If you wanted to supply the illicit market, where would you get your hands on contraband packs? Either you would have to make the packs locally and just not declare all of the packs to the taxman; or smuggle them in; or hijack a competitor’s trucks.
The first source – under-declaration – is simple enough: the undeclared surplus packs are sold, tax-free, on the black market. Factories may run double shifts or run their machines at night when they know nosy customs officers are unlikely to pay them a visit, or pay a customs officer to look the other way. They may re-use a single invoice for ‘100 cases of cigarettes’ for multiple deliveries of a hundred cases of cigarettes. Or they may claim that stock has been exported – which means that no tax is payable on it – when in fact it has been sold in the domestic market (called round-tripping or ghost exports). Commonly, they tend to have at least some kind of legitimate manufacturing and sales, with the illicit packs simply constituting a percentage of their overall sales, making it more difficult to distinguish between licit and illicit packs found on the market. This borrows from an art that big tobacco seems to have perfected decades ago: ‘umbrella operations’, where legitimate packs are deliberately sold to provide cover for their illegal cousins and explain their presence on the market.
The second source – smuggling the packs in from somewhere – is simple enough. In South Africa, much of this comes from neighbouring Zimbabwe, with large volumes of packs literally being smuggled in on a daily basis. At some point this heavily involved using fuel tankers and trucks which would deliver an unrelated consignment to Zimbabwe, and ostensibly return to South Africa empty, instead being stuffed with cigarettes (many trucking companies actively defray their costs by filling what would otherwise be empty vehicles with illicit loads on their way back, from cigarettes and cocaine to rhino horn and ivory.)2 When Zimbabwe introduced vehicle scanners at Beitbridge border post, using trucks became more dangerous, so they are now mostly used by those with political protection or enough money to grease a customs palm.
Why single out Zimbabwe? Because the illicit trade in South Africa is very closely tied to its neighbour, for two simple reasons: Zimbabwe is the biggest tobacco producer on the continent, producing what is widely regarded as some of the best tobacco in the world; and South Africa is the largest, most profitable consumer market and production hub.
Not all of Zimbabwe’s cigarettes that head down south were necessarily always destined for the South African market: in my conversations, a few sources have noted how South Africa was historically also used as a sanctions-busting transit space for its neighbour. When sanctions were imposed on what was then Rhodesia (today’s Zimbabwe), it became exponentially more difficult to sell what was considered to be some of the best quality tobacco leaves in the world. The solution was simple, as explained by an acquaintance whose father ran a tobacco factory in the country at the time: Zimbabwean cigarettes were produced as they always had been but were fraudulently marked as having being produced in South Africa – apparently this part of the factory was blocked off, with only a few people having access to the space where the packs were marked, and with the packs subsequently being smuggled into South Africa and exported from there.
Of course, not all of the illicit packs on the South African market come from Zimbabwe: packs are to a lesser or greater degree also smuggled into South Africa from places like China, often via Singapore, or from free trade zones in the United Arab Emirates. Almost all of it is ‘genuine’ contraband – since around the 2000s, counterfeit cigarettes have actually made up a very small percentage of the South African market, as is true for most of the world.
The third source – hijacking a competitor’s trucks – is perhaps a more uniquely South African phenomenon: BAT at one point reported that 1 412 of its transport vehicles are hijacked annually – at least four hijackings a day, and accounting for 20% of all vehicle hijackings in South Africa’s Gauteng province.3 That’s a lot of cigarettes going missing – and, depending on how the taxman dealt with this, potentially a lot of cigarettes not being taxed.
So, in its simplest form, when we talk about illicit cigarettes and smuggling, what we’re dealing with is the art of giving cigarettes an invisibility cloak, because the taxman can’t tax what he can’t see.
As you read through the next few chapters on smuggling, it may be useful to remember the anodyne synonyms the industry developed when talking about its smuggling activities (because even the most emboldened of businesses would probably not refer to its ‘smuggling’ business as ‘smuggling’ on paper.) And, so, the industry has developed a set of rather less offensive, somewhat more neutral terms to describe the illicit parts of its strategy.
Smuggling and illicit channels are implied any time you read the following words or acronyms: ‘duty not paid’ (DNP for short);4 ‘transit’; ‘general trade’ (GT for short); ‘border trade’, ‘free markets’ or ‘value for money’ (VFM).5 A few of BAT’s older documents quite neatly explain the terms:
•‘With regard to the definition of transit it is essentially the illegal import of brands upon which duty has not been paid.’6
•‘The DNP market is the volume of cigarettes produced in Venezuela, exported (mainly to Aruba), and re-entering Venezuela as transit.’7
•‘The imported sector in Taiwan has increased each year. This figure includes legal imports plus GT [general trade/smuggled] imports estimated at 7.6 bns.’8
Against that short introduction to smuggling, next we’ll explore how BAT may have made as much as 25% of its profit from smuggling into China and how big tobacco ended up paying more than $1 billion in penalties for the smuggling of its packs.
5. Smuggling: A rogue’s gallery
Some of the examples and case studies included in this book go back some years. It was important to include them, because they highlight a consistent pattern of behaviour spanning both decades and continents, and because it is only by understanding the industry’s consistent history of obfuscation and filibustering and legally dubious behaviour that we can begin to pre-empt the future.
The examples are not meant to be an exhaustive catalogue of smuggling and tax evasion, and of course include only those cases already in the public domain, because most tax and customs agencies are sworn to secrecy. Once you start delving into the industry it becomes something of a rabbit hole. For every example quoted in this book, you can likely find ten others. And while the examples are illustrative only, they do make the point that the illicit trade in tobacco products is not limited to backyard taverns, bootleggers and mobsters, but has very much been the playground of big tobacco.
BAT kindly documented for us in detail some of its forays into China in the 1980s:1 BAT documents note how official imports offered ‘relative poor corporate profitability’2 because of the highly restrictive import quotas and tariffs, leading to large-scale smuggling to access the world’s largest market of smokers, activities foreign tobacco companies were aware of.
BAT’s own records detail how they did it: by setting up BAT Distribution Ltd to manage illicit trade in Asia, which they were advised ‘should be incorporated in a tax haven of choice’3 to ensure that the contraband trade could be carried out ‘on an arms-length basis’.4 It needed to be ‘little more than a brass plate company with very low overheads and the flexibility to establish branch offices wherever the transit traders move’.5 Its activities remained fully controlled by the BAT China Group, and the structure was approved by BAT’s Chairman, to ‘ensure the efficient distribution within the China markets of duty free [illicit] BAT products’.6
BAT invested heavily in its illicit trade stream in China, with one of their vice presidents saying: ‘The best prospects for growth in the Chinese market continues [sic] to be the unofficial channels for the foreseeable future.’7
BAT’s Head of Corporate Planning at the time recognised the contraband trade’s vulnerability given the ‘danger of serious action by the authorities’.8