Five things you need to know about SA's illicit tobacco trade

Cape Town – SARS will be prioritising illicit trade and strengthening the capacity of its investigative units to tackle the illicit economy, Acting Commissioner Mark Kingon told Parliament's Standing Committee on Finance (Scof).

Scof has heard from players in the tobacco industry, agencies and Treasury in recent weeks, to find out what is being done to tackle illicit tobacco trade.

Illicit trade results in revenue losses to the fiscus, and the committee’s concern is what is being done to curb it, Scof chair Yunus Carrim said during a hearing in May.

Illicit tobacco trade has been at the heart of the state capture project, according to investigative journalist Jacques Pauw’s book The President’s Keepers.

Here’s what you need to know about illicit trade:

What is illicit tobacco trade?

According to the Financial Action Task Force, an independent inter-governmental body which fights money laundering, terrorist financing and the financing of weapons of mass destruction, illicit tobacco trade is the supply, distribution and sale of smuggled genuine, counterfeit or cheap white tobacco products. It is based on the idea of sourcing the product cheaply to sell in a higher-priced market.

Why is it a problem?

Illicit trade is used for tax evasion. According to the Tobacco Institute of Southern Africa (TISA) this is often enabled in three ways: firstly, tax is not paid at all on imported products. Alternatively, tax is avoided through undeclared local production in either approved factories or through illegal operations. Thirdly, tax is evaded through counterfeit products.

According to TISA, tax on a packet of cigarettes amounts to roughly R17.85. However, illicit products are sold for prices as low as R10 or R5 per pack, which means revenue owed to the South African Revenue Service (SARS) is lost. 

TISA has argued that the illicit sector has negatively impacted the legitimate market, which has declined 20.6% between 2012 and 2017, resulting in lower government revenue collections.

TISA has estimated that between 2010 and 2016, R27bn was lost to the fiscus. 

UCT’s Economics of Tobacco Control Project (ETCP), which tracks tax data to monitor cigarette sales and consumption in South Africa, has found that between 2016 and 2018, there was a 20% decrease in the number of tax-declared cigarettes.

Who are the industry players?

In South Africa, the majority of companies are represented by two main bodies in the tobacco industry.

These is TISA, which represents international players British American Tobacco (BAT) and Phillip Morris International and Limpopo Tobacco Processors, among others.

The Fair-trade Independent Tobacco Association (FITA) represents manufacturers Carnilinx, Gold Leaf Tobacco and Amalgamated Tobacco Manufacturing, among others.

Both organisations made representations in Parliament on illicit tobacco trade. FITA has criticised TISA for inflating the figures of the cost of illicit tobacco trade to the fiscus. In a statement issued on Friday FITA referred to a 2014 report by head of ETCP Professor Corné Walbeek challenging the veracity of industry statistics.

Reports by News24 in 2016 revealed that BAT, represented by TISA, had paid a private security firm, the Forensic Security Services, to spy on its competitors, particularly Carnilinx, which is represented by FITA, according to an affidavit filed by a former employee of FSS.

What has SARS done to fight illicit tobacco trade?

SARS used to run a project known as “Honey Badger” to investigate illicit tobacco trade, News24 previously reported. It was launched in November 2013, but allegations of the so-called rogue unit surfaced in 2014 and later that year, suspended SARS Commissioner Tom Moyane shut down the specialised unit.

According to TISA, as a result of the disbanding of the unit, it appeared that SARS had done nothing to curb illicit trade between 2014 and 2017.

In the meantime, a number of senior officials had left SARS. In early 2017, head of the Tactical Intervention Unit, which investigates customs and border offences, Kumaran Moodley was suspended. News24 reported that he was the last team member of the Honey Badger project.

At the time News24 reported that Moodley’s unit was investigating the tobacco industry and Mpisi Trading, a company linked to former president Jacob Zuma’s family. Moodley’s suspension is reportedly driven by an internal investigating unit run by Yegan Mundie.

News24 revealed that Mundie has links to a Zuma-family associate, Jen-Chih “Robert” Huang. Huang’s wife was an employee of Mpisi Trading while SARS was investigating the company. Huang is also a business partner of Khulubuse Zuma, Jacob Zuma's nephew.

SARS briefed Scof in May 2018 about what SARS had been doing to fight illicit tobacco trade. Group executive for customs compliance risk and case selection, William Mpye, admitted that the tax authority could have done more in the past two to three years.

"The acting commissioner [Mark Kingon] alluded to the fact SARS will raise efforts to make sure the issue is dealt with better, going forward," he said.

Since the 2014/15 year to 2017/18, SARS has conducted 1 368 seizure operations, where 270 million cigarette sticks to the value of R217m were collected, according to Mpye.

What will SARS do next?

Kingon, acting SARS commissioner told Scof in a follow-up briefing later in May that there are only eight people looking into illicit tobacco trade and that SARS is willing to reestablish investigative teams.

"Historically SARS Project Honey Badger was managed under a unit called National Projects," Kingon told Scof. "National Projects brought about the integration and coordination of various capabilities and dedicated teams to focus on specific areas in the illicit economy."

The investigators part of the teams have been split and are now scattered throughout SARS, he said.

"SARS is reassessing whether the organisation has adequate capacity to investigate the illicit economy. 

"The matter will be taken through the relevant governance processes in compliance with the laws that govern SARS," spokesperson Sandile Memela said in an emailed response to questions about the unit and whether those who used to be part of it would be reappointed.

When asked if Moodley's suspension would be lifted and if he would return to his post to lead the unit, SARS said that Moodley’s case wasgoing through an internal process. "SARS would like to respect the rights of its employee in this regard," he said.

SARS confirmed that Hlengani Mathebula, acting chief officer of enforcement, will be part of the assessment of the unit as he is a member of SARS executive, he is the chief officer of governance, international relations, strategy and communications.

SARS would not say if it would reach out to former official Johann van Loggerenberg to draw on his expertise for the reestablished unit. 

At a briefing on Monday on the upcoming tax season, Kingon said that the reestablishment of the investigating unit is being treated as a matter of urgency. “We are working in all haste to ensure it is done. The team members in various units need to be consulted in this process and the various chief officers who are responsible for various areas are being consulted.

“Illicit trade continues to be a serious issue in our country, it is not only cigarettes as may people may think - it goes beyond that,” he said.

Kingon added that in due time the chief officer of enforcement would make an announcement on the unit. 

* Update: This article was updated at 16:30 on June 4, 2018 to include comments made by acting SARS Commissioner Mark Kingon at a press briefing earlier on Monday about the investigating unit.

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