KPMG

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Background

KPMG is a global accountancy firm, one of the so-called “Big Four”, along with Deloitte, PricewaterhouseCoopers and Ernst and Young. It employs over 150,000 people in 155 countries.[1]

Tobacco Industry Links

The company has a longstanding relationship with the tobacco industry, including advising on privatisation, corporate social responsibility (CSR) and smuggling (see below).

KPMG Helps British American Tobacco Rebrand itself

“A Responsible Company within A Controversial Industry”

In the late nineties, as the tobacco industry’s 40 year campaign to deny the health effects of tobacco was becoming no longer tenable due to successful litigation in the United States and the release of internal tobacco industry documents, KPMG assisted British American Tobacco (BAT) with its corporate social responsibility strategy. This involved KPMG helping BAT to rebrand itself as a “responsible company, within a controversial industry”.

One BAT document noted that “Agreed that as a result of our meeting, KPMG would have no problem in helping us with the CSR exercise”.[2]

Core Problem: Cigarettes Kill People and are Addictive

In 1999, another document, entitled, “BAT: The Project: The Way Forward” written by KPMG outlined how “BAT's over-riding objective is now to regain control of its own destiny by re-establishing dialogue with key stakeholder groups. To do this, it must be seen to be a truly responsible global organisation, redefining itself from its present situation to the responsible company within a controversial industry.”

Although this slogan, “a responsible company within a controversial industry” has been consistently utilised since the turn of the century, KPMG noted that there were three core problems with trying to reposition BAT as responsible, which have not changed since:

  • “Tobacco products kill people”;
  • “They also cause serious illness and impose an unreasonable burden on health facilities worldwide”;
  • “Tobacco products are addictive”; [3]

Working for BAT to Counter the World Health Organisation

Also in 1999, KPMG worked with BAT to help counter the World Health Organisation’s proposed Framework Convention on Tobacco Control. “In particular”, one KPMG document noted, “BAT wishes to lead the rest of the industry in repositioning tobacco manufacturers as socially responsible.”

KPMG acknowledged the risks of this strategy: “BAT’s proposal is seen as a spoiling tactic, which backfires on BAT”, the firm warned. [4]

”Conflicting” Role in Tobacco Privatisation in Uzbekistan

An academic paper, published by members of the Tobacco Control Group at the University of Bath and others, examined the privatisation of the tobacco industry in post-Soviet states. The paper noted that KPMG may have had a “potentially conflicting” role in the privatisation processes, not only being appointed by the State Privatisation Agency (GKI) to advise on privatisation, but also lobbying for Philip Morris International (PMI) in the country.[5]

Tobacco Industry and Plain Packaging

PMI Corporate Affairs Update, March 2012

KPMG’s earlier advisory role with the tobacco industry, where it effectively acted as public relations advisor for BAT and PMI raises legitimate questions about its consultancy for the industry, in relation to tobacco smuggling.

Since 2005 KPMG has produced reports on the scale of the illicit trade in tobacco products in the European Union (EU) and in Australia. This t research has been severely criticised in both Australia and the UK (see below), raising questions about its independence and whether the company is effectively acting as a third party advocate for the tobacco industry.

PMI’s Leaked Documents

KPMG is also mentioned in leaked documents from PMI, which outlined the tobacco company’s 2012 public relations strategy to prevent plain packaging in the UK. On the page outlining the company’s “workstreams”, there is a section on “submissions (including reports and studies” where the PMI proposes: “KPMG report (PP Impact on Supply Chain)”. [6]

It is unclear whether this report was commissioned.

Tobacco Industry and Smuggling

“Project Star”

In 2004, PMI signed an Anti-Counterfeit and Anti-Contraband Cooperation Agreement with the European Commission.[7].

As part of this agreement, PMI commissioned KPMG “to measure the size of the legal, contraband and counterfeit markets for tobacco products in each of the 25 EU Member States”. KPMG’s study of the illicit market was to be undertaken on an annual basis.

To start with KPMG’s remit was to produce a yearly Powerpoint presentation[8], but by 2010 the results of its research were written up in a report, called “Project Star”, which was eventually published in 2011 after a European Freedom of Information Request, albeit with sections redacted.[9][10]

The PMI contract is worth a significant sum of money to KPMG, which the accountancy firm estimates at £10 million. KPMG’s smuggling / Project Star work is led by Robin Cartwright, who joined KPMG from the British security service MI5.[11]

Questions Over KPMG’s Methodology and Data

On 17 April 2013, the Financial Times wrote that “Smokers turning more to illicit tobacco”.[12]

The article was based on the latest KPMG Project Star study and suggested it revealed that the level of illicit in the UK rose sharply in 2012. This is indeed what PMI’s press release on the study claimed.[13]

But it is not in fact an accurate reflection of the data, once you read the small print. In fact, KPMG warned that, due to a subtle change in methodology, the 2012 data could not be accurately compared with the previous year’s data,[14], and that this change would lead to an overestimate in 2012 compared to 2011.

Academics (including at the University of Bath) conducted a review of the 2010 Project Star report and compared its data to independent data. They concluded that there was little information provided on the 'Project Star methodology used to produce the illicit estimates and that Project Star underestimated legal cross-border sales by using interviews and what are termed Empty Pack Surveys (EPSs). [15]

Problems with Empty Pack Surveys (EPSs)

The paper outlined problems with EPSs, one of the main ways which KPMG analyses the extent of the illicit market:

  • EPSs cannot distinguish between foreign packets that have had duty paid and those which have not;
  • No details were provided about the timing of pack surveys (apart from in Germany). Tourist seasons would see more foreign packs and so this information provides important context;
  • No methodological information was given to discern whether EPSs are conducted via a random selection of areas to ensure that the sample is representative of the population. No description was given of how areas were selected and only large cities were included and therefore non-urban areas were under-represented. For example, those who are more deprived are more likely to use illicit tobacco[16][17][18] and live in urban areas.[19][20]

Furthermore, there was inadequate external validation of the data, which was mostly validated by tobacco companies who arguably have a vested interest in overestimating the illicit trade.

Moreover, the report revealed that approximately 25% of the illicit trade market in Europe in 2010 was made up of genuine PMI brands. This is against the Illicit Trade Protocol, where tobacco companies are accountable for ensuring their supply chain is adequately controlled. PMI did not present this data when presenting the findings of the 2010 report to the public. [21]

In other words, far from showing the level of illicit trade in the UK to be rising, the figures suggested it is actually falling. This corroborates data from Her Majesty Revenue and Customs (HMRC) indicating that the illicit tobacco trade has actually been declining over time, although a small increase from 2011-12 to 2012-13 was noted in the estimated figures from 2012-13. The 2012-13 estimated figure for the UK was 9% which is the same as the 2010-11 figure.[22]

KPMG Project Star cited by PMI in its 2012 Consultation Submission

To argue that illicit trade is a significant problem in the UK, PMI cited KPMG’s Project Star report in its submission to the 2012 UK Consultation on plain packaging stating: “nearly 11 billion units of illicit tobacco products are consumed in the UK each year, equal to more than 10% of the total UK cigarette market…”[23] [24]

PMI goes on to argue that plain packaging will make the current situation worse. For a counter argument to this go here:

“Project Sun”

In 2014, instead of its annual Project Star report, KPMG produced a report called “Project Sun”, which was no longer commissioned by the European Commission, but the four tobacco companies: BAT, Imperial Tobacco, Japan Tobacco International (JTI) and PMI.[25]

Data Contradicts Industry Messaging in the UK that Illicit Levels are Rising Rapidly

Since 2011, when the British government announced that it was going to consult introducing plain packaging, there have been dozens of industry-generated press reports which argue that levels of illicit cigarettes in the UK are increasing rapidly. Many of these argue that plain packaging will make the situation worse. [26]

Also see:

Despite this misleading press strategy, Project Sun actually revised its estimate for the UK illicit trade downwards for 2013. The report stated that “alternative data sources suggest this [the 2012 estimate] may have overstated non-domestic incidence for the full year”.

KPMG claims that additional data which were not previously available to them “suggest there has been a more gradual decline from 2011 to 2013.” [27]

Neither KPMG nor the tobacco industry has made any attempt to correct the misleading stories in the British press in light of this new analysis.

KPMG in Australia

The accountancy firm has also produced reports for the tobacco industry in Australia, examining whether the introduction of plain packaging has led to an increase in tobacco smuggling.

KPMG has a produced two reports – one half-year and one full-year - for the industry examining the penetration of illicit after the introduction of plain packaging there. Their reports have been severely criticised by the Australian government, academics and Sir Cyril Chantler (see below), the paediatrician who examined the health benefits of plain packaging for the British government:

KPMG “substantially exaggerates” size of illicit in Australia

In a damning critique of KPMG, the Australian Government has published the following:

“The tobacco industry‘s estimates of the size of the illicit market are not considered to be accurate. A KPMG report prepared for the tobacco industry (British American Tobacco Australia, Philip Morris Ltd and Imperial Tobacco Australia Ltd) and released on 4 November 2013, claims that during 2012-2013, consumption of illicit tobacco grew from 11.8 per cent to 13.3 per cent of total tobacco consumption in Australia. The report claims that this represents a loss of $1 billion in excise revenue.”

However, the Government argues:

“Like previous illicit trade reports commissioned by the tobacco industry, the KPMG report appears to substantially exaggerate the size of the illicit tobacco market in Australia and the consequent loss of excise and duty revenue.” [28]

The Government’s critic was in part based on analysis of KPMG’s methodology by Quit Victoria and the Cancer Council Victoria, who have concluded that:

In addition to the very real possibility of over-sampling of foreign packs, the proportion of foreign packs that are contraband is also likely to be overestimated due to KPMG substantial underestimation of legal non-domestic consumption. KPMG appears to have underestimated likely amounts brought into Australia both by Australian residents returning from overseas visits and by overseas students and other visitors. And it has neglected to include foreign packs brought in by individual travellers or mailed in excess of personal limits but on which customs duty has been paid. The total market for illicit tobacco in Australia is likely to be substantially smaller than is suggested in the KPMG report”.[29]

“I do not have confidence in KPMG’s assessment”

In his report on the health benefits of introducing plain packaging published by the British Government, Sir Cyril Chantler wrote:

Tobacco manufacturers cite the industry funded KPMG report on illicit tobacco in Australia, which purports to show that there has been a large increase in illicit trade since the introduction of plain packaging. I have considered both this report and a critique. My team have also met with KPMG in order to understand their methods.

However, his highly critical conclusion was that: “I do not have confidence in KPMG’s assessment of the size of – or changes in – the illicit market in Australia.”[30]

TobaccoTactics Resources

External Links

TCRG Research

Visit Tobacco Control Research Group: Peer-Reviewed Research for a full list of our journal articles of tobacco industry influence on health policy.

Notes

  1. KPMG, KPMG Website, accessed August 2014
  2. British American Tobacco, KPMG Meeting 27 July 99 - Results and Action Points, undated, Bates Number 321310128, accessed August 2014
  3. KPMG, BAT - The Project - The way forward, Bates No 325079627-325079646, 15 November 1999, accessed August 2014
  4. KPMG, BAT - KPMG's involvement in the WHO project - Terms of reference, Bates No 321310090-321310096,15 October 1999, accessed August 2014
  5. Gilmore, A. McKee, M. & Collin, J. The invisible hand: how British American Tobacco precluded competition in Uzbekistan, Tobacco Control. 2007; 16(4): 239–247
  6. Philip Morris International, UK Corporate Affairs Update, March 2012
  7. European Commission, Anti-contraband and anti-counterfeit agreement and general release dated July 9, 2004 among Philip Morris International, Philip Morris Products, Philip Morris Duty Free, and Philip Morris Trade Sarl, the European Community represented by the European Commission and each Member State listed on the signature pages hereto, accessed August 2014
  8. KPMG, Letter to the European Commission, 3 August 2005
  9. KPMG, Project Star 2010 Results 22 August 2011
  10. A. Gilmore, A. Rowell, S. Gallus, A. Lugo, L. Joossens, M. Sims Towards a greater understanding of the illicit tobacco trade in Europe: A review of the PMI funded Project Star report, Tobacco Control doi:10.1136/tobaccocontrol-2013-051240
  11. KPMG, Robin Cartwright Bio, accessed August 2014
  12. D. Robinson, “Smokers turning more to illicit tobacco”, Financial Times, 17 April 2013, accessed May 2013
  13. Philip Morris International, New Study Finds EU Black Market for Cigarettes Reaches Record High; Member State Tax Loss an Estimated €12.5 billion, PMI News Release, 17 April 2013, accessed May 2013
  14. Philip Morris International, KPMG Study Shows Illicit Cigarettes in EU Reach Highest Recorded Level in 2011, Fifth Consecutive Yearly Increase, PMI News Release, 20 June 2012, accessed May 2013
  15. A. Gilmore, A. Rowell, S. Gallus, A. Lugo, L. Joossens, M. Sims Towards a greater understanding of the illicit tobacco trade in Europe: A review of the PMI funded Project Star report, Tobacco Control doi:10.1136/tobaccocontrol-2013-051240
  16. C. Ciecierski. The market for legal and illegal cigarettes in Poland: A closer look at demand and supply side characteristics, IDRC Working Paper Series/ITEN working Paper Series No.1 2007
  17. G. Siggens, P. Murray. NEMS North East Survey: Illicit Tobacco North of England Study 2013. NEMS market research, 2013
  18. L. Joossens, A. Lugo, C. La Vecchia, A. Gilmore, L. Clancy, S. Gallus. Illicit cigarettes and hand-rolled tobacco in 18 European countries: A cross-sectional survey. Tobacco Control, doi:10.1136/tobaccocontrol-2012-050644
  19. E. L. Glaeser, M. E. Kahn, J. Rappaport. Why do the poor live in cities? The role of public transportation. Journal of Urban Economics, 2008;63:1-24
  20. D. McLennan, H. Barnes, M. Noble et al. The English indices of deprivation 2010. London: Local Department for Communities and Local Government. March 2011
  21. A. Gilmore, A. Rowell, S. Gallus, A. Lugo, L. Joossens, M. Sims Towards a greater understanding of the illicit tobacco trade in Europe: A review of the PMI funded Project Star report, Tobacco Control doi:10.1136/tobaccocontrol-2013-051240
  22. HMRC,, Tobacco tax gap estimates 2012-13 11 October 2013
  23. KPMG, Project Star 2011 Results, p262, 19 June 2012, accessed July 2014
  24. Philip Morris International, Standardised tobacco packaging will harm public health and cost UK taxpayers billions: A response to the Department of Health consultation on standardized packaging of tobacco products, 9 August 2012
  25. KPMG, Project Sun, accessed August 2014
  26. A. Rowell, K. Evans-Reeves and A.B. Gilmore, Tobacco industry manipulation of data on and press coverage of the illicit tobacco trade in the UK, Tobacco Control 2014
  27. KPMG, Project Sun, accessed August 2014
  28. The Parliament Of The Commonwealth Of Australia, House of Representatives, Excise Tariff Amendment (Tobacco) Bill 2014 – Customs Tariff Amendment (Tobacco) Bill 2014 – Explanatory Memorandum - Circulated by the authority of the Treasurer, the Hon J B. Hockey MP and the Assistant Minister for Immigration and Border Protection Senator the Hon Michaelia Cash, undated
  29. Quit Victoria, Cancer Council Victoria, Analysis of KPMG LLP report on use of illicit tobacco in Australia 2013 Full year report, 12 April 2014, accessed August 2014
  30. Report of the independent review undertaken by Sir Cyril Chantler,Standardised packaging of tobacco, April 2014