Illicit Trade of Cigarettes in South Africa
Many countries have successfully increased tobacco taxes without illicit trade increasing.
Strong enforcement and an independent track and trace system are the most effective ways to combat illicit trade.
The illicit trading of tobacco products is the supply, distribution, and sale of smuggled genuine, counterfeit, or cheap white tobacco products (defined below). This page:
Defines types of illicit tobacco trade in South Africa,
Discusses the levels of illicit trade in South Africa,
Examines and addresses myths promoted by the tobacco industry, and
Suggests methods to reduce illicit trade, including success stories from other countries.
A one page fact sheet with the key information from this page is available here.
To learn more about the data and methods used in this page, click here.
Market Share
of Illicit Trade in South Africa
The illicit tobacco trade has increased markedly since 2010.
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 weakening enforcement capacity at SARS.
By 2021, illicit tobacco consumption had risen further, to 54%.
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.54%
The estimated percentage of illicit trade in South Africa in 2021
Types of Illicit Trade
in South Africa
Illicit Tobacco
Products
Contraband
Tobacco products produced legally but which are illicit because the applicable taxes, duties, and fees are not paid before they are sold to the consumer. The diversion of supply from manufacturer to licensed retailer can occur via bootlegging or large-scale smuggling operations.
Most of the illicit cigarettes smoked in South Africa are produced domestically in legal facilities.Counterfeit
Tobacco products illegally produced and that have fake manufacturing labels and trademarks. These products infringe intellectual property rights, they may not pass health regulations, and the appropriate taxes are not paid. Counterfeit cigarettes are relatively rare, estimated to make up just 2% of global illicit cigarettes.
Cheap whites
Tobacco products produced legally but for the sole purpose of being exported and illegally sold in another market where they are not legal. They may not meet the destination country’s health standards and the appropriate taxes are not paid in the destination country (though in some cases, the appropriate taxes are paid in the country of production). These are also sometimes referred to as “illicit whites” or “off-brand”.
Loose tobacco
Loose tobacco refers to the tobacco used to manufacture cigarettes. If the appropriate taxes are not paid or the appropriate health checks not conducted on the loose tobacco, it is deemed illicit.
Tobacco Tax
Types
Import duties tax
Levied on selected imported goods destined for local consumption (i.e. not in transit).
Value-added tax (VAT)
Levied as a percentage of the value of many different products (in SA the VAT rate is 15%), aimed at raising revenue.
Excise tax
Typically levied on specific products, like tobacco, alcohol and, since 2018, on sugar-sweetened beverages in South Africa, with the primary aim to discourage their consumption.
Excise taxes are typically levied as:a. Specific excise tax: Monetary value per quantity (e.g. pack/piece/weight);
b. Ad valorem excise tax: Levied as a percentage of the product’s value
Illicit Tobacco
Supply Methods
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. 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.
Transnational Tobacco Companies
and Illicit Trade 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.
Recently, there has been an upsurge in smuggled cigarettes in Africa — most notably of popular brands such as Philip Morris’ Marlboro and Japan Tobacco International’s Camel cigarettes — in several African countries, including Benin, Cameroon, Central African Republic, Egypt, Eritrea, Ethiopia, Gabon, Morocco, and South Africa.
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.
Analysis suggests BAT carried out corporate espionage, made questionable payments in several African countries, and ran networks of informants in Africa.
One of BAT’s informant networks was a secret network in Southern Africa that allegedly used drones, trackers, and other questionable means to undertake surveillance on competitors. Many of the alleged surveillance operations were possible due to BAT’s influence over law enforcement agencies.
BAT has also used questionable payments, such as bribes to government officials, to try to influence tobacco control policies and undermine competitors in Africa.
In South Africa, analysis of leaked industry documents and court affidavits suggests BAT was engaged in illegal informant networks, state capture, and the potential smuggling of its own products.
Case Study: British American Tobacco and Cigarette Smuggling in Mali
Billions of cigarettes, most made by BAT, are smuggled north through Mali every year on their way to the grey markets of the Sahel and Northern Africa.
Profits from cigarette smuggling fuel the struggle between jihadists, armed militias, and corrupt military officers, which has turned northern Mali into a war zone.
This smuggling began soon after militants took control in the north of Mali, when BAT started to oversupply Mali.
The most commonly smuggled cigarettes through Mali are Dunhills, produced in BAT’s factories in South Africa, and Philip Morris’ flagship brand, Marlboros, which are handed to smugglers linked to armed groups.
Data shows that there may be up to 4.7 billion surplus cigarettes moving through Mali every year — the equivalent of around 470 shipping containers of extra cigarettes. Some of them are produced in the country, but most are imported, almost all of them from South Africa.
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. Strategies include 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.
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.
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 to 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.
Brazil brought down illicit cigarette consumption through a combination of legislation and technology.
During the 1990s, Brazil’s cigarette exports increased 8,000-fold, but the majority of exported cigarettes found their way back to Brazil as contraband. Brazil initially dealt with this by imposing an export tax of 150% on cigarettes sent to neighbouring countries, a measure that successfully reduced the prevalence of contraband cigarettes. However, tobacco companies sued the Brazilian government, on the grounds that the export tax was against free-trade legislation, and won the lawsuit, overturning the export tax.
Between 2000 and 2006, the Brazilian government kept excise taxes low in order to out-compete illicit products by motivating the legal production and supply of cheap cigarettes. This did not work, because cigarette manufacturers did not lower their prices but instead benefitted from the low tax environment. In 2007, realising that their tax policy was not working, the government began to raise excise taxes by more than inflation and imposed a minimum price per pack. In addition to changing its tax policy, Brazil mandated the licensing of its manufacturers and introduced a track and trace system.
The increase in excise taxes increased cigarette prices, reduced both legal and illegal cigarette consumption, and increased tax revenue. The track and trace system exposed seven manufacturers’ engagement in illicit activities and led to their closure.
