TRIBUNE

When we decided to launch I.T.T.A (ALCCI) to sensitize businesses and the public sector on the damages caused by this scourge, only a few international bodies had addressed it, like the World Customs Organisation, the O.E.C.D, the World Economic Forum in Davos, Interpol and Europol. In France, governmental authorities have not yet recognised this subject fully and enterprises are still in a reactive stance regarding it. The situation has somewhat changed lately. Studies have eased the understanding of the threat, entailing that people who have to know about it to act are alarmed. It is only a fledgling movement that I.T.T.A wants to bolster so that Illicit Trade be reined in, In France as abroad. Alain Juillet, Hervé Pierre, Dominique Lapprand

Traceability of physical flows : what is the contribution of blockchain technology?

Illicit Trade can be defined as the selling of goods and services to the public in violation of laws. This activity is as old as commercial and economic exchanges. It was there all along. In its most traditional aspect, it violates property rights. More recently, it antagonized laws protecting consumers, environment and more broadly speaking the judicial international order.

A traditional form of crime, but poorly enforced

Illicit Trade is not like other forms of commerce that, until the end of the 19th century, relied on physical property of goods being traded between buyers and sellers. Illicit Trade today is mostly about stolen, counterfeited or fraudulent merchandise.  It also thrives on the violation of laws protecting intellectual property.

Its development was mostly due to the creation of complex and heavy taxes which have generated trafficking of numerous items that may be sold without paying affixed taxes (VAT, customs and excise, and other diverse taxes). More recently, Illicit Trade has gained further momentum with the violation of intellectual property laws. It is based in this case on the counterfeiting of intangible (software, patents, and copyrights) or tangible assets (branded goods). As before, enforcing the law in the latter cases relies on proving the property rights of traded items.

The illicit trader benefits from a tremendous pricing advantage compared with honest competitors. At best, the product did not cost the perpetrator anything (theft); at worst, he/she avoids affixed taxes (contraband, fiscal embezzlement) or the conception of the item (counterfeit). Whilst it would be possible to enforce Illicit Trade on the basis of penal laws and regulations that are intended to protect property effectively and the collection of taxes, it is however difficult to do so considering the laxity of most courts re these violations.

In its traditional aspect, Illicit Trade is therefore a major risk for businesses. If it is theoretically possible to enforce it with existing statutes, those are not sufficiently used by the judiciary whose knowledge of what is at stake is still insufficient.

New forms of Illicit Trade regarding consumers and natural/social environment protection.

Ethics regulations among corporate and smaller businesses are imposed to protect both consumers and natural/social environment. For consumers, health, hygiene and security are priorities. Illicit Trade obviously has no such concern and does not provide any form of consumers protection. As for the environment, the situation is often worse. Illicit Trade deals with many items or services related to polluting activities, endangered and protected species² or, worse, in connection with new forms of slavery (forced labour or child labour) or conflicts (blood diamonds, tropical wood). These violations are in total non-compliance to laws.

The forms of non-compliance are diverse. It depends on local laws, particularly sophisticated in the Western world, but not well harmonized or congruent on the regional or multilateral stage despite a multiplicity of agreements. Thus, the trade of a product can be licit here and illicit elsewhere, depending on where you are. The various answers to these administrative regimes emphasise an insufficient globalization of laws with respect to the items which are the most traded and exchanged throughout the world. The W.T.O so far has refused to address this issue whereas other organizations (O.E.C.D, W.E.F) are at least beginning to do so.

The risk for the business is twofold. On the one hand, the illicit trader benefits from a pricing advantage. On the other hand, businesses can, unbeknownst to them, integrate products coming from Illicit Trade and its nastiest forms, in their processes.

In its emerging form of non-compliance, Illicit Trade not only represents an unfair trading threat, but also a threat to the integrity, ethical positioning and image of businesses. The answer to those challenges is unfortunately still judicially insufficient and politically only fledgling.

The corruption of commercial practices and laws

The complexity of modern economy and the new capabilities of transportation and communication allow a high mobility of goods and of financial transactions that accompany these trades. Speed and globalization ultimately jeopardize commercial and contractual practices, sometimes causing businesses to lose control of the products they make, sell or buy. Parallel imports of licit and authentic items can make for high losses. The participation in a laundering process involving Illicit Trade can also threaten businesses, and cause lawsuits and financial risks.  The violation of the law is here mainly one of commercial rights.

This is still a grey area, a sensitive issue that most enterprises are poorly cognisant of. This is exacerbated by the lack of consistency and rules on the international level.

The corruption of commercial practices and laws by Illicit Trade can strike any business; they may become victims of predatory unfair competitive practices and cause grave financial damage and a potential heightened risk to their image.

Illicit Trade’s connection to crime

Illicit Trade is not only about violation of laws and regulations. It is also about a close link between those unfair commercial practices and organized crime, not only for bulk supplies but also with street distribution through the retailing sector. Who, indeed, can convey and protect whole containers on several continents if not organised crime? Who is able to control high street sale, generating several millions annually? Who can finance, manage and launder the money earned?

The risk brought about by Illicit Trade is here and now: in fostering the change from a demand rationale to a supply one: thereby creating an apparently satisfied client. This implies that Illicit Trade can no longer be viewed as a collection of diverse violations. It upends the traditional judicial view: the mechanisms behind Illicit Trade must be treated on their own, as a whole, on the same level as money laundering.

Trade is pervading the Web, a virtual public space where multiple transactions happen, as in the streets (Street sales on the sly), commercial outlets (sales under the counter) or neighbourhoods (from word of mouth). We identify three basic forms of e-Illicit Trade.

Illicit Trade and Darknet

Illicit Trade on the Darknet requires specific softwares and processes, warranting the actors’, sellers’ and buyers’ anonymity. Several studies have shown that e-Illicit Trade represent an annual market of several $ billion, involving numerous sites  (crypto markets) where retailers thrive. The same studies also evidenced that the majority of exchanges taking place are about drugs (70%), medicines (20%), the rest being spread from arms to fraud-softwares, hacking tools, ID thefts, personal date filrs, illegally obtained. Payment will take place through particular means, Paypal or still crypto-currencies.

Illicit Trade and the classical Web

On the classical Web, sales of counterfeited, prohibited for sale, stolen or non-compliant products are the most frequent forms of Illicit Trade. Placing the sites, identifying them, is always difficult. Payment is here too processed through cards, Paypal or any other means. Delivery is conveniently done through regular postal services or express delivery companies whose responsibility is at stake. Expedition is often from abroad (outside the E.U) entailing a slight risk at the borders. To avoid that risk, it can be orchestrated from a clandestine warehouse in France. Figures in billions of dollars are often cited (source?)

Illicit Trade on social networks and sites between individuals

Social networks and Small Ads sites are the third place for e-Illicit Trade. The method is always the same: the network or the small adds site facilitate the initial relation between a seller and a buyer. The realization of the transaction and the subsequent payment will take place on another support, contrary to what happens on the Darknet where the three-pronged action (contact, payment, transaction) are on one same interface. Figures lack, but if querried, enterprises victims of those trades speak of volumes in the hundreds of thousand dollars, if not millions. This worries regular corporates such as Facebook,, Le Bon Coin, PriceMinister, Amazon, Alibaba.

Traceability of physical flows : what is the contribution of blockchain technology?

In spite of currently common sayings, “the blockchain” is not a universal solution. Actually there is nothing like “THE” blockchain, just like nobody would speak about “THE” database: blockchain is a technology with different implementations and different ways of using it. Nevertheless, viewed as a data storage and sharing technology, blockchain brings new, extremely interesting and useful properties. Depending on its implementation, this technology can address a variety of complex problems: cryptocurrencies are a well-known and widely discussed use case; supply chains traceability is another use case often referred to, which comprises the fight against illicit trade as a key underlying challenge. These two use cases are radically different, and not only because their purposes are different… and to some extent opposite. Although blockchain is self-sufficient for cryptocurrency, it would be a rather naive to believe that the same applies to the traceability of physical flows.

At its core the blockchain technology enables the creation of a secure and auditable data exchange network. Provided the implementation is correct, the resulting network allows to share information while permanently keeping track of the “who, what and when” of each information; each stakeholder is certain that no information can be altered afterwards, and everyone can independently verify and prove it. Although blockchain is commonly referred to as a “trust technology”, it’s not really “trust” that is at stake here, but rather the “responsibility” of each stakeholder towards the others.

One technology, several typologies of deployment

A difference is usually made between a “public” and a “private” blockchain. However, this simple dichotomy is somewhat misleading as it hides a variety of very different questions:

  • Who owns a copy of the data and who can check the integrity of the registry?
  • Who can input new data in the registry (meaning insert transactions into a block)?
  • How many independent participants operate a network node?
  • What is stored in the registry: is it information intrinsic to the registry or the representation of something extrinsic to the registry?

The first two questions are related to the need for authentication or authorization for reading or adding information to the registry. The third question is directly related to the security of the network, from the point of view of its accessibility but also of the possibility to corrupt the data it contains. The last question raises a very subtle problem: the link between the validity of a piece of information and its veracity.

The “validity” of an information refers to its technically correctness, and the fact that it does not introduce any inconsistency in the registry; the blockchain technology further guarantees that it could not be changed retrospectively. The “veracity” of an information is the fact that it describes a status or a fact commonly recognized as true.

 Digital assets Case

Bitcoin is typically a use case based on a public and anonymous deployment, managing data that are intrinsic to the blockchain registry: these data represent digital assets to which Bitcoin members agree to assign a value that can in principle be exchanged for goods or redeemed for FIAT currency . Call it a “crypto currency” if you wish.

When the registry handles intrinsic information, it is sufficient for the information to be technically valid to be deemed as true, at least “after a while”. This has been empirically demonstrated by Bitcoin for 10 years. The “proof of work” mechanism leads to a consensus on the sequence of valid transactions since the creation of the network, in the sense that transactions since the root of the network do not include double spend nor other fraudulent “monetary” inputs. Under standard assumptions, it is commonly accepted that a transaction older than 6 blocks (roughly an hour) will no longer be rollbacked: it can be viewed as a stable contribution to the “true” state of the Bitcoin network. In fact, when the information is intrinsic to the registry, there is no difference between validity and veracity: if the information is technically valid then it is true, by definition of the registry. We are in a closed system, which can ensure its own control: for better or for worse, that is an important but entirely different debate…

Physical traceability Case

When using blockchain for the traceability of supply chain, the deployment structure and the nature of information are different from the case of digital assets. The data to be registered is related to industrial or commercial flows (order, supply, distribution, control, etc.), more than likely confidential, which leads to the need for authentication and authorization mechanisms to read from and write into the registry. The registry itself relies on a network of technical resources provided by independent and identified members, sharing a common interest, of business, safety or regulatory nature. That common interest might be the risk of sourcing “conflict” minerals, the detection of counterfeit or grey markets, the safety of product recalls, or the valorization of a controlled origin. In any case, the information managed in the registry represents physical objects or practices, obviously extrinsic to the registry itself.

The validity of information is a property resulting from the technology itself: it remains guaranteed. But what about its veracity? Two notions need to be differentiated to assess that question:

1) The veracity of the source (origin): is it the exact information provided by X at date D?

2) The veracity of the content: is the information “true” in a common sense?

The origin is guaranteed by the electronic signature mechanisms applied to transactions and transaction blocks: a given electronic signature derives without equivoque from the owner of the corresponding private key, the content and the date.This link between ownership of a private key and origin is not unique to blockchains and is already used in the larger legal context of electronic signature. Thus, a blockchain registry for physical traceability keeps ensuring two things: the validity and the veracity of the origin of an information; that elementary feature makes blockchain an extremely useful and powerful system for sharing auditable information.

On the other hand, the veracity of the content is not guaranteed, not more than in any other database: it depends on the actual physical goods, from their measurement (aka transcription into data) to the frequency of that measurement (aka sampling): in short it depends on the physical-digital link, or on the analog-digital transcription in terms of signal and data theory. Quite obviously, simply registering a physical object in a digital registry results in an open system, even if it’s called a blockchain registry. From system theory we know that open systems are unstable: information in the registry will unavoidably tend to diverge from the physical reality it represents. The information will remain valid, the veracity of its origin can be proven but the content will become ever falser.

A naive approach would be to focus solely on data capture, trying to record only “true” information in the registry at all cost: actually if it were possible to have that level of control, why would modern supply chains be plagued with the growth of illicit trade in the first place? Besides a rapid assessment of the volumes induced by the traceability of industrial and commercial flows shows that scale makes this approach unrealistic in practice. Simpler and more efficient, a feedback mechanism can stabilize the “open system” mentioned above: analysis of all data, detection of incoherent information that are likely indicative of some kind of dysfunction or fraud, and action accordingly to correct it. In short, this is results into a continuous improvement approach of the supply chain, realistic and pragmatic in practice.

Conclusion

Organizing the traceability of products and goods is surely an essential use case of blockchain technology, for commercial, regulatory but also health and safety reasons. The level and the growth of illicit trade illustrate the importance of this application. However, a transposition from the use of cryptocurrency to physical traceability cannot be too literal: it is necessary to dissect the various mechanisms of this technology to integrate it appropriately in a global and pragmatic solution.

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REFERENCES

I.T.T.A is gathering here main documents relating to Illicit Trade. Some are published by international organisations. Others are academic works that the reader the reader is invited to get by him/herself, accordingly with copyrights. READ MORE

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