Illicit Trade of Cigarettes in South Africa
South Africa lost R15 billion in excise revenue and R3 billion in VAT revenue due to illicit cigarette trade in 2022.
Illicit tobacco trade refers to the production, import, export, distribution, purchase, sale, or possession of a tobacco product in contravention of the law. This trade also includes the sale of smuggled genuine or counterfeit cigarettes. This page:
Discusses the levels of illicit tobacco trade in South Africa
Defines types of illicit tobacco trade in South Africa
Discusses the drivers and threats of illicit tobacco trade
Highlights the role of transnational tobacco companies in illicit trade
Discusses the geography of South Africa’s illicit tobacco trade
Examines and addresses myths promoted by the tobacco industry
Suggests methods to reduce illicit trade and highlights success stories from other countries in combating illicit trade
To learn more about the data and methods used in this page, click here.
Market Share and Implications
of Illicit Trade in South Africa
Market Share of Illicit Cigarette Trade
Market Share of Illicit Cigarette Trade
The illicit cigarette market has grown substantially from less than 10% of the market in the first decade of the 21st century to a peak of around 60% between 2020 and 2022.
In the early 2000s, the illicit trade in cigarettes was estimated at below 10% of South Africa’s total cigarette market.
Between 2005 and 2009, the South African Revenue Service (SARS) focused attention on illicit tobacco trade and mobilised specialised enforcement units to shut down a number of illicit tobacco manufacturers.
In the 2010s, and especially since 2015, illicit trade rose sharply, largely due to the entry of smaller, local producers and the weakening enforcement capacity at SARS.
Illicit trade peaked at around 60% between 2020 and 2022.1,7 This rise in illicit consumption followed South Africa’s ban on tobacco sales, which was part of national COVID-19 lockdown measures. Read more here.
Even after the sales ban was lifted in August 2020, illicit trade did not decrease, and remained at around 60% in 2021 and 2022.
Based on data published by the National Treasury in February 2024, the legal sale of cigarettes decreased even further in 2023, which suggests that the illicit market may have increased above 60% of the total market in 2023.
Illicit Cigarette Trade as a Percentage of the Total Market in South Africa
Source: Vellios and van Walbeek, 2024
Lost Tax revenue due to Illicit Trade in South Africa
Lost Tax revenue due to Illicit Trade in South Africa
South Africa lost R15 billion in excise revenue and R3 billion in VAT revenue due to illicit cigarette trade in 2022.
The amount of lost tax revenue due to illicit trade has increased steadily since 2010, with a particularly sharp increase in 2020 following the Covid-19 ban on tobacco sales.
Lost VAT and Excise Tax Revenue due to Illicit Trade in South Africa
Source: Vellios and van Walbeek, 2024
The Prevalence of Illicit Cigarette Trade Across Africa
The Prevalence of Illicit Cigarette Trade Across Africa
At an estimated 58% of the total cigarette market in 2022, the prevalence of illicit cigarette trade in South Africa is remarkably high. For African countries with data available, South Africa has the highest prevalence of illicit trade, with a rate nearly 12 times higher than Kenya (see chart below).
Prevalence of Illicit Cigarette Trade in African Countries
Source: Vellios and van Walbeek, 2024
Legal vs Illicit Cigarette Consumption in South Africa
Legal vs Illicit Cigarette Consumption in South Africa
The number of illicit sticks, defined as the gap between self-reported consumption and registered (i.e. legal) sales, was less than 5 billion from 2002 to 2012, after which it increased rapidly, reaching an estimated 19.4 billion sticks in 2022.
Self-reported vs Annual Tax-paid Cigarette Consumption in South Africa
Source: Vellios and van Walbeek, 2024
58%
The estimated percentage of illicit cigarette trade in South Africa in 2022
R18 billion
Government revenue lost due to illicit cigarette trade in 2022
Types of Illicit Trade
in South Africa
Illicit Production
a. Production at illegal facilities
Cigarettes and other tobacco products are manufactured at illegal facilities. These cigarettes may not meet health and packaging regulations. Counterfeit cigarettes infringe upon intellectual property rights of companies who own the rights to the brand. No excise tax or VAT is paid on these products.
b. Production at legal facilities
i. Under-declaring: Manufacturers produce more than they report to the tax authorities. These cigarettes are sold in South Africa without paying excise duties and VAT. For instance, “factories in South Africa operate double shifts, running their machines at night, and/or they hide the true scale of their production by paying off customs officials and using fraudulent paperwork. They make use of all the available gaps in SARS’s monitoring of their ‘bond’ warehouses, for example reusing invoices for multiple deliveries”.
ii. Ghost exports: Manufacturers declare some production for export, exempting them from excise duties and VAT. These products are instead diverted to the South African market without paying tax.
Illicit Import/Export
a. Smuggling
Products are illegally traded across borders without paying taxes. Both legal and illegal tobacco products can be smuggled. They are brought into the country at both legal and illegal entry points without paying import duties and are then sold without paying excise duties or VAT. These products may or may not meet health or other legal requirements.
b. Bootlegging
Small-scale smuggling where an individual purchases cigarettes in one country, where the taxes are low, and sells them in another country where taxes are higher.
c. In Transit
Tobacco products are produced for export by a legitimate manufacturer but are smuggled to a different country en route without paying any tax.
The Protocol to Eliminate Illicit Trade
in Tobacco Products
The Protocol to Eliminate Illicit Trade in Tobacco Products (ITP) was adopted by the Parties to the FCTC in November 2012. The ITP complements and expands Parties’ obligations under Article 15 of the FCTC. There are at least 63 Parties to the ITP, which entered into force on September 25, 2018. In general, the ITP obligates Parties to:
Identify, verify, and license players in the tobacco supply chain, or equivalent systems.
Track and trace products throughout the supply chain and prevent the diversion of tobacco into the illicit market.
Enforce record-keeping requirements for the tobacco industry and government.
Regulate sales by Internet, phone, and other new technologies, as well as sales in tax- and duty-free zones.
Establish and implement criminal laws to combat illicit trade by specifying liability for violations, search and seizure procedures, and procedures for destroying confiscated illegal products and equipment.
Ensure international cooperation — including information sharing and coordination — between law enforcement, prosecutors, scientists, administrators, and other officials and agencies.
Link to WHO FCTC Protocol
Transnational Tobacco Companies
and Illicit Trade in Africa
Tobacco Smuggling Operations in Africa
Tobacco Smuggling Operations in Africa
Internal tobacco industry documents from British American Tobacco revealed that, since the 1980s, the company has been involved in smuggling in at least 40 of the 54 African countries, a trend which continues today.
Tactic: Tobacco companies enter into voluntary partnerships with law enforcement and customs agencies through memoranda of understanding (MoU) to prevent policy measures designed to stop the supply side of illicit tobacco trade and preempt more restrictive government regulations concerning illicit trade. All four major tobacco companies have signed such documents in Botswana, Eswatini, Lesotho, Mozambique, Namibia, and South Africa. Phillip Morris has MoUs in Ghana, and British American Tobacco has MoUs in Egypt, Ghana, Nigeria, Mauritius, and Zambia.
British American Tobacco (BAT) Tactics in Africa
Case Study: British American Tobacco (BAT) Tactics in Africa
Analysis by STOP suggests BAT carried out corporate espionage, made questionable payments in several African countries, and ran networks of informants in Africa. See examples from the STOP report below.
South Africa
BAT allegedly used a massive network to undertake surveillance on its competitors using drones, trackers, CCTV, and other technologies. BAT carried out many of these military-style operations as part of the company’s anti-smuggling efforts, but the documents suggest BAT targeted competitors’ legal operations for disruption as well. Informants, some of whom were allegedly embedded into organised crime groups, were paid via a variety of methods, including a private contractor and/or by untraceable Travelex cash cards. BAT also exerted its influence over various state agencies, including law enforcement, to help it carry out surveillance operations. Read more
Uganda
Paid US $20 000 to a parliamentarian to allegedly “amend” an investigative report on its main Ugandan competitor, Continental Tobacco Uganda (CTU). The report ultimately recommended the revocation of CTU’s growing licence for the upcoming season.
Kenya
Ran “Operation Snake,” a roughly US $56 000 effort to allegedly establish a trade union and create unrest within Mastermind Tobacco Kenya. Payments appeared to include “handsome offer[s]” for “vocal employees”.
DRC
Allegedly attempted to obtain intelligence on Japan Tobacco International (JTI)’s operations to determine if JTI was facilitating smuggling into the country.
Rwanda
Paid US $20 000 to a Ministry of Health official to allegedly obtain draft tobacco control regulations.
Burundi
Paid US $3 000 to allegedly alter draft tobacco control legislation and have a Burundi civil servant promote BAT’s interests at an international FCTC meeting on illicit trade.
Tanzania
Ran “Operation Deep Jungle” to allegedly install “a permanent source inside Japan Tobacco International (JTI) Tanzania” for the purpose of obtaining intelligence on JTI’s operations.
Zambia
Received communications on Mastermind Tobacco Kenya’s exports to Zambia and allegedly attempted to obtain intelligence on Japan Tobacco International’s operations.
Malawi
Allegedly obtained data on Mastermind Tobacco Kenya’s exports to Malawi. Emails indicate BAT paid specific prices for different types of documents and data.
Comoros
Paid a civil servant US $3 000 to allegedly obtain draft tobacco control regulations while Comoros was actively attempting to pass FCTC-based legislation.
British American Tobacco and Cigarette Smuggling in Mali
Case Study: British American Tobacco and Cigarette Smuggling in Mali
Combating
Illicit Trade
The illicit tobacco market is a global problem and requires a global solution
Global strategies are essential in the fight against illicit tobacco. Currently, only a limited number of frameworks exist, such as the World Health Organization’s (WHO) Framework Convention on Tobacco Control (FCTC) and WHO Protocol to Eliminate Illicit Trade in Tobacco Products.
The Protocol to Eliminate Illicit Trade in Tobacco Products aims to eliminate all forms of illicit tobacco trade, in accordance with the terms of Article 15 of the WHO FCTC. It provides guidance for preventing illicit trade, such as an international track and trace system, law enforcement measures, and international cooperation.
South Africa was one of the first countries to sign the Protocol in 2013, but has not yet ratified it. Ratification is important because it legally obliges the country to implement the provisions of the protocol. To prevent this illegal trade, the Protocol aims to make the supply chain of tobacco products secure through a series of measures by governments. It requires that within five years of ratification, countries establish a global tracking and tracing regime comprising national and regional tracking and tracing systems and a global information sharing point located in the Secretariat of the WHO FCTC. Other provisions to ensure control of the supply chain include licensing, record keeping requirements, and regulation of Internet sales, duty-free sales, and international transit. Read more about the Protocol.
Recommended Approaches
to Combating Illicit Trade in South Africa
Implement a Track and Trace System
Track and trace technology has been successful in various countries in reducing illicit trade and increasing tax revenue.
Regularly Monitor Illicit Trade
Provides estimates of the size of the illicit market and informs the most effective ways in which to tackle the problem.
Investigate and Enforce Criminal and Civil Laws
Between 2013-2015, South African cigarette producers exploited a tax loophole whereby only they could declare their production numbers.
Develop New Excise Stamp
South Africa uses excise stamps which are barely visible, easy to counterfeit, and essentially meaningless.
Geography
of Illicit Tobacco Trade in South Africa
The extensive South African border (1840 km in length) poses a substantial enforcement challenge in preventing illicit tobacco trade, as it is estimated to have around 96 illegal points of entry – of which more than half are with Zimbabwe.
South Africa is the main destination country for illicit cigarettes that are smuggled from source points such as Zimbabwe.
Neighbouring countries, such as Lesotho, have customs and excise controls that are perceived to be relatively weak. Thus, these countries can be used as a destination market for round tripping, which involves creating fake destinations (exports) for products that are kept and most probably sold locally.The contraband enters South Africa from Zimbabwe through two general types of smuggling operations: small-scale entrepreneurial operations or organised smuggling networks. The small-scale operations make use of informal border-crossing points in the bush, which are abundant at the Limpopo River border. These points of entry are crossed by runners (mostly unemployed men) between midnight and 03:00 a.m. These runners use backpacks or plastic bags to transport the contraband, and when border patrol officials are encountered, a bribe is often offered to avert any scrutiny. This method of smuggling has become more popular due to the installation of truck scanners that can detect tobacco.
Myths and Facts
About Illicit Trade
Myth: An increase in taxes leads to an increase in illicit trade.
Fact: Independent research shows increasing tobacco taxes does not necessarily increase illicit trade.
Myth: Illicit cigarettes are only manufactured by local South African companies.
Fact: Both local and international companies contribute to the illicit tobacco trade in South Africa.
Myth: Illicit trade occurs primarily in the townships of South Africa.
Fact: Buyers of illicit tobacco products can be found throughout the country.
Myth: The tobacco industry provides reliable data.
Fact: The tobacco industry consistently produces unreliable data and frequently fails to state the source or research methodology.
Myth: Codentify/INEXTO Suite is an established and effective alternative to track and trace systems.
Fact: Codentify/INEXTO Suite is not a true track and trace system and cannot be relied on because it is owned by the tobacco industry.
Success Stories
in Combating Illicit Trade
Kenya’s Track and Trace System increased excise tax revenue.
Kenya implemented a track and trace system in 2013, resulting in a 20% increase in excise tax revenue between 2013 and 2016.
The Kenyan Revenue Authority estimates that the illicit cigarette trade market share declined from 12% in 2013 to 5% in 2016, a direct result of the implementation of track and trace measures.
Georgia decreased the size of the illicit tobacco market (while increasing taxes).
In Georgia, almost 50% of cigarettes sold between 2000 and 2010 were illicit. Georgia successfully implemented progressive economic reforms in its revenue and customs services, including requiring tax stamps on all tobacco products. Currently, these are only used for tracing, though they have the capability of being used for both tracking and tracing.
As a result, illicit cigarette consumption fell to 1.5% of total consumption in 2018. This reduction in illicit consumption coincided with significant increases in Georgian excise taxes.
Romania improved tobacco-control enforcement and reduced illicit trade.
In early 2010, 19% to 30% of tobacco in Romania was purchased on the illicit market. To combat this, Romania took steps to improve the enforcement of tobacco-control policies. In the first phase, from 2010 to 2012, they aimed to:
• create a better legislative framework;
• strengthen the administrative capacity of customs; and
• focus on specific and more effective controls to curb cigarette smuggling.
By the end of 2013, the size of the illicit market had decreased to 11.4% of the total market.
The United Kingdom was able to decrease illicit trade and reduce smoking prevalence while increasing tobacco taxes.
In the United Kingdom (UK), the sale of illicit tobacco products was estimated in the year 2000 to have caused a loss of £3 billion in tax revenue. The tobacco industry has often argued that increases in tobacco taxes lead to increases in illicit trade. While tax and price differences in neighbouring countries/regions may increase the incentives for illicit trade, the UK experience shows that a comprehensive tobacco control strategy can increase government revenues through higher tobacco taxes, achieve significant reductions in smoking, and successfully reduce levels of illicit trade. The UK experience shows that contrary to the tobacco industry’s argument, increases in tobacco taxes are not the reason for increases in the illicit trade in tobacco. When accompanied by comprehensive tobacco control laws, illicit trade in tobacco can be controlled and reduced, in spite of higher taxes, through improved tax administration and enforcement of tax laws.
