Statement of SICPA Product Security

Chairman Lewis, Ranking Member Ramstad, and other Committee members, we thank you for the opportunity to provide testimony for the printed record of this hearing. The information we provide we hope will answer possible questions on the feasibility of a federal cigarette tax stamping system as proposed by Congressman Lloyd Doggett in H.R. 5689, the Smuggled Tobacco Prevention Act (the “STOP Act”) as he testifies before your committee today.

SICPA supports implementation of a federal high-tech tax stamp system. Our experience has proven that a federal system is feasible and successful in preventing counterfeiting and diversion while protecting government revenues and public safety.

SICPA offers support of the STOP Act based on our experience with tobacco stamping systems. Founded in 1927, SICPA is a trusted advisor to governments, central banks and brand owners providing security inks and integrated systems for anti-counterfeiting.

Feasibility of a Federal Stamping System

It is currently feasible to use digital tax stamp technology to establish a federal tax stamp or other tax-payment indicia for cigarettes.  SICPA has experience in operating such systems in contracts with the Federal Governments in Brazil and Turkey and was recently awarded the contract for such a system in Canada.  Provided the appropriate systems are in place, the following information could be read from the stamp by portable scanning devices in real-time at the point of inspection:

1. The denominated value of the stamp, meter impression or indicia.
2. A unique serial number or tracking code.
3. The name and address of the person purchasing (and, if different, of the person affixing) the stamp, meter impression, or indicia.
4. The date the stamp, meter impression or indicia was purchased, when it was affixed and the brand to which it was affixed.
5. The name and address of the person purchasing or otherwise receiving the tobacco product from the person who affixes the tax stamp, meter impression, or indicia and the date of such purchase or transfer.

SICPA systems worldwide have been customized with particular proprietary inks for visual authentication and encrypted with data similar to and beyond the desired items above that were priorities for Congressman Doggett.

SICPATRACE® Solution

SICPA has designed our tax stamp solution with several key attributes:

·        To provide overt and advanced covert deterrence against stamp counterfeiting

·        To provide secure stamp manufacturing and distribution processes

·        To minimize impact of the new program on key players (federal government, state governments, manufacturers, distributors) while enhancing their ability to control and monitor the program

·        To provide information technology to facilitate the ordering, distribution, authorization, audit, reconciliation and reporting of tax stamp application

·        To provide tools for to authenticate the tax stamps using individual features designed for each user group (enforcement, manufacturers, consumers, etc.)

Implementation of a federal system would likely be carried out in a similar fashion to systems used in other federal government programs.  Typically, a federal stamp is produced in a secure environment under very strict production procedures to ensure full accountability for all stamps produced.  Stamps are shipped to manufacturers where they are applied to packs prior to cellophane wrapping.  All the recognized providers of cigarette packing equipment lines have tax stamp application modules available that they can readily install on cigarette manufacturers current lines.  As stamps are applied to packs, the digital stamp is read thereby recording the stamp affixing and the brand to which it was applied.  Subsequently the stamp can be read as it is packaged in a carton and case.  As cases are shipped the unique numbers of the cases (and therefore the cartons and packs contained therein) are used to reference the destinations and each subsequent change in the chain of custody.  In the US, such a system could be adopted without interfering with the rights of the States to apply their own state tax stamp as their current practices dictate.

High-tech tax stamps are extremely difficult to counterfeit and improve upon the current stamping systems based on old technology. Adapting technology used to protect documents of value (e.g. currency, transit tickets, passports, etc.) the technical sophistication of SICPA’s proposed tax stamp will protect existing tax revenue from erosion due to counterfeiting while increasing revenues. The proposed approach would use layered security combining overt and covert counterfeit deterrent features in the printed design of the tax stamp. This approach provides multiple hurdles for counterfeiters and a ready ability to change or adjust individual features – enabling the governing body to stay ahead of counterfeiters without having to redesign the entire stamp every time a threat is discovered. The SICPA stamp design has built in flexibility to allow cost effective incremental features to be incorporated over time to continually improve counterfeit protection. While each feature is individually secure, the combination of overt, covert and machine readable security features provides a significant barrier of protection. Although copies of stamps will be attempted we provide sufficient sophisticated elements that they are virtually counterfeit proof.

Costs and Implementation

In the absence of detailed information on the number of manufacturers, number of manufacturing lines, separate locations, shipping and delivery methods, number of scanners required, etc., it is premature for us to provide an estimated timetable for implementation or approximate costs.  In Turkey, the federal system was implemented in 6 months and in Brazil it was completed in 8 months; the federal system in Canada is planned to take 6 months.  In all cases the requirements differ to some extent but give an indication of the time requirement.  In the State of California, SICPA was awarded a contract in August 2004, and full implementation of the SICPATRACE^® system began January 2005.  By June 30^th, 2005, the system was fully operational in the state, but this system only covered licensed distributors.  Stamp costs will also vary substantially dependent on what is also to be provided by way of stamp content, equipment, information systems and other services, and therefore the indicative price range is very broad from $4.00 to $30.00 per thousand.

We respectfully decline to speculate on the amount of increased cigarette tax revenues the federal government would be likely to obtain from the introduction of a stamping system, with or without a tax increase. In the State of California, $125 million in revenues were recovered in the first 20 months of the SICPATRACE^® system. It had been estimated that nearly $292 million was lost annually in the state. It is arguable that with any tax increase, the opportunity for counterfeiters becomes more lucrative and a digital stamp becomes more necessary.

The stamping of other tobacco products (OTP) is feasible using a similar stamp to that recommended for cigarettes. However, given the variety of products in terms of size, shape, packaging materials, etc., different machines may be required for different manufacturing environments but the principles remain the same as for cigarette packs. Again, due to limited information on the scope of such a system, we respectfully decline providing estimated cost information at this time.

SICPA Systems: Proven Tobacco Stamping Success

In order to provide additional information on the feasibility of a national system for federal stamping, we include two case studies of our stamping systems on federal levels which have been implemented with much success. Additionally, SICPA has been awarded the contract for federal cigarette stamping in Canada, to be implemented following further negotiations with the Canada Revenue Agency. We hope this information will be helpful in determining how a federal system in the US could be established.

BRAZIL

SICPA is currently managing secure, nationwide tax stamp programs for Brazil. The program in Brazil provides fiscal stamps on packs that account for some 5.3 billion cigarettes per year. Elements of the system in Brazil include:

·        Overt and covert security features for the fiscal stamp.

·        Data Management System (DMS) to control national cigarette production, which will be integrated with the government’s taxation system.

·        Coding activation systems incorporated into the production lines at 152 manufacturer locations.

·        Use of invisible SICPADATA^® codes for product authentication, production control and track and trace.

·        Supply and installation of hardware and software for track and trace and codification of the “intelligent tax stamp” with an overt security element.

·        Technical support and ongoing training of technical personnel necessary for the fulfilment of the scope of this contract.

Turkey: TURKTRACE^®

Turkey has become the first country in the world to implement a single technology to monitor all excisable tobacco, alcohol and beer products – more than seven billion packaged items per year. The product tracking system required the installation of non-intrusive automatic tracking units onto manufacturers’ packing and filling lines for product monitoring and transmission of the relevant information to a central data management system. To handle the monitoring of imported products, dedicated facilities have been set-up close to customs points at Istanbul, Izmir and Mersin.

The reach of this tracking system is broad and extensive:

·        137 tobacco packing lines at eight sites, applying six billion security stamps per year.

·        50 filling lines for alcohol products at 39 sites, applying 140 million security stamps per year.

·        24 filling lines for beer at nine sites, applying one billion security codes per year.

 Conclusion

SICPA applauds the efforts of lawmakers who have brought the issue of contraband cigarettes to national prominence. It is increasingly apparent that the safeguards currently in place against counterfeiting are not enough. By moving to an encrypted stamp system, the US government will protect legitimate tax revenue and protect national security. We have seen the success of such systems and trust that it is feasible in the US. We also believe such a system should complement, not hinder the efforts of individual States to control their own stamping programs, whether encrypted or not. We strongly believe that a federal stamping system and a state stamping system are not mutually exclusive. Any federal system should not undermine the efforts of an individual state to secure and monitor their own tax revenues.

SICPA thanks you for the opportunity to provide this additional information in support of a federal stamping system. SICPA remains available as a resource for further information on system implementation and continues to encourage efforts against counterfeit and diverted products.