What do illegal cigarettes really cost our country?
The trade in illegal cigarettes is estimated to have cost Government over R5-billion in excise and VAT for 2012. The Tobacco Institute of Southern Africa (TISA) estimates that the fiscus lost approximately R12-billion over the past three years due to the trade in illegal cigarettes. Independent research shows that the illegal trade in cigarettes now accounts for 30% of the total cigarette market in South Africa, with approximately 55% of illegal tobacco products reaching South Africa from Zimbabwe. More than 30% is manufactured locally and small quantities originate from Middle Eastern countries and other sources.
Combating illicit trade has become a major challenge, not just in South Africa, but globally. We fully support regulators, governments and international organisations such as the World Customs Organisation, the World Trade Organisation, World Health Organisation along with our local authorities such as South African Police Services (SAPS) and South African Revenue Service (SARS).
The black market is driven by high tobacco taxes, particularly when taxes and therefore prices in neighbouring countries are much lower. Weak criminal penalties, poor border controls, low arrest rates and corruption in some parts of the world add to the problem. We see it as vitally important that governments establish workable tax regimes and economic policies that do not create conditions for illicit trade, with strong border controls and effective laws to combat it.
Illicit trade in cigarettes may be classified three categories
Smuggling is the movement of product (either genuine or counterfeit) from one jurisdiction (country, state or province) or excise regime to another, in circumstances where it is unlawful to do so because it is done without payment of the applicable taxes and/or duties, or is in breach of laws prohibiting its import or export.
Counterfeit is product that is identical or a substantially identical copy of a branded product and its packaging, which is manufactured by parties that do not have the relevant intellectual property rights, authorising them to manufacture such branded products.
Local Tax Evaded is product that is manufactured and sold for consumption in the same country, where the product is not declared to the local excise authorities and therefore excise tax is not paid. This product may be manufactured in approved factories, or it may be manufactured in illegal covert operations.
All types of illicit trade have a negative impact on our business. However, a key focus is placed on the protection of our brands which is our most important asset.
Badly made and poor tasting counterfeits may also be riskier to health than genuine product. They are unlikely to comply with the rigorous regulatory standards that we adhere to for tar, nicotine and carbon monoxide levels and they might contain unapproved ingredients. Raids by the authorities do take place but many operations are small, highly mobile and difficult to trace in remote areas. The makeshift factories, where the cigarettes are usually packed by hand, are often underground and can vanish within hours.
Crime and reward
Illicit trade is not just the work of small operators. Organised crime is increasingly dominant. The rewards can be high. A single 40 foot long container (8.5 million cigarettes) smuggled into South Africa and sold at half the recommended retail price could net the criminals millions of rands in profit.
Interpol, the international police organisation, says gangs that traffic drugs, arms and people are also behind the illicit cigarette trade. The US Department of Justice says some also have ties to terrorist organisations.
A number of in-depth reports on cigarette smuggling , including links with terrorism, corruption and organised crime, have been published by the International Consortium of Investigative Journalists, part of the US-based Center for Public Integrity. In addition, media reports on illicit trade interventions by law enforcement officials are on the increase, with news of busts, raids, seizures and destruction being reported almost on a daily basis.