Statement of Authentix

Members of the Oversight Subcommittee of the U.S. House Ways and Means Committee, the Department of The Treasury’s Alcohol and Tobacco Tax and Trade Bureau, federal cigarette tax collection efforts are an important revenue generator for the U.S Government and the TTB is to be commended on its five year anniversary. However, there is more that could be done to efficiently and effectively collect federal cigarette taxes. A high-tech federal tax stamp for cigarettes harnessing new technologies such as digital stamping would provide the most effective method for federal cigarette tax collection. Along with increased efficiency of tax collection, a federal tax stamping program would help eliminate the ability of organized crime to highjack our economy through cigarette smuggling, diversion and counterfeiting. Authentix has harnessed nano-scale engineering and top-notch training programs to enable governments across the world such as India, Kenya, South Africa and Guyana  to recoup billions of dollars in lost excise tax revenue over the course of the past five years.

As a global leader in excise tax recovery, the situation in the US is a growing program with billions of dollars at stake at the federal level. These precious tax dollars that provide our nation with funds for schools, hospitals, roads, and defense are being high jacked by very sophisticated organized global crime rings.  

A Snapshot of the Illegal Cigarette Problem

Some other sources put the total loss at over $1 Billion.The global trade in illicit cigarettes is estimate to represent over 10% of cigarettes sold globally – about 600 BILLION cigarettes.¹ Each year, the Illicit tobacco trade potentially represents up to $US 50 billion worth of losses to governments worldwide.2

We all know, illicit trade in tobacco products significantly contributes to death and disease caused by tobacco consumption and to the rise in tobacco consumption by making cigarettes "cheaper, more accessible and more difficult to regulate.3 as taxes in many states have climbed, so has the illicit cigarette trade. The Bureau of Alcohol, Tobacco, Firearms and Explosives estimates they made 35 arrests for tobacco trafficking in 2003 and 162 such arrests in 2005. More than 700 new investigations have been opened in the past five years, according to Phillip Awe, the chief tobacco enforcer of the ATF.5   As recent media articles have pointed out, the Bureau of Alcohol, Tobacco, and Firearms, and Explosives have found that Russian, Armenian, Ukranian, Chiese, Taiwainese, and Middle Eastern (mainly Pakistani, Lebanese and Syrian) organized crime groups are highly involved in the trafficking of contraband and counterfeit cigarettes and counterfeit tax stamps for profit.6

Examples of Illegal Cigarette Trafficking Schemes

Smuggling occurs in a variety of ways, including counterfeit and “grey” products, illegally manufactured, counterfeit tax stamps, Internet and postal schemes, theft, and smuggling across borders and into ports.

 The Impact

As Mr. William Billingslea of the ATF states, “It's hard to exaggerate the harm caused by smuggling and counterfeiting. Governments miss out on tax revenue, legitimate manufacturers suffer lost sales and damage to their reputations, and consumers end up with inferior products. What's more, the profits from smuggling and counterfeiting provide seed money for other illegal activities such as organized crime and terrorism.” 7

What’s Being Done isn’t Enough

• In the U.S., states rely on tobacco stamping technologies from the 1950’s to protect tobacco tax revenues. These stamps have limited security and tracking features which makes it much easier for counterfeiters and smugglers to foil the tax recovery system in place.

Unlike many countries such as Canada, Malaysia and The Czech Republic, the US currently does not have a federal tax stamp and has no way of protecting our precious excise tax dollars. This is a great risk every day. There is legislation afoot, HR 5689, that is calling of the mandate of a digital tax stamp for cigarettes sold in the US.

Some will say digital technology is immature and we should stay with the status quo. We would argue, and so would countries from around the world, as well as many of our Fortune 500 clients, that indeed the technology does exist and has enabled our clients to recover over $5 billion in lost revenues in the last five years.

The Authentix Digital Tax Stamp Solution is customizable to fit customer needs. The solution can authenticate, serialize and track cigarette packs as they move from distributors’ warehouses throughout the supply chain.

A high tech digital printed on demand federal tax stamp would be a leapfrog advance from current countries practices and would significantly reduce the ability of criminals to get smuggled and counterfeit product into our country and thus reduce the ability of foreign operatives to highjack our valuable tax dollars.

Authentix Offers a Better Solution

Authentix offers a digital tax stamp solution that enables governments to collect tobacco tax revenues effectively and track the status of legally issued tax stamps electronically. By using digitally printed on-demand stamps with remote and field verification capability, this solution ensures a high level of security and data integrity, accurate and customizable reporting and makes it much easier for governments to recover lost tobacco tax dollars.

The Authentix Excise Tax Stamp Management System is a web based application. New users will be registered after they file an online request and complete an electronic application. The request will be directed to Authentix to verify completeness and will be forwarded to appropriate tax collection authorities for disposition. The applicant will be automatically notified; via e-mail, phone or fax, once a decision is made to approve, reject or when additional information is required. Authentix will act upon the request based on the decision made by the authorities. This process can take as little as few minutes or several days depending on the protocol set by the authorities for the review process.

Properly registered manufacturers will have access to their account through a secure web portal. Upon logging in on the system the manufacturer will be able to review status of pending orders, initiate new orders or otherwise manage his/her account The process of ordering new stamps will as simple as filling in and configuring an online order request form and specifying information about type of stamp required, stamp denomination, etc.

Individually serialized stamps will be delivered to manufacturers in singulated stacks for application on cigarette packs. Most cigarette manufacturing equipment has the capability to apply the stamps before cellophane wrapping is applied to the cigarette packs. Information about tax stamps used can be collected from the manufacturing/assembly line. This data will be aggregated and shall be forwarded to Authentix through a secure portal for archives and future investigations.

Only authorized revenue collection agency personnel will have access to this information. The system will provide full search and indexing capability to assist investigations for validating tax stamps as they are intercepted in the field ( at distribution centers or at retail stores). Authentix will provide all required instruments for authenticating stamps and validating stamp IDs.

Authentix offers secure web-enabled architecture using HTTPS (128 bit SSL) and proprietary encryption technologies to facilitate exchange of information throughout the platform. Users are able to securely login using a standard web browser. Once access is granted by the firewalls, transaction processing layer will interact with various databases to respond to queries. All available databases (Reports, Audit, Stamps, Transaction and Notification) are physically isolated and protected behind a secondary firewall.

We recommend a phased deployment, by geography or by brands.

Carlyle Senior Advisor, Charles Rossotti, who from 1997 to 2002 served as Commissioner of Internal Revenue Service believes, “In particular, Authentix’ Excise Tax Recovery Programs provide government authorities with the ability to effectively authenticate and track goods to ensure tax revenues are optimized rather than lost altogether, a major problem, for example, in tobacco and oil and gas industries. I look forward to working with the Authentix team to further expand the company’s global client base.”

The Authentix solution enables law enforcement authorities to authenticate the digital stamps and verify the embedded information on the stamps in the field via simple-to-use and secure handheld instruments.

Authentix digital tax stamp with multi-layered security features and track & trace technology 

Authentix Advantages

• Multiple layers of security features leveraging nano-scale technology, tamper resistance and intaglio printing
• Can track each stamp as applied and distributed
• Delivers a digitally encrypted, counterfeit-resistant tax stamp
• Each stamp carries a unique serialized identification code

Conclusion

 Authentix once again thanks the Committee on Ways and Means Oversight Subcommittee Department of The Treasury’s Alcohol and Tobacco Tax and Trade Bureau for making valiant efforts to keep tobacco taxes from and urges the adoption of a more efficient way of monitoring, tracking and authenticating tobacco sales so they provide the maxium amount of federal tax dollars. 

About Authentix

Authentix is a trusted partner of Governments and Brand Owners Worldwide.

Authentix provides authentication solutions to the oil & gas, consumer goods, tobacco, spirits, banknote & agrochemical industries. Our client list includes Fortune 500 companies and governments across the globe. In the past five years, Authentix has helped our clients recover over $5 billion in lost revenues.

 For more information, please contact Authentix at www.authentix.com .

• “How Big Was the Global Illicit Tobacco Trade Problem in 2006?” Framework Convention Alliance (FCA). June, 2007.
• Ibid.
• “WHO takes aim at tobacco smuggling with new pact.” Reuters. Feb. 15, 2008.
• “With Taxes on the Rise, Cigarette Smuggling Likely to Increase,” Associated Press. April 11, 2008.
• Cigarette Trafficking Grows as Taxes Climb The Heartland Institute, Budget & Tax News. June 1, 2006.
• “Illicit Cigarette Trafficking and the Funding of Terrorism.” William Billingslea. ATF. The Police Chief Magazine. February 2004.
• The Counterfeit Trail. Tobacco Reporter magazine blog. February 2008.