Who can we trust and what can be done about illicit trade in tobacco products?

Illicit trade in tobacco has been a hot topic in the news of late. The recent SA Revenue Service (Sars) inquiry has highlighted the need for increased focus by Sars and the rebuilding of its investigative capacity while the Tobacco Institute of South Africa (Tisa) preaches gloom and doom for the tobacco industry, claiming that the “legitimate” industry is at the brink of closing its factories, putting over 100,000 workers out of their jobs.

Tisa is predominately driving the discussion on the illicit tobacco trade and has published a study on illicit trade in order to promote its own agenda. Fair enough, it is a lobby for the large tobacco industry in South Africa so it is acting in the interest of its members and unfair competition erodes profits.

But much of Tisa's rhetoric is rubbish. It is true that illicit trade in tobacco is certainly a major problem in South Africa, contributing to the significant revenue shortfall and undermining public health policies, and whole lot more can and should be done about it.

However, one must be wary of the tobacco industry painting itself as both the victim and saviour when it comes to illicit tobacco trade. It has proven time and again by its behaviour and a litany of legal cases to simply not be credible when it comes to illicit trade in tobacco.

One must be cognisant of the fact that “big tobacco” has been a global serial repeat offender when it comes to illicit tobacco, and has spent millions on lobbying to block regulation and promote its own agenda.

Big tobacco has paid billions of dollars in fines over the years and has been found to be either directly involved or complicit in illicit trade in its own product.

One could fill a book on big tobacco’s track record on illicit trade. Having already paid nearly 2-billion euros from 2004 (yes billion) in settlements with the European Union, the UK’s serious fraud office has opened a formal investigation following The Guardian’s investigation revealing that British American Tobacco and other multinationals have used threats against at least eight African nations, demanding they stop or dilute tobacco control measures that have proven effective in the rest of the world.

Part of this investigation revolves around allegations of money- laundering and espionage that took place in South Africa.

Further, a recent study from the Tobacco Control Research Group at the University of Bath exposed evidence that big tobacco companies are facilitating tobacco smuggling, while also attempting to control a global system (WHO FCTC Protocol) designed to regulate it.

The study, which draws on leaked industry documents and investigates industry front groups, highlights the elaborate lengths the industry has gone to, to control a global track and trace system and to undermine the World Health Organisation’s Illicit Trade Protocol (Protocol).

The paper, published in June 2018, “calls on governments and international bodies to crack down on big tobacco tactics and to instead ensure systems designed to control tobacco smuggling are free of industry influence”.

Supply always finds demand

Regulators, including Sars, should be careful in how and where they engage with the tobacco industry and question the solutions they advocate. We should also not be surprised by big tobacco’s behaviour when it comes to illicit trade.

From a purely capitalist perspective they are acting rationally – supply must meet demand.

This was openly revealed by BAT’s former chief executive Kenneth Clarke in his op-ed published in The Guardian where he admitted that multinational tobacco companies supply cigarettes knowing they are likely to end up on the black market.

In his piece he said:

“Where any government is unwilling to act or their efforts are unsuccessful, we act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as the legitimate market”.

The objective of tobacco companies is more sales, both legal and illegal. Tobacco companies make their profit the moment the shipments leaves the factory, whether the tax is paid – or not – makes no difference to their bottom line.

The practice of oversupplying a low tax market with more cigarettes than can be consumed serves as a source of supply to smugglers who then sell them in a higher-tax jurisdiction.

This is a well-known practice used by big tobacco over the years and they have been caught red-handed many, many times. BAT is currently facing a fine of £650,000 for oversupplying the Belgian market which British Customs believes to be the source of smuggling back into the UK.

Big tobacco is the progenitor of the illicit trade monster, but now their “Frankenstein” is on the loose and has become a major business that is being perpetrated by a lot of smaller players.

That is the main focus of the study it released. But, is big tobacco out of the game completely and can they be trusted with the solution? According to the 2018 Tobacco Atlas, 98% of the world’s illicit tobacco comes from legitimate suppliers.

Recent investigations with regard to money-laundering, corporate espionage, bribery and smuggling around the world and including South Africa, should provide a sobering caution as to who government can really trust.

What can be done?

South Africa’s tobacco control legislation was thought to be one of the most comprehensive in the world at the time of its adoption, but is now falling behind many other countries – of 24 tobacco-control measures identified by the WHO, South Africa currently complies with only 11. (Shisana, et al., SANHANES-1 Team, 2013, South African National Health and Nutrition Examination Survey (SANHANES-1), (Cape Town: HSRC Press), 2013, p. 38)

Sars can also do a lot more. For an agency that has built world-class tax and customs administration systems and processes, its excise control is nothing short of archaic.

For example, it relies on the diamond stamp to determine if tax has been paid. The presence of the diamond stamp is intended to validate that the tax (R15.52 per pack) has been paid and that the pack is “legal”. But the diamond stamp, a simple die impression, contains no security features and is very easily counterfeited.

It gives a false sense of security, and is readily found on both legal and illegal packs. The diamond stamp should, at a minimum, be replaced by a secure fiscal mark to give Sars independent third-party data on what has been produced and imported, and provide law enforcement with a means to determine what is illicit.

Today, Sars is flying blind in this respect.

Ironically, South Africa was one of the first 10 countries to sign the WHO's Illicit Trade Protocol. However, the protocol has not been ratified here and little if anything is being done with regard to its implementation. The protocol, which now comes into force after having been ratified by the 40th nation, contains provisions that requires, inter alia:

• The licensing of all entities involved in tobacco supply chains;


• Tobacco companies to apply due diligence measures to its customers;


• Secure track and trace of tobacco products and production controls in factories;


• Record-keeping obligations in respect of tobacco manufacturing equipment; and,


• Restrictions on the sale or purchase of tobacco manufacturing equipment.