* EU law to require tracking of single packs to retailers

* Industry-developed system, Codentify, garners criticism

* Consultation underway on various systems

By Martinne Geller

BAYREUTH, Germany, June 18 (Reuters) – It takes a British
American Tobacco factory machine three minutes to load
4 million cigarettes onto a truck in northern Bavaria – but it
can take a lot longer to figure out whether those cigarettes end
up where they should.

So the EU is asking tobacco firms to do more to track and
trace their goods, in order to tackle a huge black market and
ultimately prevent some of the 700,000 deaths each year in the
EU from smoking-related diseases.

The legislation, which takes effect over the next two years,
is part of a package that also slaps no-holds-barred pictures of
the health effects of smoking on packets, and bans menthol.
Alongside it, an international treaty ratified by 178 countries
– the Framework Convention on Tobacco Control (FCTC) – aims to
ensure similar measures are introduced right across the world.

There’s one problem, however: The big international tobacco
firms – Philip Morris International, British American,
Japan Tobacco and Imperial Tobacco already use
a track and trace system called Codentify, developed by Philip
Morris, which they say works perfectly well.

They do not want to have to add costly third-party systems
to their massive operations, which turned out more than 2
trillion cigarettes last year.

“Our biggest concern is proprietary solution providers
pushing unproven solutions on to governments,” said Daniel
Hubert, BAT’s supply chain tracking and verification programme
manager and a director of the Digital Coding Tracking
Association (DCTA), a group made up of BAT, Philip Morris, Japan
Tobacco and Imperial.

But tobacco industry critics say Codentify is simply not
good enough, because it focuses too much on production and does
not store product codes or track them. Last year Luk Joossens,
advocacy officer of the Association of European Cancer Leagues,
and Anna Gilmore, director of the University of Bath’s Tobacco
Control Research Group, published a report listing the system’s
technical and ethical limitations.

“Codentify is not up to the task and worse than that, it
puts the fox in charge of the hen-house,” Gilmore told Reuters.

In response, Big Tobacco acknowledges that Codentify only
does part of the job, and says critics fail to include
third-party technology used alongside it to make it fully
compliant.

EU member states have two years to bring their national
legislation into line with the new tobacco directives. So most
of the new rules will apply in the first half of 2016. In the
interim, experts are analysing the feasibility and cost of a
range of alternative track and trace options from security
printing companies and IT/data processing companies, and will
report back at the end of the year.

For now it is not clear what they will recommend, but
industry sources doubt Codentify will be adopted without at
least significant changes.

“There’s a lot of resistance to allowing the tobacco
industry to use its own technology,” said Euromonitor
International analyst Shane MacGuill.

WHO MAKES POLICY?

Track and trace technology aims to pinpoint cracks in the
supply chain where cigarettes fall into illicit trade, which
according to the WHO, makes up about 10 percent of the global
tobacco market, robs governments of over $30 billion a year in
taxes and undermines public health goals with a cheap supply.

In order to comply with the EU laws, governments must impose
complex control systems on manufacturers that track every pack
from factory floor to store shelf, through all the hands it
passes with details such as time and place of production,
intended market, names of buyers and payment records.

The industry has reason to help. By stamping out illicit
trade, it would recoup millions in annual revenue lost to
counterfeits and lower the chances of costly “seizure payments”
when its goods turn up contraband.

Over three days in March, private investigators working for
Philip Morris say they made 23 purchases of illicit tobacco in
London’s central borough of Westminster, from well-known
international brands to so-called illicit whites – fake
cigarette labels made outside the EU especially for smuggling.

“If we’re finding product here, what is it like elsewhere in
more of the deprived areas?” said Will O’Reilly, a former
Detective Chief Inspector with the Metropolitan Police now
working for Philip Morris, the world’s No. 1 tobacco company.

In 2012 Philip Morris donated 15 million euros ($20.42
million) over three years to Interpol – the world’s biggest
police force, which had total operating income of 70 million
euros that year – to help it fight the black market.

Interpol says the donation was in full compliance of its
rules which allow it to accept private money “when it is in the
best interests of the organization to do so … and when
Interpol itself decides how the money is to be used.”

But sceptics say that help from the industry allows it to
maintain influence with governments and public agencies.

This is particularly worrying, they say, given historical
evidence of links between the industry and smugglers: Several
cigarette makers have been accused of oversupplying markets with
porous borders on the edge of the EU, or other low-tax markets,
in order to benefit from the additional revenues.

In 2004 Marlboro-maker Philip Morris struck a $1.25 billion
deal with EU regulators to end a legal dispute over its role in
smuggling cigarettes into the bloc. Japan Tobacco, maker of the
Winston and Camel brands, settled a similar dispute in 2007, and
BAT and Imperial, maker of Gauloises, reached voluntary
agreements with EU regulators in 2010. Their combined payments
were around $2 billion.

SCALE OF THE CHALLENGE

The industry’s current standard, Codentify, which is used in
50 world markets, focuses on product authentication, volume
control and tax verification. It does not store codes, create a
database or register the product’s journey – hence critics’
claims that the system is inadequate.

Back at BAT’s plant midway between Berlin and Munich, Bernd
Meyer, head of manufacturing for Western Europe, oversees
operations that track cartons of Lucky Strikes and Pall Malls
from production line to first customer, usually a wholesaler.

However, shipments often pass through several independent
distributors after that, and gathering that information is the
biggest challenge.

Another difficulty is tracking individual packs – which are
packed inside cartons that are fitted into cases that are placed
onto pallets, which are loaded onto trucks that leave Bayreuth,
BAT’s largest factory by volume, at a rate of about 40 per day.

Meyer says he is in the process of implementing changes
expected to cost 100 million to 200 million euros, some of which
relate to track and trace.

With the Codentify technology Meyer is installing, the
Digital Coding Tracking Association says each production line
will have a code generator that feeds into a central server
overseen by a government. Each pack would be printed with unique
codes, which would link to the codes on cartons and cases and be
scannable in transit – allowing the government and customs
agents to trace its journey.

“We are intensifying our work in this area,” Meyer told
Reuters. “It’s a lot of money because you have to equip every
single machine with that track and trace technology.”

Nonetheless, critics still question whether Codentify meets
the independence test, especially that of the FCTC, which states
that “obligations assigned to a party (country) shall not be
performed by or delegated to the tobacco industry.”

To get around this, the industry says it is willing to hand
over Codentify’s intellectual property or open itself to audits.

“We’re open to any level of inspection,” said BAT’s Hubert,
on behalf of the DCTA.

THE PRICE OF INDEPENDENCE

Any alternative system will be pricey, insiders say.

“By definition, any system where they self-regulate and
where they choose the functionality they want is going to be
cheaper than any system that comes from the outside,” said
Christine Macqueen, director of corporate affairs for SICPA, a
Swiss company that sells rival authentication technology.

It is also likely to be multi-layered as countries will have
different needs and thus need different functionalities.

Several different options are on the table at the moment.

SIPCA, which operates a tobacco tracking programs in Brazil
and Morocco and could benefit from Codentify’s rejection, says
it offers among other things data aggregation from pack to
carton and carton to master case, and supply chain visibility by
consolidating data from SICPA systems and other sources.

Britain’s De La Rue, which also makes banknotes and
passports, provides authentication systems alongside track and
trace solutions that include tax stamps, although some in the
industry worry that affixable stamps can be removed.

In fact, the EU’s feasibility experts are more likely to
recommend standards or business requirements than specific
technologies, says Michael Eads, president of Sovereign Border
Solutions, one of the companies carrying out the EU’s
feasibility study.

Their aim, he added, is to find a standard that takes into
account not just the mandates of law enforcement and public
health but also consumer protection and business efficiency.

“That’s the holy grail,” Eads told Reuters, then added:
“Whether or not we can achieve that with this particular
project, I’m not sure.”

($1 = 0.7345 Euros)

(Editing by Sophie Walker)

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