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.

In December 2017, the firm employed over 189,000 people in 152 countries.[1]

Relationship with the Tobacco Industry

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

Helped BAT Rebrand as “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]

Another document written by KPMG, titled BAT: The Project: The Way Forward, outlined how “BAT's over-riding objective is now to regain control of its own destiny by re-establishing dialogue with key stakeholder groups.[3] 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 being responsible, which have not changed since:[3]

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

Worked for BAT to Counter the World Health Organization

In 1999 KPMG also worked with BAT to help counter the World Health Organization’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.”[4]

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

A 2007 peer-reviewed paper[5] examining the privatisation of the tobacco industry in post-Soviet states, demonstrated that KPMG had a “potentially conflicting” role in the privatisation processes, by 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.

KPMG's Illicit Tobacco Studies Used to Oppose Plain Packaging in the UK

Image 1. PMI Corporate Affairs Update, March 2012

Since 2005 KPMG has produced reports on the scale of the illicit trade in tobacco products in the European Union (EU) and in Australia which have been used in the media to argue against the introduction of plain packaging.[6][7][8]

For more information see: Plain Packaging: Have Illicit Levels Risen in Australia?

Leaked PMI documents, describing the tobacco company’s 2012 strategy to prevent plain packaging in the UK, mentioned a KMPG report as part of a “workstream which included “submissions (including reports and studies)” (see Image 1).[9]

KPMG's illicit tobacco trade research has been severely criticised in both Australia and the UK (see below), with questions raised about its independence and whether the company effectively acted as a third party advocate for the tobacco industry.

“Project Star"

In 2004, PMI signed an Anti-Counterfeit and Anti-Contraband Cooperation Agreement with the European Commission.[10] 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.

Initially KPMG’s remit was to produce an annual Powerpoint presentation[11], but by 2010 the research findings 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.[12][13]

The PMI contract has been estimated to be worth £10 million, and is led by Robin Cartwright, who joined KPMG from the British security service MI5.[14]

Methodology and Data Criticised

In April 2013, PMI claimed that levels of illicit tobacco in the EU rose from 10.4% in 2011, to 11.1% in 2012, citing KPMG’s 2013 Project Star study as evidence.[15]

This was not an accurate reflection of the data according to the study's small print. The report warned that, due to a subtle change in methodology the 2012 data could not be accurately compared with the previous year’s data, and that this change would lead to an overestimate in 2012 compared to 2011.[16]

Academics, including University of Bath researchers, conducted a review of the 2010 Project Star report and compared the KPMG data to independent data.[13] 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).

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 would provide important context;
  • No methodological information was given to discern whether EPSs were conducted via a random selection of areas to ensure that the sample was 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[17][18][19] and live in urban areas.[20][21]

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 publish this data when presenting the findings of the 2010 report.[13]

In other words, far from showing the level of illicit trade in the UK to be rising, the figures suggested it was actually falling. This corroborated 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]

Cited in PMI Submission to 2012 Plain Packaging Consultation

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 go here:

“Project Sun”

In 2014, the annual Project Star report was changed to Project Sun, with the report no longer commissioned by the European Commission, but by four tobacco companies: BAT, Imperial Tobacco, Japan Tobacco International (JTI), and PMI.[25]

Contradicted Industry Argument That Illicit Levels Were Rising Rapidly in UK

When the British government announced that it was to consult on introducing plain packaging in 2011, dozens of industry-generated reports in the UK media argued that levels of illicit cigarettes were increasing rapidly, and that plain packaging would make the situation worse.[26] Also see:

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 claimed that additional data which were not previously available to them “suggest there has been a more gradual decline from 2011 to 2013".[25]

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

KPMG's Australian Illicit Tobacco Data Strongly Criticised

KPMG has also produced bi-annual reports, commissioned by tobacco companies, to examine whether the introduction of plain packaging in Australia led to an increase in tobacco smuggling.[27]

The reports have been strongly criticised by the Australian government, academics and Sir Cyril Chantler (see below), the paediatrician who examined the health benefits of plain packaging for the UK government.

“Substantially exaggerates” size of illicit in Australia

In a damning critique of KPMG's research on illicit trade, the Australian Government published the following:[28]

“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.”

The government continued:

“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.”

The Government’s critic was in part based on analysis of KPMG’s methodology by Quit Victoria and the Cancer Council Victoria, who 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:[30]

"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".

Sir Chantler concluded that: “I do not have confidence in KPMG’s assessment of the size of – or changes in – the illicit market in Australia.”[30]

Other KPMG Research on Illicit Tobacco: Northern Africa, India and New Zealand

On 26 July 2017, KPMG released a report on illicit cigarette trade in the Maghreb region in Northern Africa, commissioned by PMI.[31] The report included additional qualitative analysis conducted by the Royal United Services Institute for Defence and Security Studies (RUSI) – an organisation that, like KPMG, was awarded funding from PMI IMPACT (a PMI research funding initiative) to conduct research on illicit trade and organised crime.[32]

On 12 October 2017, KPMG released a report in conjunction with the Federation of Indian Chambers of Commerce & Industry (FICCI) (an association of Indian business organisations), titled ‘Illicit trade: Fuelling terror financing and organised crime’.[33] As with many other KPMG reports, its findings were widely-publicised by media outlets.[34][35][36]

On 20 July 2018, KPMG released a report on illicit tobacco in New Zealand, commissioned by Imperial Tobacco NZ.[37] The report included data from a consumer survey carried out by Kantar New Zealand, commissioned by BAT NZ, Imperial Tobacco NZ and PMI. It estimated that 9.2% of total tobacco consumption in New Zealand was illicit.[38] Previous estimates from 2009 suggested illicit tobacco made up only 1.0 – 1.1% of total tobacco consumption in New Zealand.[39] The 2018 report was released approximately four months after New Zealand’s Ministry of Health announced a review of tobacco excise tax,[40] and was publicised throughout the national media.[41][42][43] Acting Prime Minister Winston Peters responded to the report by suggesting high tobacco excise tax was fuelling violent crime.[42][43]

Embroiled in South African Controversy

In December 2014, KPMG was commissioned by South African President Jacob Zuma to conduct an investigation into allegations that a covert unit with the South African Revenue Service (SARS) had spied on the President and other politically-connected figures.[44] Following revelations that many senior KPMG South Africa executives were involved with businesses linked to the Gupta family (who have strong ties with President Zuma[44]), on 15 September 2017, KPMG announced that it was withdrawing the findings and conclusions of its report on its’ SARS investigation.[45]

The KMPG report was described by some as a contribution toward ‘state capture’ of the SARS, with former finance minister Pravin Gordhman stating that:

“KPMG had no basis‚ except subservience to a malicious SARS management‚ to malign a number of individuals and facilitate the capture of a vital state institution."[46]

KPMG also came under scrutiny for serving as auditors for BAT, who were also featured in the SARS allegations.[44] The former UK public relations company Bell Pottinger was also implicated for its relationship to the Gupta family, ultimately leading to its administration. For more on this, see: Bell Pottinger.

TobaccoTactics Resources

Relevant Link

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, About-overview, accessed December 2017
  2. Unknown, KPMG Meeting 27 July 99 - Results and Action Points, Truth Tobacco Industry Documents, undated, Bates no: 321310128, accessed December 2017
  3. 3.0 3.1 British American Tobacco, BAT - The Project - The Way Forward, Truth Tobaco Industry Documents, 15 November 1999, Bates no: 325079627-325079646, accessed August 2014
  4. 4.0 4.1 Unknown, BAT - KPMG's involvement in the WHO project - Terms of reference, Truth Tobacco Industry Documents, 15 October 1999, Bates no 321310090-321310096, accessed December 2017
  5. A. Gilmore, M. McKee, J. Collin, The invisible hand: how British American Tobacco precluded competition in Uzbekistan, Tobacco Control, 2007; 16(4): 239–247
  6. A. Howe, Illicit tobacco funding gangs and increasing use, Herald Sun, 3 November 2013, accessed December 2017
  7. G. Bentley, “Here's how government policy fuelled a booming black market in tobacco”, City AM, 23 April 2014, accessed December 2017
  8. P. Farrell, “Illegal tobacco consumption increases, survey funded by cigarette firms says”, The Guardian, 4 November 2013, accessed December 2017
  9. Philip Morris International, UK Corporate Affairs Update, March 2012
  10. 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 December 2017
  11. KPMG, Letter to the European Commission, 3 August 2005
  12. KPMG, Project Star 2010 Results 22 August 2011, accessed July 2014
  13. 13.0 13.1 13.2 A. Gilmore, A. Rowell, S. Gallus, et al, Towards a greater understanding of the illicit tobacco trade in Europe: A review of the PMI funded Project Star report, Tobacco Control, Published Online First: 11 December 2013
  14. KPMG, Track and Trace: Approaches in Tobacco. Robin Cartwright Bio, 2014, accessed December 2017
  15. Philip Morris International, New Study Finds EU Black Market for Cigarettes Reaches Record High; Member State Tax Loss an Estimated €12.5 billion, BusinessWire, 17 April 2013, accessed December 2017
  16. Philip Morris International, KPMG Study Shows Illicit Cigarettes in EU Reach Highest Recorded Level in 2011, Fifth Consecutive Yearly Increase, BusinessWire, 20 June 2012, accessed December 2017
  17. 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
  18. G. Siggens, P. Murray. NEMS North East Survey: Illicit Tobacco North of England Study 2013. NEMS market research, 2013
  19. L. Joossens, A. Lugo, C. La Vecchia, et al, Illicit cigarettes and hand-rolled tobacco in 18 European countries: A cross-sectional survey. Tobacco Control, doi:10.1136/tobaccocontrol-2012-050644
  20. 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
  21. D. McLennan, H. Barnes, M. Noble et al. The English indices of deprivation 2010. London: Local Department for Communities and Local Government. March 2011
  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, accessed July 2014
  25. 25.0 25.1 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, Illicit tobacco in Australia: 2016 Full Year Report, 20 March 2017, accessed December 2017
  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, accessed July 2018
  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. 30.0 30.1 Report of the independent review undertaken by Sir Cyril Chantler,Standardised packaging of tobacco, April 2014, accessed December 2017
  31. KPMG, Illicit cigarette trade in the Maghreb region, 26 July 2017, accessed December 2017
  32. PMI IMPACT, Selected Projects: First Funding Round, undated, accessed December 2017
  33. FICCI, KPMG, Illicit trade: Fueling terror financing and organised crime, 12 October 2017, accessed December 2017
  34. The Times of India, Enhance awareness to check illicit trade: Ficci-KPMG report, 12 October 2017, accessed December 2017
  35. Business Standard, India continues to see rise in illicit tobacco trade: Ficci-KPMG report, 16 October 2017, accessed December 2017
  36. Financial Express, Smuggling in India: From cigarettes, gold to smartphones, here is all you need to know at a glance, 21 October 2017, accessed December 2017
  37. KPMG, Illicit tobacco in New Zealand 2017, KPMG website, 2018, accessed July 2018
  38. KPMG, Illicit tobacco in New Zealand 2017 Full Year Report, accessed July 2018
  39. New Zealand Institute of Economic Research, Review of Ernst & Young’s Report on New Zealand’s Illicit Tobacco Market, NZ Parliament website, accessed July 2018
  40. Radio NZ, Review to weigh up tobacco tax, 15 March 2018, accessed July 2018
  41. Scoop, Government losing up to $182m over illicit tobacco, 23 July 2018, accessed July 2018
  42. 42.0 42.1 NewsTalkZB, Winston blames smokes tax for murders, robberies, 23 July 2018, accessed July 2018
  43. 43.0 43.1 L. Bennett, Tobacco excise tax leading to murders and assaults at dairies, says Winston Peters, NZ Herald , 23 July 2018 accessed July 2018
  44. 44.0 44.1 44.2 M. Thamm, SARS Wars: KPMG report – the Firm, the lawyers, the Auditor and the Blame Game, 3 October 2017, accessed December 2017
  45. KPMG, KPMG South Africa leadership changes and key findings arising from KPMG International’s Investigation, 15 September 2017, accessed December 2017
  46. G. Hosken, Gordhan tells KPMG to admit they were complicit in state capture 16 September 2017, accessed December 2017