What would the industry have us believe? What are they actually doing to fix the systemic issues that recur year after year? We simply don’t know. We certainly aren’t seeing any real change in either their behaviour or in the risks they pose.
At the very best, giving industry every conceivable benefit of the doubt, it is clearly highly vulnerable to criminality (even if you buy its occasional plea that this is not of its own making but the doings of countless rogue employees), making the case for far stronger regulation of the industry.
As Gilles Pargneaux, Member of European Parliament, puts it: ‘What are we witnessing when it comes to our dealings with the tobacco industry? It is illegal activities flirting with criminal organisations, duplicity in the fight against illicit trade of tobacco products and strategies of fiscal evasion which were unveiled by the special committee of the European Parliament on Tax Evasion. This is the worrying assessment we have to make in order to stop these practices and rein in the influence of the tobacco industry.’26
Why have they managed to get away with this on such a grand scale? Because our law enforcement agencies and policy makers have failed to put up a meaningful fight.
7. They play a weak defense
Despite having had centuries to refine their regulatory efforts and tactics, governments are failing dismally in their efforts to curtail the illicit trade in cigarettes.
An internal PMI corporate affairs document perhaps says it best: ‘[They] play weak defense.’1 As a result, cigarette smuggling is now one of the fastest growing forms of organised crime.2
Cigarettes are the world’s most widely smuggled legal substance.3
Dealing in illicit cigarettes is a lucrative, relatively low-risk activity, netting around $2 million profit on a black-market container. As one enforcement officer notes, cigarettes are easy to smuggle, easy to buy, drug dogs can’t sniff out the difference between a licit or illicit pack, and you don’t go to jail for 50 years if you get caught.
They differ from other illicit commodities like methamphetamines or cocaine in that they are not inherently illegal, but the business is no less dirty for it.
Against that global perspective, just how big of a problem has this been in South Africa? Some years ago, back in 2012, I was asked to coordinate the crafting of a compliance programme for SARS. At the time, our analysis suggested that the tobacco industry in South Africa was disproportionately risky, resulting in it being listed as one of the key focus areas for the agency over a coming number of years.4
I’d like to think that, for a small amount of time, before the walls came tumbling down, it made a difference: By 2014, SARS’ focus on criminality in the tobacco industry had resulted in a 25% increase in excise and VAT payments. In 2012, SARS had seized 54 million illicit cigarettes – by 2014 this had increased to 270 million cigarettes. And all of it attributable to a single project: Honey Badger.
But in real terms, this was a veritable drop in an ocean of contraband. The successes were real – but they were not and are not nearly enough. Globally, governments are finding and seizing an estimated 0,7% of all illicit cigarettes believed to be on the market.5 In South Africa, it’s almost certainly even less than that.
Are the seizures making a difference? I’d like to think so. Is it enough? No.
Even if nine containers were seized in ten, smugglers still would not be losing money, one expert in the field has suggested.6
Illicit tobacco consumption in the EU alone is the equivalent of more than 5 860 twenty-foot containers a year.7
Best estimates suggest the annual illicit trade in cigarettes is worth more than the nominal GDP of almost one quarter of the world’s countries. If all the different organisations involved in the illegal tobacco trade were combined into a single company, it would be the third largest international tobacco company by revenue.8
An average, legitimate business may make around 25% in profit. Shoe companies tend to fare a little better, with profit margins averaging around 42%. Making counterfeit products, like handbags? You’re looking at 330% profit. But, as a law enforcement officer at the DEA notes, for real money? Heroin (1 886% profit) and untaxed contraband tobacco (4 200% profit)9 are where the stakes get really high.
Illegally trafficked cigarettes now have a higher profit margin than cocaine, heroin, marijuana or guns. A fine, or even a conviction, becomes a simple calculated cost of doing business that is easily discounted against the profits being made on other consignments.
In Australia, if you were to buy $150 000 worth of cocaine or heroin, you’d make around $2,3 million selling the consignment. If caught, you go to prison. The same $150 000 spent on smuggled tobacco would earn you $10 million. If caught, you’d get a small fine. How would you spend your $150 000?10
And so, globally, it is estimated that illicit cigarettes account for around one in every 13 cigarettes.11 But the global average is not the problem: local and regional variances are. In countries with poor regulatory frameworks, and even poorer compliance cultures, the prevalence of illicit tobacco is far higher. As much as 80% of the cigarettes in some West and North African countries are illicit12 – meaning that the vast majority of the cigarettes sold in these countries profit criminals.
Even in better-regulated Europe, the number of known illegal factories is increasing: in 2010 five illegal factories were closed down – by 2016 this figure had jumped to 55. Some of the bigger illegal factories have a production capacity of around 1 million cigarettes per day.13
An estimated one third of cigarettes that are declared for export are believed to end up in the illicit cigarette supply chain.14 Even the simplest of analyses shows how billions of cigarettes go missing. If you were to compare the volume of cigarettes declared for export in one country, they should match the volumes of cigarettes declared for import in the destination country. Very often, they do not.
So, for example, let’s have a look at cigarettes that are exported from South Africa to Botswana. The packs are shipped in a container, with two key pieces of paper: an export declaration that is submitted to authorities in South Africa, and an import declaration for authorities in Botswana. In theory, what’s physically in the container should match both the export and import declarations, and what is exported from South Africa, should match what is imported into Botswana, right?
Instead, comparing publicly available data from South Africa and Botswana, it would appear that five times more cigarettes are declared for export from South Africa, than are declared for import into Botswana. The stuff in the container should match, and the data should match – they don’t. Literally billions of cigarettes simply seem to be going missing somewhere between this side of the border and that side of the border. But the mismatch makes sense – because you don’t pay export duties on cigarettes that leave a country, but you do pay import duties on cigarettes coming into a country. There is little incentive to cheat on an export declaration, and every incentive to cheat on an import declaration.
In 2010, records would suggest that tobacco companies declared that they were exporting $219 million worth of cigarettes to Botswana – and yet Botswana records seem to suggest that country received only $28 million worth of cigarettes; in 2012 exports were pegged at $232 million – but only $38 million of this was declared on Botswana’s side. At least by 2016 the numbers looked marginally better: $129 million worth of cigarettes were declared for export to Botswana, and a moderately more respectable $75 million were declared for import into Botswana.15 If not smuggled, then where did these cigarettes go?
And as much as governments may say they take the challenges around the illicit trade in tobacco seriously, this is often not reflected in the way in which perpetrators are treated. So, for instance, in Australia, which is very publicly battling illicit cigarettes, tobacco smugglers are reportedly being fined on average $17 000 – far below the maximum $210 000 penalty allowed, while being allowed to keep the proceeds of crime, and without any profits from illicit tobacco reportedly having been seized. There have only been 24 fines imposed in five years. That is less than five fines a year – in a year when 226 contraventions