Flourishing illicit trade in liquor and cigarettes is giving the fiscus a lockdown hangover

First published in the Daily Maverick 168 weekly newspaper.

South Africa is experiencing an exacerbation of illicit trade at a time when the economy is at its weakest. 

“Unemployment is at 31%, poverty levels are more than 50%, youth unemployment is higher than 50% and our inequality levels in society are the most unequal in the world. When you add illicit trade to that picture, the situation is increasingly dire,” said Busi Mavuso, chief executive of Business Leadership SA.

She was speaking at a webinar organised by Business Leadership SA on illicit trade. 

Mavuso said the ban on tobacco alone translated to a loss of R35-million a day for the fiscus. “Our national budget deficit is more than R350-billion. With businesses closing down and thousands of job losses, South Africans are looking at government to assist with stimulus packages to help businesses rebuild and survive. In that environment, the loss of fiscal revenue and tax revenue could not have come at a worse time.”

Mavuso called on business, society and the government to support the South African Revenue Services and tax commissioner Edward Kieswetter in his efforts to resuscitate the illicit trade unit, which was shut down during the Zuma State Capture years.



Evidence of widespread illicit trade

Yusuf Abramjee, the founder of Tax Justice SA, said the ban on cigarettes opened the door for criminals to continue their illegal activity on a larger scale; as a result illicit trade was now out of control.

Tax Justice SA commissioned a research project in Cape Town, Pretoria, Johannesburg and Durban to investigate how widespread it was. “We released the findings of our survey two weeks ago. Out of 40 supermarkets, spaza shops and corner cafés that we visited, we found that 39 were selling a pack of 20 cigarettes for under R20.01.”

Cigarettes are taxed at almost R20 a packet, which means a pack of cigarettes priced as low as R20.02 is likely part of the illicit trade industry with no taxes being paid.

The government has indicated that its target is to keep excise duties or “sin taxes” on cigarettes at 40% of the overall cost price. Once VAT is added to this, the net effect is that more than 50% of the marked price on a legitimate pack of cigarettes goes to tax.

Zacharia Motsumi, the executive director of Tobacco Producers Development and the spokesperson for the South Africa Tobacco Transformation Alliance, suggested that the government introduce a minimum price list (MPL) to make it easier for law enforcement to identify illicit tobacco traders.

“At this stage, the tobacco industry employs around 8,000 workers where we used to employ 14,000 to 15,000 workers with 30,000 dependants. Prior to the lockdown, illicit trading in the tobacco industry stood at around 25% to 28%, but [when] the bans were introduced, illicit trading has moved to almost 100%,” he said. Motsumi said the minimum price for a pack of 20 cigarettes should be R25 to R28.

In 2013, South Africa was one of 54 countries to sign the World Health Organisation protocol to eliminate illicit trading in tobacco, but Motsumi said no action had been taken since then. The WHO protocol outlines the following steps:

• Unique, secure and non-removable identification markings, such as codes or stamps, to be on all outer packaging of cigarettes within five years, and other tobacco products within a period of 10 years of enforcing the protocol.


• The development and expansion of a track-and-trace system up to the point that all duties and relevant taxes have been paid. The objective of the protocol is to have information through the whole supply chain until duties are paid or other obligations discharged.


• To establish a global track-and-trace system within five years of the protocol being implemented.

According to the WHO protocol, countries may require the tobacco industry to bear any costs associated with a track-andtrace system.

Lockdown hangover

Kurt Moore, CEO of the South African Liquor Brand Association (Salba), said about 15% of market share was accounted for by illicit trade or organised crime, which seemed to have flourished during lockdown.

Moore said the problem was widespread and all stakeholders, including the police, alcohol manufacturers, retailers, and consumers, must work together to combat it.

Before the lockdown, the South African alcohol sector lost an estimated R12.9-billion a year to illicit trade. Current losses have not been quantified, but this figure is expected to have risen considerably.

On average, regulated alcohol production contributes R72-billion to the South African economy through taxation, VAT and excise. In 2019, the alcohol sector accounted for 3.4% (R173-billion) of South Africa’s nominal GDP. Yet the government is estimated to lose around R6.4-billion per year as a result of illegal alcohol trading.

Moore said the industry had identified three ways in which illegal alcohol was entering the market:

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  • Border smuggling: Imported alcohol is smuggled through the border, where border officials are bribed to allow the goods through without the payment of any border taxes. Moore said this problem was particularly common at the harbours as points of entry.
  
  
  • Hijackings: The rate of truck hijackings in the alcohol industry is significant. Consortiums execute hijackings once trucks have left the manufacturing depots and before they reach their retail destination. This illegally obtained alcohol is then sold at prices lower than market value.
  
  
  • Knock-off products: This is a relatively small occurrence compared to the first two entry points outlined above. In this case, criminals attempt to produce a cheaper knock-off of popular alcohol brands. A lack of specialist equipment and expert knowledge means this is not a huge threat, however.
  
  
  
  

How to spot fake booze

It can be easy to identify fake or illegal alcohol if you know what to look for:

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  • Place: Only buy alcohol from a reputable store or manufacturer.
  
  
  • Price: Illegal alcohol is often sold at below-market prices. These prices are low for one of two reasons. Either the alcohol was smuggled into the country illegally without paying taxes or it has been stolen in a hijacking. Prices can be up to 40% cheaper.
  
  
  • Packaging: Look carefully at the label for duller and less accurate paintwork. Bottle tops are often made of inferior material and tend to bend or crumble on opening. Be wary of loose bottle tops and broken seals because this indicates a product that has been tampered with or is an inferior product.
  
  
  • Product: Look out for fake versions that sport misspelt names of popular brands. Examine the bottle. Vodka is the most counterfeited spirit. If there is any sediment, or white particles floating in the bottle, it could point to a drink that has been diluted with tap water.
  
  
  
  

In 2020, Salba set up a toll-free hotline – 0800 014 856 – to report any suspected illegal alcohol trading. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.