Parliament demands tougher action against illicit tobacco

The Standing Committee on Finance (SCoF) held a meeting on the illicit trade in tobacco on the 2 May 2018.  The briefing flowed from public hearings on the 1% VAT, fuel and other increases proposed by National Treasury (NT).  SCoF highlighted in its report on the public hearings on the Fiscal Framework Policy dated 6 March 2018, that more needs to be done by government and relevant agencies to reduce the staggering amounts of money leaving the country through illicit financial flows and revenue being lost from the illicit trade in tobacco.  Further, in terms of Parliament’s constitutional mandate, committees must conduct oversight over government entities to ensure that these entities are held accountable not only as to how monies allocated them are spent but also, how policies such as the National Development Plan (NDP) are being implemented.

The illicit cigarette trade is defined as the production, import, export, purchase, sale, or possession of tobacco goods which fail to comply with legislation and or on which taxes have not been paid.  The 2016 illicit cigarette trade figures indicated that approximately 23% of all cigarettes consumed in South Africa were illicit.  In terms of impact on the fiscus, more than R27 billion in tax revenue has been lost to the illicit trade between 2010 to 2016 (at least R4 billion per year).

SCoF called NT, South African Revenue Services (SARS), National Prosecuting Authority (NPA), Directorate for Priority Crimes Investigation (DPCI), Financial Intelligence Centre (FIC), Tobacco Institute of Southern Africa (TISA) and the Fair Trade Independent Tobacco Association (FITA).

TISA represents 95% of the legal tobacco sector and it highlighted that historically it had a good relationship with NT and SARS.  TISA actively participated in various task teams and forums established by SARS to curb illicit trade.  In 2013, NT and SARS prioritised combating and taking serious action in the illicit trade in tobacco through Project Honey Badger.  Subsequent to the commencement of Project Honey Badger, allegations of a “Rogue Unit” surfaced in 2014.  A new SARS Commissioner was appointed in 2014.  SARS’ special investigative units were subsequently disbanded and Project Honey Badger unit was closed down.  It appeared as if nothing was done thereafter by the relevant authorities to curb the illicit trade in tobacco products.  It was also pointed out that the role of various companies in illicit trade and state capture are mentioned in the books of Johan van Loggenberg, “Rogue: the inside story SARS illicit crime busting unit” and Jacque Pauw’s, “The President’s Keepers”. 

FITA said illicit trade in tobacco products affects its members more than any other players in the local tobacco industry.  This was compounded by the fact that the tobacco industry is monopolistic and anti-competitive firms, riddled with unethical practices.  It emphasised that counterfeit tobacco products were also a huge challenge in South Africa.

NT pointed out that the tax incidence remains at 52% of a pack of 20 cigarettes.  NT emphasised that the last two years have been particularly worrying.  In particular, NT had forecasted to collect an estimated revenue from domestic excise on cigarettes was of R15,04 billion for 2018, however, it only collected 11, 07 billion.  NT conceded that it appears that the loss in revenue is a result of illicit trade in tobacco products and not a reduction in smoking incidence.  Operational seizures between 2014 to 2018 amounted to 1368 seizures of the value of R217 million.  SARS is in the process of reconstituting the discontinued SARS / Tobacco Industry forums to foster collaboration and increase compliance in the sector.  It added that destructions of confiscated cigarettes are taking place.  It was not in a position to say how many destructions have taken place.  A concern raised was that confiscated product which is not destroyed could be stolen and resold illicitly.

The FIC supports investigations using financial intelligence generated through analysis.  The FIC supports project-driven investigation in the illicit trade in tobacco products by various law-enforcement agencies.  Based on matters handled by the FIC, it has been observed that both local and foreign nationals were involved in the illicit trade in tobacco products.  The main perpetrators of smuggling of cigarettes in South Africa were locals, foreigners and local tobacco manufacturers who under-declare their production volumes to avoid taxes.

DPCI pointed out that to combat the illicit trade in tobacco products, a more coordinated approach is required.  Presently, the Customs and Excise Act is implemented by SARS.  DPCI therefore cannot take the lead.  There are many instances where DPCI investigators have struggled to get hold of a SARS official to assist in investigations.

Members of Parliament (MPs) were furious and emphasised that government cannot institute a 1% VAT increase when R5 billion is lost to illicit trade in tobacco products.  Interpol also ranks South Africa as amongst the top five countries globally in the illicit trade tobacco.  MPs enquired whether there was an Inter-ministerial task team appointed to deal with this problem?  What projects are in place to curb this illicit trade?  Another MP pointed out that there seems to be a problem of enforcement and coordination.  Why are there no prosecutor-led investigations?  MPs wanted to also know the number of staff and budget allocated to task teams.  Further, whether NT has the necessary intelligence to counter this problem?

SARS responded that Project Honey Badger had not been discontinued but is operating in a different form.  SARS eventually admitted that it no longer has intelligence capacity to fight the illicit trade in tobacco products and stated that it will increase capacity and will consider placing officials at manufacturers to monitor inputs and outputs. 

SCoF MPs insisted that an intelligence component is essential.  MPs further emphasised that it is not interested in the number of meetings the joint forums or task teams have but rather how initiatives are bearing fruit.  MPs agreed that future annual reports of NT and SARS must include reporting on projects on the combatting of illicit trade in tobacco. 

This is but one committee meeting that SCoF and various other parliamentary committees will be holding throughout the year leading up to the Minister of Finance delivering the Medium-Term Budget Policy Statement (MTBS) in October/November this year.  The MTBS reflects on the social and economic developments priorities, how departments have moved away from ineffective spending and are moving towards the implementation of the NDP and reforms, and infrastructure planning and delivery in provinces and municipalities.

Lastly, as the budget process is unfolding, it is crucial that the public is involved from here on, whether individually or through associations.  This will enhance and enrich this constitutional process of oversight and accountability. 


Zelna Jansen,

CEO, Zelna Jansen Consultancy