Lebanon Launches Tobacco Authentication and Traceability Programme

Prime Minister Najib Mikati of Lebanon was guest of honour at the recent launch of a countrywide authentication and traceability programme to combat tobacco illicit trade and promote economic reform.

Regie President and Director General Eng Nassif Seklaoui addresses Prime Minister Najib Mikati and members of Cabinet at the traceability solution inauguration.

Lebanon has the third highest cigarette consumption rate per capita in the world, and is one of five countries that devotes more than 1% (ie. 3.2%) of its agricultural territory to tobacco farming.

The tobacco industry should therefore be providing a solid source of tax revenue for the Lebanese government… were it not for the fact that revenue collection is hampered by an illicit cigarette trade level of around 25%.

Hence the reason for implementing the new authentication and traceability programme.

The programme was developed by OpSec Security and SCOPSIS (a digital transformation company in Lebanon), in collaboration with the Regie Libanaise des Tabacs et Tombacs (Lebanese tobacco and tombac authority).

Regie Libanaise is a state-owned tobacco producer mandated by the Lebanese Ministry of Finance to manage the Lebanese tobacco market. This includes exclusive rights to purchase locally grown tobacco leaf, manufacture and distribute tobacco products within Lebanon – including export/import activities – and oversee an anti-smuggling unit.

The Regie is the sole entity in Lebanon able to purchase from and negotiate trade agreements with transnational tobacco companies (TTCs), and therefore plays a role between TTCs and wholesale distributors, in addition to supplying domestic brands to wholesalers.

Supply chain not compliant

Despite the sole authority of the Regie over the Lebanese tobacco market, some supply chain actors are far from compliant.

A 2022 report published by BMC Public Health 1 describes how the 800 licenced wholesalers in Lebanon are, in theory, controlled by the Regie, which has the right to suspend their licences.

As for retailers, although licenced by the Regie, they are not directly controlled by it, and communication with them is through the wholesalers. This makes retailers largely dependent on wholesalers for their tobacco supply.

And while the Regie has authority over retail prices and sets the profit margins for both wholesalers and retailers, in practice, this control is quite limited.

The wholesalers seem to have formed a cartel that controls most of the licences, explains the report. The large ones effectively control the wholesale market, and these have direct links with TTCs, with whom they can create artificial shortages to increase profit, or agree to promote one brand over another.

Wholesalers also have the power to manipulate retail prices, and some retailers take advantage of this by charging prices above those set by the Regie.

In addition, the report found through informal conversations with retailers, that illicit tobacco products are being sold alongside licit products, although this mainly occurs outside of Beirut, where there are fewer customs police.

Where does illicit trade come from?

According to a 2019 Oxford Economics report 2, the level of illicit trade of domestically produced cigarettes in Lebanon is negligible. This assumption is based on the findings of an empty pack survey coupled with industry market intelligence, and is supported by the fact that the production and distribution of domestic products are tightly controlled by the state authority.

This leaves non-domestic products, which constitute almost all of Lebanon’s illicit cigarettes. Specifically, these are broken down into counterfeit, contraband, and illicit whites (cigarettes that are legally produced in one country, usually for the sole purpose of being smuggled into other countries).

The majority of non-domestic illicit inflows were identified by the Oxford Economics report as originating from Iraq. In total, over 64% of illicit consumption was composed of Iraqi products, following a 20% increase in their consumption in 2018.

There was also an increase in brands labelled as duty-free, representing 12.6% of illicit inflows, where analysis suggested these brands did not enter the market through legitimate duty-free channels.

Illicit brands from Syria represented a further 10.4% of total illicit consumption, following a 33% increase in consumption in 2018. The increase coincided with the reopening of the last remaining official Lebanon-Syria border in December 2017.

These incidents of illicit trade essentially involve cigarettes that were legitimately produced in their country of origin but smuggled into Lebanon without payment of duties. As far as illegally produced, counterfeit cigarettes are concerned, however, the report advises that these represented just 2.6% of Lebanon’s total illicit consumption in 2018.

In total, an estimated 3.7 billion illicit cigarettes were consumed in 2018 in the country, representing 25.9% of total consumption – or more than one in four cigarettes.

Furthermore, a Q2 2019 empty pack survey indicated that this trend continued into 2019, with the illicit incidence rising to 28.1%.

Regie initiative

The prevalence and growth of illicit cigarette consumption in Lebanon was integral to the launch of the First National Conference Against Illicit Trade in March 2018 – an initiative spearheaded by the Regie to encourage security, judiciary, military, and administrative agencies in Lebanon to join forces and tackle illicit trade.

This initial meeting generated a series of recommended actions for adoption within five years, including actions to raise public awareness, update legislation, enhance monitoring, and support the national industry.

One such action has now been realised, exactly five years later, in the shape of the new authentication and traceability programme.

Programme specifics

The programme consists of the use of physical, high-security labels with unique identification codes, as well as secure information transfer systems, and mobile authentication devices.

In addition, OpSec will utilise its web monitoring technology to ensure any attempt by illicit traders to sell counterfeit labels via online marketplaces, websites or social media will be captured, removed and reported to enforcement officials.

Although some stakeholders refer to the labels as ‘digital tax stamps’, they are not actually tax stamps, as they are not issued by the Lebanese tax authority as a visible proof of tax paid. Instead, they are authentication labels with unique identifiers, which are purchased by the Regie from OpSec Security, and then applied, by the Regie, to all tobacco products sold on the Lebanese market.

At their simplest level, the labels offer a quick, visible way of identifying which products are licit and which are not, just by looking at them with the naked eye and, in particular, noticing the presence of a holographic security feature.

As additional security, at multiple levels, the labels are equipped with semi-covert and covert features for use by inspectors and supply chain operators.

The serialised codes, printed onto the labels, will allow products to be tracked through the supply chain and traced back to their origin, in order to identify any points along the chain where genuine goods may have been diverted into the illicit market.

The ability to trace a product to a particular site or retailer allows enforcement officials to gather information on common distribution routes and practices and the role that particular wholesalers, retailers – or even TTCs – might play in the smuggling network. Furthermore, the programme will help inspectors identify the culprits involved in acts of non-compliance such as retail price manipulation.

While the programme will initially focus on tobacco products, discussions are already underway to expand it into other public sectors.

1 - Alaouie, H., Branston, J.R. & Bloomfield, M.J. The Lebanese Regie state-owned tobacco monopoly: lessons to inform monopoly-focused endgame strategies. BMC Public Health 22, 1632 (2022). https://doi.org/10.1186/s12889-022-13531-z

2 - www.oxfordeconomics.com/resource/levant-illicit-tobacco-2019/