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What Philip Morris International Is Doing to Fight Smuggling

By Dan Caplinger – Sep 16, 2016 at 10:57AM

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The tobacco company takes a big hit from illegal trade every year and is looking to do something about it.

Image source: PMI Impact.

The tobacco industry around the world is huge, with millions of smokers consistently looking for ways to get the cigarettes they want. However, many governments tax cigarettes heavily, and whenever there's a financial incentive to cut corners and circumvent taxation of a high-value product, smugglers will emerge to conduct illegal trade activity. Philip Morris International (PM -0.63%) has historically been a huge victim of illegal trade, estimating that if it could cut the illegal tobacco trade by just a single percentage point, it would equate to a $120 million boost to its operating income if it could capture its fair share of the resulting increase in sales volume. Although the company has always worked to try to eliminate smuggling, Philip Morris took a bigger step forward earlier this year, and its efforts have already started to produce some promising proposals.

Philip Morris and its antismuggling efforts

For a long time, Philip Morris has centered its efforts to fight illicit trade on controlling sales of products to its direct customers. By ensuring a clean supply chain to bring Philip Morris products from manufacturing facilities to the retail outlets that then sell them to smokers, the tobacco giant worked to keep its grip on its cigarettes while they were in its control.

However, expectations among government regulators were broader than that, and they expressed a desire to have Philip Morris exercise more oversight even when its products had left its direct control. Improvements in technology helped Philip Morris be more effective in tracking and preventing illegal trade. Pack authentication practices have rolled out in more than 90 countries, and Philip Morris has trained more than 11,000 law enforcement officials on smuggling issues. By the end of 2017, the company expects it will cover 80% of its total cigarette production with pack-tracking capabilities.

PMI Impact: The latest move from Philip Morris

But at its core, Philip Morris believes that it can't do the job alone, and it will need help from all corners in order to put an end to the smuggling problem worldwide. The tobacco giant has memoranda of understanding with governments in more than 20 countries, but it wants to bring even more stakeholders into the mix.

That's why earlier this year, Philip Morris launched its PMI Impact initiative. The move seeks to bring together various public, private, and nongovernmental organizations to come up with new projects that can fight illegal trade and the crime that often accompanies it. Philip Morris pledged $100 million toward PMI Impact, and it believes that the initiative will not only facilitate the development of good ideas and coordinate the implementation of those ideas but also produce a broader understanding of the factors that lead to corruption, organized crime, and money laundering associated with cigarette smuggling.

Earlier this week, PMI Impact received its initial round of project proposals. More than 200 projects from 170 different organizations came in, including many from government agencies, research institutes, universities, nongovernmental organizations, and private entities. More than 40 countries were represented, with the majority in Europe and North America. That makes sense, given the first round's emphasis on fighting illegal trade and related crime in the European Union. PMI Impact expects to make final decisions by the middle of 2017.

Future rounds of funding will address different themes. In general, each project must address one or more of PMI Impact's primary focus areas, which include research to increase the knowledge base surrounding illegal activity, education and awareness of consumers and the general public of the problem of illegal trade, and action toward solving the problems more permanently.

Philip Morris knows that no single effort will be enough to eliminate the problem of smuggling. Yet when it looks at the economic impact of illegal trade on its own business along with the broader impact on the communities it serves, Philip Morris believes that it's in everyone's best interest to limit smuggling as much as possible and reduce the related crime that often accompanies illegal trade activity.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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