No smoke without fire: the illicit cigarette trade in South Africa

2020-01-20

The illicit trade in tobacco, especially cigarettes, costs South Africa’s economy billions of rand annually through the loss of tax revenue. According to a study conducted by the South African Revenue Service (SARS), the estimated loss through the illicit trade of cigarettes for the 2015/16 financial year was R6 billion.

The illegal cigarette trade forms part of a broader illicit economy. This involves counterfeit goods, motor vehicles, clothing and textiles, movies and music. The revenue from this has also contributed to high-level corruption, political party funding and other criminal endeavours.

The illicit cigarette trade is defined as the ‘supply, distribution and sale of smuggled genuine, counterfeit or cheap white tobacco products’. Counterfeit cigarettes refer to identical copies of branded products that are manufactured without the authorisation of the rightful owners. This is intentionally meant to deceive consumers.

Cheap white cigarettes (or illicit whites) are produced with the approval of a licensing authority in one country, but smuggled and sold in another without duties being paid.

The illegal cigarette trade forms part of a broader illicit economy involving counterfeit goods, motor vehicles, clothing and textiles, movies and music

Of the six ways to identify illicit cigarettes, five are related to the markings on the pack: the absence of the excise marking (diamond stamp); the absence of or incorrect marking of the health warnings; tar and nicotine readings on the pack are higher than 12 mg tar and 1.2 mg nicotine or aren’t printed on one of the long sides of the pack; the quit line number is incorrect or absent; and the absence of the words ‘reduced ignition propensity’ anywhere on the pack.

The last aspect refers to the pricing of the cigarettes. The excise tax on a 20-pack of cigarettes is R16.66 as at February 2019. Adding the VAT rate of 15% means that the full tax amount on a 20-pack of cigarettes is around R20. So if a pack of 20 cigarettes is sold below that price, it is probably illicit.

In South Africa, the largest share of the illicit cigarette market is occupied by those manufactured locally, with other brands smuggled from neighbouring countries like Mozambique and Zimbabwe making up the rest. According to a Directorate for Priority Crime Investigation (Hawks) presentation to parliament, it was estimated that between April 2017 and March 2018, 80% of illegal tobacco products found in the country were produced domestically.

Due to their low prices, illicit cigarettes make for an attractive bargain and all indications point to a growing market in the country. In his book Tobacco Wars, Johann van Loggerenberg estimates that illicit cigarettes make up around 40% of the cigarette trade and show ‘no sign of slowing down’.

In South Africa, the largest share of the illicit cigarette market is occupied by those manufactured locally

Addressing this problem requires a concerted effort by both law enforcement and revenue services. But how can this be achieved? First, law enforcement such as border police, customs, the canine unit and immigration officers who are involved in combating the problem must be strengthened. This requires well-funded law enforcement agencies that are fully staffed. These agencies need to be provided with a clear mandate to tackle illicit cigarettes as a national priority.

In line with this, it is recommended in the Nugent Commission of Inquiry into Tax Administration and Governance by SARS report that SARS ‘re-establish capacity to monitor and investigate the illicit trades, in particular the trade in cigarettes, within appropriate governance structures’. Enhancing effective information sharing between enforcement agencies and judicial authorities to promote investigation and prosecution of cigarette trafficking is essential.

Second, using technologies such as track-and-trace is important in addressing tobacco product smuggling across borders. Tracking the cigarettes from the supplier enables monitoring of the product from manufacture to end user while tracing provides the ability to follow the product back to a point along the supply chain.

This will no doubt help in the prevention of diversion of cigarettes into the illegal market. Kenya is an example where such a technology has succeeded in reducing illicit trade in cigarettes. Learning from this, SARS recently issued a call for tender for a track-and-trace marker technology. However while technology can contribute to detecting illicit cigarettes and provide a tool to combat organised crime, it amounts to little if corruption is a key enabler of the crime in the first place.

Third, criminal networks must be targeted. Current law enforcement initiatives target the traders of illicit cigarettes. While arresting these individuals may send a message to the criminal networks, the fact remains that they are small-scale players in the criminal chain. As with other forms of organised crime, they are at the bottom of the network and can easily be replaced by numerous other willing unemployed individuals. There is a need to target those who are higher up the chain.

Current law enforcement initiatives target the traders of illicit cigarettes – there is a need to target those who are higher up the chain

Despite the large profit generated from illicit cigarette trafficking, the penalties associated with the crime are moderate compared to other crimes such as drug or weapon trafficking. Introducing more stringent sentences for illicit cigarette trafficking (as in the case of drugs for instance) in the region could serve as a deterrent for traffickers. Such penalties could include seizing the assets of convicted traffickers.

Since illicit cigarette trafficking is also a cross-border issue, developing a regional strategy targeting the affected countries is important. The strategy should cater for the enhancement of regional capabilities to deal with the problem such as improved collaboration in terms of joint law enforcement operations, intelligence sharing among states and enhancement of legislation that aim at curbing the production and smuggling of illicit cigarettes. This would enable a concerted effort from the region to tackle this growing form of organised crime.

Aside from the obvious loss of revenue to the Southern African region’s governments, the illicit trade in tobacco has negative effects on business and individuals’ health, posing a threat to the continued economic growth of the region. Combating this challenge not only has an economic and health benefit but also cripples an important source of funding for organised criminals in the region.

Richard Chelin, Researcher and Rumbidzai Nyoni, Digital Communication Officer, ENACT project, ISS.

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