17] causing substantial tax losses and providing a major source of financing for organized crime.[18]
• Food fraud in the form of Economically-Motivated Adulteration (EMA) robs the global food industry of an estimated $30-40 billion each year, undermining economic growth and costing jobs, with potentially disastrous effects on the health and well-being of consumers.[19] 
• The spread of ineffective, illegal pesticides further compounds risks to sustainable food systems. And the introduction of mislabeled, unregulated, and unidentified substances and chemicals poses risks to workers, consumers, animal consumption and broader ecosystems. 

Meanwhile, the world faces new threats and new actors, including cybercrimes, violent extremism and the exploitation and misuse of digital marketplaces and social media networks.
​

Given the G7’s recurring commitment to the 2030 Agenda, these threats compel the G7 to amplify its attention to the problem and to press for implementation and enforcement of all its standing declarations against illicit trade. Without concurrent efforts to combat all forms of illicit trade – and the associated corruption and organized crime – the global community will not be able to achieve the overarching sustainable development goals to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity. Fighting illicit trade must therefore be seen not only as a global responsibility of G7 leaders, but also recognized as a prerequisite to achieve the UN SDGs. 

Spotlight on improving integrity in Customs and free trade zones Breaches of integrity in global supply chains, especially in border control, present significant non-tariff barriers to trade that hamper economic growth and trade performance. Recent figures from the OECD show that improving integrity policies in customs alone has the potential to reduce trade costs by 0.5% and 1.1%.[20]  Breaches in integrity in customs also contribute strongly to facilitating illicit trade: Customs officers are on the front-line conducting inspections and detecting and seizing illicit goods. If this role is compromised, the system fails and enables opportunities for illegal trade, criminal activity, illegal financial flows and trafficking in products and persons. Promoting integrity in customs can therefore generate dual benefits of reducing trade costs and mitigating flows of illicit trade, delivering significant benefits to the world trade system and economic development at large. 

The misuse of transshipment points in cargo routings, especially through Free Trade Zones (FTZ), represents another challenge. Deceptive transshipment practices, mislabeling and fraudulent invoices allow illegal traders to bypass sanctions, trade tariffs and regulations by obfuscating the identity of the country of origin or the illicit nature of the goods. Unrestricted regimes for transshipment and transit of goods through FTZs contribute to a wide range of illicit activities, including money laundering, organized criminal activity in illegal wildlife trade, tobacco smuggling, fraud, and counterfeiting and piracy of products. OECD research shows that an additional FTZ within an economy is associated with a 5.9% increase in the value of exported counterfeit and pirated goods on average. Enhancing transparency in FTZs is an important measure to reduce trafficking vulnerabilities and strengthen the integrity of global supply chains.

The Charlevoix Summit represents an opportunity for G7 Leaders to collectively underscore the importance of clean international trade by driving the process towards better integrity in customs and improved transparency of FTZs.

A unified business response to illicit trade
The transnational problem of illicit trade has clearly grown well beyond the capabilities of individual governments. What is needed is a sustained, holistic and coordinated response by governments to address the multifaceted nature of this threat. Equally important is the recognition that the private sector can be an important partner in the fight against the unfettered flow of fake and harmful goods across borders.[21]

Consequently, any long-term solutions to the threat of illicit trade will depend on sustained collaboration between governments and private sector partners. Business can contribute by continuing to develop technical solutions that protect the integrity of supply chain, and share intelligence, data, resources and measures that effectively control illicit activity. And business is willing to work with partners to convene stakeholders, improve awareness, expand the knowledge base, and energize the global dialogue. 

Governments, however, need to improve regulatory structures, set deterrent penalties, rationalize tax policies, strengthen capacity for more effective enforcement, and educate consumers. This is a matter of urgency and G7 government efforts to fight illicit trade should be considered investments that pay tangible dividends to economic development and global security. 

The Transnational Alliance to Combat Illicit Trade (www.TRACIT.org) is responding to this challenge by leading business engagement with national governments and intergovernmental organizations to ensure that private sector experience is properly integrated into rules and regulations that will govern illicit trade. TRACIT represents companies and organizations that have a shared commitment to combatting illicit trade and ensuring the integrity of supply chains. Addressing illegal trade – whether that be smuggling of alcohol, illegal logging, counterfeit pesticides or petroleum theft and trafficking in persons – presents common challenges for a growing number of industries. All stakeholders have an interest in stamping out illicit trade; and all benefit from collective action.

In this regard, business offers its support to the G7 to advance implementation of its many commitments from past Summits. And, we suggest that Charlevoix presents a timely opportunity for Leaders to elevate priority attention to illicit trade and work with business to address associated threats to safety, security, cybersecurity, natural resources and economic development.

Notes
[1] WEF. (2015). State of the Illicit Economy. Briefing Papers, October 2015. Cologne/Geneva: World Economic Forum. Retrieved from http://www3.weforum.org/docs/WEF_State_of_the_Illicit_Economy_2015_2.pdf
[2] CNBC. (2017, July 3). The illicit economy could be as big as a G7 country: Pro. CNBC. Retrieved from https://www.cnbc.com/video/2017/07/03/the-illicit-economy-could-be-as-big-as-a-g7-country-pro.html
[3] G8. (2006). Combating IPR Piracy and Counterfeiting. Retrieved from http://www.mofa.go.jp/policy/economy/summit/2006/ipr.html
[4] G8. (2012). Camp David Declaration. Retrieved from
https://obamawhitehouse.archives.gov/the-press-office/2012/05/19/camp-david-declaration, para 9.
[5] G8. (2013). Lough Erne Leaders Communique. Retrieved from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/207771/Lough_Erne_2013_G8_Leaders_Communique.pdf, para 40
[6] G7. (2015). G7 Foreign Ministers’ Declaration on Maritime Security Lübeck. Retrieved from http://www.mofa.go.jp/files/000076378.pdf, para 9.
[7] G7. (2016). G7 Foreign Ministers’ Statement on Maritime Security Hiroshima. Retrieved from http://www.mofa.go.jp/files/000147444.pdf
[8] G7. (2016, 27 May). Ise-Shima Leaders’ Declaration G7 Ise-Shima Summit. Retrieved from http://www.mofa.go.jp/files/000160266.pdf
[9] OECD/EUIPO (2016), Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact, OECD Publishing, Paris. Retrieved from http://dx.doi.org/10.1787/9789264252653-en.
[10] TERA Consultants. (2010). Building a Digital Economy: The Importance of Saving Jobs in the EU's Creative Industries. Paris: TERA Consultants. Retrieved from https://euipo.europa.eu/ohimportal/documents/11370/71142/Building+a+Digital+Economy,+the+importance+of+saving+jobs+in+the+EUs+creative+industries
[11] Frontier Economics. (2016). The Economic Impacts of Counterfeiting and Piracy. n.p.: Frontier Economics. Retrieved fromhttps://www.inta.org/communications/documents/2017_frontier_report.pdf
[12] Hoare, A. (2015). Tackling Illegal Logging and the Related Trade What Progress and Where Next? London: Chatham House. Retrieved from https://www.chathamhouse.org/sites/files/chathamhouse/publications/research/20150715IllegalLoggingHoareFinal.pdf; Biderman, R and Nogueron, R. (2016, December 9). Brazilian Government Announces 29 Percent Rise in Deforestation in 2016. World Resources Institute. Retrieved from http://www.wri.org/blog/2016/12/brazilian-government-announces-29-percent-rise-deforestation-2016; Plumer, B. (2015, March 2). Deforestation in Brazil is rising again — after years of decline. Vox. Retrieved from https://www.vox.com/2015/3/2/8134115/deforestation-brazil-increasing
[13] Cone, A. (2017, February 5). Report: Human trafficking in U.S. rose 35.7 percent in one year. UPI. Retrieved from https://www.upi.com/Report-Human-trafficking-in-US-rose-357-percent-in-one-year/5571486328579/
[14] Kelly, A. (2017, September 19). Latest figures reveal more than 40 million people are living in slavery. The Guardian. Retrieved from https://www.theguardian.com/global-development/2017/sep/19/latest-figures-reveal-more-than-40-million-people-are-living-in-slavery
[15]Desjardins, J. (2017, May 7). Fuel theft is a big problem. Business Insider. Retrieved from http://www.businessinsider.com/fuel-theft-is-a-big-problem-2017-5
[16]Scott, A. (2016). How Chemistry is Helping Defeat Fuel Fraud. Chemical & Engineering News, 94(5), pp. 20 – 21.
[17] Euromonitor International. (2018). Illicit Trade in Tobacco Products. London: Euromonitor International. Retrieved from http://www.euromonitor.com/illicit-trade-in-tobacco-products/report
[18] Michalopoulos, S. (2017, February 7). EU anti-fraud official: Tobacco smuggling is ‘major source’ of organized crime. EURACTIV.com. Retrieved from https://www.euractiv.com/section/trade-society/interview/olaf-official-tobacco-smuggling-major-source-for-organised-crime/
[19] PWC (2016). Fighting $40bn food fraud to protect food supply. Press release.Retrieved from https://press.pwc.com/News-releases/fighting--40bn-food-fraud-to-protect-food-supply/s/44fd6210-10f7-46c7-8431-e55983286e22
[20] OECD. (2017). Integrity in customs: taking stock of good practices. Paris: OECD Publishing.Retrieved from http://www.oecd.org/gov/ethics/G20-integrity-in-customs-taking-stock-of-good-practices.pdf
[21] OECD. (2018). Governance frameworks to counter illicit trade.Paris: OECD Publishing.Retrieved from http://www.oecd.org/gov/governance-frameworks-to-counter-illicit-trade-9789264291652-en.htm

This post was originally published by Inter Press Service (IPS)

Illicit trade in any of its forms—alcohol, tobacco, pharmaceuticals, diamonds, timber, ivory and oil—sits at the nexus of two social-economic disorders that challenge global stability. Firstly, the global economy remains on unsteady footing, and governments are scrambling to stimulate growth, employment and investment in infrastructure and other public programs. Secondly, the upswing in criminal activity and lawlessness—in some cases punctuated by terrorist acts—has left us all questioning our security for this generation and the next. Illicit trade exacerbates both problems and presents governments with an immediate challenge to address their pervasive and significantly negative impacts on our economy and our civil society.

Economic Impacts Deriving from Illicit Trade in the Petroleum Sector
Every year an estimated $133 billion of fuels are illegally stolen, adulterated, or defrauded from legitimate petroleum companies.[1] Roughly 30% of Nigeria’s refined fuel products are smuggled into neighboring states [2] and pipeline fuel theft in Mexico is at record levels [3]. This illegal activity creates an enormous drain on the global economy, crowds out billions from the legitimate economy and dislocates hundreds of thousands of jobs. 

Equally significant are associated fiscal losses from tax evasion and subsidy abuses that deprive governments of revenues for vital public services and force higher burdens on taxpayers—especially in developing countries where petroleum industry royalties and tax payments finance development. For example, Philippines loses $750 million annually in tax revenue from fuel adulteration and smuggling.[4] The Honorable Dakila Cua, Chairman of the Philippines House Committee on Ways & Means, told me that fuel smuggling is a vicious practice that deprives his country of precious revenues for investment in infrastructure. He confirmed that the problem is deeply embedded in the Philippine economy and throughout ASEAN economies. The value of the illegal fuel trade in Southeast Asia ranges from $2 to $10 billion a year.[5]

Links to transnational Organized Crime and Terrorism
The links between illicit trade and organized crime are well established. The global economic value of oil and fuel theft ranks amongst the highest of transnational crimes. Research shows connections between oil theft and drug cartels in Mexico; insurgents and human traffickers in Thailand; human smugglers in Libya; terrorists in Ireland; militant groups in Nigeria; rebel movements in Mozambique, and of course, ISIS.[6] This activity significantly threatens national and regional stability, and creates significant deterrents for business investment, which thrives in stable, peaceful environments. Notably, the criminal connection is not limited to oil and fuel theft. Transnational organized crime is involved in all forms of illicit trade, from human trafficking networks and tobacco smuggling, to the involvement of the Mafia and Camorra in the trade of counterfeit goods. Moreover, profits from one illegal activity are frequently used to finance a different type of illicit trade.  

Illicit Trade and Environmental Degradation
Illicit trade in the petroleum sector perpetuates extensive ripple effects across global markets, including undercutting sustainable development and hastening environmental degradation. The process of illegal tapping, bunkering and ship transfers, for example, carry a higher probability for oil spills and blown pipelines, potentially causing significant damage to soil fertility, clean water supplies and marine life. Consequently, fighting fuel fraud is a global responsibility, as well as a prerequisite for the achievement of the UN Sustainable Development Goals.

Solutions
Despite these severe negative effects, the global problem of oil and fuel theft so far has been largely unchecked and remains mostly hidden from international attention.  Any long-term solution will be dependent on sustained collaboration between governments and the private sector. 
Business will contribute by continuing to develop technical solutions, such as fuel markers and GPS tracking. Modern fuel-marking programs allow governments to identify stolen or diverted fuel and reduce fuel losses, while delivering improved integrity in fuel supply chains, mitigating tax evasion and subsidy abuses, and plugging revenue drains. Business also can share intelligence, data, resources and measures that effectively control this illicit activity. And Business is willing to work with partners to convene stakeholders, improve awareness, expand the knowledge base, and energize the global dialogue. 

​Governments, however, need to improve regulatory structures, set deterrent penalties, rationalize tax policies, strengthen capacity for more effective enforcement and educate consumers. This is a matter of urgency and government efforts to fight illicit trade should be considered investments that pay tangible dividends to economic development and global security. 

TRACIT is responding to this challenge by leading business engagement with national governments and intergovernmental organizations to ensure that private sector experience is properly integrated into rules and regulations that will govern illicit trade.  Our specific engagement in the petroleum sector stems from the shared understanding that a united industry voice is required to track, report and stop fuel fraud – from extraction to production to distribution to consumers. 

The geographic diversity and wide-ranging methods of oil and fuel theft and fraud require a comprehensive global approach to mitigating the problem. All stakeholders have an interest in stamping out illicit trade; and all benefit from collective action.

​
​Notes
[1] Desjardins, J. (2017, May 7). Fuel theft is a big problem. Business Insider. Retrieved from http://www.businessinsider.com/fuel-theft-is-a-big-problem-2017-5
[2] Ralby, I. M. (2017). Downstream Oil Theft: Global Modalities, Trends, and Remedies. Washington, DC: Atlantic Council. Retrieved from http://www.eurocontrol.ca/images/euo_content_images/euo_pdfs_in_articles/AtlanticCouncil_Report-Downstream_Oil_Theft_January_2017.pdf
​[3] García, K. (2018, April 5). Crece sin freno sangría a ductos de Pemex. El Economista. Retrieved from https://www.eleconomista.com.mx/empresas/Crece-sin-freno-sangria-a-ductos-de-Pemex-20180405-0016.html
[4] ADB. (2015). Fuel-Marking Programs: Helping Governments Raise Revenue, Combat Smuggling, and Improve the Environment. The Governance Brief, 24. Retrieved from https://www.adb.org/sites/default/files/publication/174773/governance-brief-24-fuel-marking-programs.pdf
[5] Gloystein, H and Geddie, J. (2018, January 18) Reuters. Shady triangle: Southeast Asia's illegal fuel market.
Retrieved from https://www.reuters.com/article/us-singapore-oil-theft-southeast-asia-an/shady-triangle-southeast-asias-illegal-fuel-market-idUSKBN1F70TT
​[6] Ralby, I. M. (2017). Downstream Oil Theft: Global Modalities, Trends, and Remedies. Washington, DC: Atlantic Council. Retrieved from
http://www.eurocontrol.ca/images/euo_content_images/euo_pdfs_in_articles/AtlanticCouncil_Report-Downstream_Oil_Theft_January_2017.pdf