No smoke without fire – South Africa’s illicit cigarette trade

First published by ISS Today

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

Aside from the local economic and health impact, illicit smuggling poses a threat across the Southern African region. Tackling the problem will improve regional economic outlooks and cripple an important source of funding for organised criminals in South Africa and beyond.

The trade is part of a broader illicit economy involving counterfeit goods, motor vehicles, clothing and textiles, movies and music. Revenues gained contribute to high-level corruption, political party funding and other criminal endeavours.

The illicit cigarette trade involves the “supply, distribution and sale of smuggled genuine, counterfeit or cheap white tobacco products”. Counterfeit cigarettes are identical copies of branded products manufactured without the authorisation of the rightful owners. 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.

Of the six ways to identify illicit cigarettes, five are related to markings on the pack: the lack of the excise marking (diamond stamp); the absence of or incorrect marking of the health warnings; tar and nicotine readings higher than 12 mg tar and 1.2 mg nicotine or readings that aren’t printed on a long side of the pack; the quit line number is incorrect or missing; 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. With 15% VAT added, the full tax amount is around R20. So if a pack of 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. The Directorate for Priority Crime Investigation (Hawks) told Parliament that between April 2017 and March 2018, about 80% of illegal tobacco products found in the country were produced domestically.

Due to their low prices, illegal 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”.

To address the problem involves boosting both law enforcement and revenue services. First, capacity and funding for border police, customs, the police’s canine unit and immigration officers must be strengthened. So too must information sharing between enforcement and judicial authorities to ensure cases are prosecuted.

These agencies also need a clear mandate to tackle illicit cigarettes as a national priority. In line with this, the Nugent inquiry into tax administration and governance recommended that SARS “re-establish capacity to monitor and investigate the illicit trades, in particular the trade in cigarettes, within appropriate governance structures”.

Second, technologies such as track-and-trace are key to tackling the smuggling of tobacco products across borders. Tracking the cigarettes from the supplier enables monitoring of the product from manufacture to end user while tracing allows the product to be followed back to a point along the supply chain.

This will help prevent cigarettes being diverted into the illegal market. Kenya is an example where such technology has succeeded in reducing the illicit trade in cigarettes. Learning from this, SARS recently issued a tender for a track-and-trace marker technology. Of course, technology can’t deliver on its full potential if corruption is a key enabler of organised 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 sends a message to the criminal networks, they remain small-scale players in the criminal chain. As with other forms of organised crime, traders are at the bottom of the network and can easily be replaced by other willing unemployed individuals. Those higher up the chain need to be targeted instead.

Despite the large profit generated from illicit cigarette trafficking, the penalties associated with the crime are moderate compared to other crimes such as drugs or weapon trafficking. Introducing more stringent sentences for illicit cigarette trafficking (as in the case of drugs for instance) – not only in South Africa but across the region – could serve as a deterrent. Penalties could include seizing the assets of convicted traffickers.

Since illicit cigarette trafficking is also a cross-border issue, a regional strategy for affected countries is needed. It should provide for joint law enforcement operations, intelligence sharing and better legislation to curb the production and smuggling of illicit cigarettes. This would enable a concerted effort from the region to tackle this growing form of organised crime. DM

Richard Chelin is a researcher and Rumbidzai Nyoni, Digital Communication Officer, ENACT project, ISS

This article was first published by the ENACT project. ENACT is funded by the European Union (EU). The contents of this article are the sole responsibility of the author and can under no circumstances be regarded as reflecting the position of the EU