Still sceptical?
I can’t point to any publicly available information that proves that a company like BAT has been caught with its hand in the proverbial contraband cookie jar in South Africa in particular.
Well, aside from that eye-watering assessment for R214 million (around $15 million) that SARS issued against BAT towards the end of 2018. It related to apparent mismatches between their export declarations and what was actually in the containers, and some other apparent abuses around rebates.9
Or the additional income tax assessments SARS issued against BAT to the value of $124 million for aggressive tax planning using debt financing structures (the single biggest dispute on record between SARS and a taxpayer.)
Or that affidavit, filed as part of a High Court case against BAT, by an ex-employee of their security company that alleged the company bribed police officers and tax officials, including allegations that this was intended to secure a blind eye to BAT’s ‘tax evasion’ and ‘money laundering‘ in South Africa.10 At the time, BAT said it had appointed an independent law firm to investigate whether there were any illegalities in the way the security firm had done its work.
I asked BAT for comment. They never got back to me.
There is also the small problem of the Tobacco Institute of Southern Africa’s missing billions. In Johann van Loggerenberg’s Tobacco Wars, there is this little nugget: TISA apparently said that its members – BAT, JTI and PMI – had manufactured around 19 billion sticks of cigarettes during 2017/18. But for the same fiscal year, only 15,3 billion sticks of cigarettes were reportedly declared to the taxman (at least some of which must have come from the independent manufacturers). Just on big tobacco’s own numbers that’s quite a big gap. A whopping 3,7 billion sticks have gone missing somewhere – 185 million packs that have simply not been accounted for, and R4,625 billion lost (around $320 million).
If the data in Tobacco Wars is correct – and I believe it most likely is – there are only four possible explanations: either TISA made a mistake (but having seen some of the other analysis that TISA has been doing over the years, this seems unlikely); or TISA deliberately gave a wrong number (but why would they?); or TISA’s members are not declaring all of the packs they produce to the taxman; or perhaps they are deliberately inflating their production volumes to demonstrate to shareholders that their operations are on the increase, when in fact they are not (and there seems to be some whispers in the industry of this indeed happening).
I asked TISA for comment. They initially asked whether I was writing this book in my personal capacity or on behalf of another organisation. They then replied as follows: ‘We will not be responding to any of your questions. Most of your questions are loaded and with a clear agenda in mind. TISA represents the legal industry and to this extent we have made many public statements about illicit trade etc. You are welcome to use information on our website.’
(In a surprise twist, on 22 January 2020, a source suggested I have a look at the TISA website again. The entire TISA website had been replaced with a single page, ‘TISA to be wound up,’ it said. TISA was no more. The source also suggested that this was because – in his words – ‘the other members no longer wanted to be associated with BAT South Africa.’ Read the rest of this book, and make up your own mind on the likely reasons behind TISA’s unexpected implosion.11)
Whichever one of the above explanations sits most comfortably with you, there seems to be a snake in the grass in the big boys’ club.
We also know that SARS – before it had its wings clipped – had reportedly been set to take away 15 tobacco manufacturing licences. There are fewer than 15 smaller, independent manufacturers, so perhaps one can conclude that one or more of the multinational tobacco companies also would have faced the threat of having their licence revoked.12
Aside from these clues hinting at something untoward, I really don’t have a smoking gun, perhaps just a really warm barrel (for South Africa anyway).
What I can do, aside from that, is tell you how companies like BAT, PMI, JTI and Imperial developed a global business model that allowed their cigarettes to be smuggled in other countries around the world.
4. Dead easy to cheat
To understand the basics of how a smuggling empire operates, we need at least a rudimentary understanding of how the illicit trade in products like cigarettes works.
The term ‘smuggling’ encompasses a whole plethora of different behaviours, just as the trade in illicit cigarettes is not one homogenous concept.
Smuggling, of course, is an age-old phenomenon. As far back as the 1700s, pirates were dropping off illicit cigarettes in ports not controlled by colonial authorities, in what was a booming smuggling industry. Filling tubs of tobacco with sawdust and powdered brick in the 1800s saw the start of a counterfeiting industry, padding the tubs to falsely inflate the total amount of tobacco that could be sold, much like with modern drug dealers ‘cutting’ substances. (Addendum 5 has more details on the history of tobacco smuggling.)
Modern smuggling is very different and involves a variety of practices, as I have already explained. These days, excise duty is payable on every pack of cigarettes that is sold for use inside a country. It’s deceptively simple – but within that simplicity lies a multitude of ways to cheat.
At its heart, the scheme is to convince the taxman that you are selling fewer packs in the country than you really are. And it’s dead easy to cheat the system.
(For a far more detailed overview, have a look at addendum 1, the SARS letter to tobacco manufacturers, in which they explain the different schemes in some detail.)
Many countries – including South Africa – have virtually no insight into production volumes, and effectively have to take cigarette manufacturers at their word. It’s easy simply not to declare a batch; or to set up a covert factory the taxman knows nothing about; or to run entire unmapped contraband towns (as BAT has allegedly been doing in the Democratic Republic of Congo).
Many countries – including South Africa – do not in any notable way monitor the tobacco supply chain. They do not as a matter of course compare how many filters or cigarette papers a company buys against the number of cigarettes declared; there is no way to track where the packs go once they are sold, or to trace packs found on the market back to where they came from. Manufacturers are under no obligation to use ‘know-your-customer’ policies or to apply due diligence checks to the people they do business with, which means they can effectively sell willy-nilly to whoever comes to their gates.
And many countries – including South Africa – are plagued with archaic excise administration systems that cannot adequately compensate for the integrity risks that are inherent in any highly manual system that only checks a small percentage of consignments, for a commodity that poses a very high risk.
And indeed, many countries – again like South Africa – do not really regulate the purchase or importation of tobacco manufacturing equipment. In many parts of the world you can buy state-of-the-art cigarette machines online from sites like Alibaba.com for $1,5 million to $3 million, which is easily recouped when you are making over $100 million in annual sales.
In addition, big tobacco companies shift significant volumes of their products across national borders. (Consider the fact that BAT South Africa alone ships its packs to at least 22 other countries.1) In light of the extremely porous nature of South Africa’s borders, the theoretical permutations and opportunities for under-declaration, ghost exports, round-tripping, diversion, over-supplying and otherwise playing with packs ostensibly destined for duty-free sales would be exponential, for whoever it is that ends up doing the actual smuggling.
Of course, for any company that wants to run a smuggling empire, hiding all of this entails an entirely different sub-set of criminal activities, including evading related income taxes; corruption and bribery; forgery; money laundering and sometimes fictitious transactions.
Some