February 17, 2019

Police see illicit tobacco trade as a crime of tax evasion

Parliament’s Standing Committee on Finance has called on its researchers to investigate allegations made in the media that the South African Revenue Service (SARS) is complicit in the massive illicit tobacco trade that is costing the country an estimated R5 billion per year in tax revenue, or 10% of what is needed to plug government’s revenue shortfall of R50 billion.

Committee Chairperson Yunus Carrim requested researchers to report back in August, and said the Committee intends to meet late this year or early next year to decide whether legislative amendments are required to enforce law enforcement agencies to act on ITT. There was nothing stopping the Hawks from operating like the Scorpions and carrying out prosecution-driven investigations, he said.

The Chairperson called on the National Treasury, through the Minister of Finance, to co-ordinate a team that would help an inter-ministerial Committee on Illicit Financial Flows to develop an effective co-ordinated strategy.

'The money being lost through illicit flows was needed now more than ever' -- Yunus Carrim.

In the interim, he wanted to see “serial transgressors” being thrown into jail and “the revenue due to the people of this country” being collected by SARS. The Chairperson said the money being lost through illicit flows was needed now more than ever.

Even SARS conceded that it had not done enough to tackle ITT in the past two to three years. It reported that it would acquire and apply Track and Trace technology to improve tax revenue collection, and auditing and enforcement. At the same time it reported that SARS has continued to clamp down on illicit trade, not just in the tobacco industry but in clothing and textiles, construction and high net worth individuals as well.

Between 2014/15 and 2017/18, SARS said it had conducted 1 368 seizure operations, where 270 million cigarette sticks to the value of R217 million were collected.

This seemed a rather paltry amount compared to that presented by the Tobacco Institute of South Africa (TISA), which said its research estimated that between 2010 and 2016 the fiscus had lost R27 billion due to illegal tobacco sales.

The comments from CEO of TISA, Francois Van der Merwe, could have come straight out of Jacques Pauw’s ground-breaking book on corruption and state capture. Van der Merwe referred to the Honey Badger project, dealt with by Pauw. It was a project launched by SARS to tackle illicit trade. Van der Merwe made the startling observation that from 2014, when the first allegations of a rogue SARS unit emerged, until 2017, SARS appeared to do nothing to stop illicit trade. He described that period as a good time for illicit traders to make money.

In the presentation, Van der Merwe said the need to take action against ITT was urgent. If it was not dealt with decisively, he said, there may soon be no legal industry to regulate. He estimated two years from now the tobacco industry could be gone and the entire market supplied by illicit products.

It’s a strong claim but he warns that the cost to the country would be enormous, not only in terms of tax revenue. He highlighted the economic contribution of the legal tobacco industry to the South African economy, even though it has contracted in recent years. Currently, the industry has a market value of R28.8 billion and supports 8,000 to 10,000 workers in the agricultural sector with 30,000 to 35,000 dependents as well as more than 179,000 wholesalers and retailers. In his view, all of this will be at risk if the illicit trade continues.

Van der Merwe said SARS should collect R17.85 tax, (R15.52 in excise duties and R2.33 in VAT) per packet of cigarettes in the 2018/19 year, according to the national budget. This meant a pack of cigarettes selling for less should sound alarm bells.

The presentation by the Priority Crime Investigations (the Hawks) was equally chilling. Major-General Alfred Khana, from the Hawks said tax evasion was the crime at the heart of ITT through non-reporting of income. South African should regard this criminal activity as tax evasion and not ITT, he said.

He explained that legitimate businesses were operating as fronts to trade illicit tobacco from other countries. Allegations of cigarettes manufactured in Lesotho and Zimbabwe are illegitimately brought into South Africa.

The South African Police Service (SAPS) does not have the capacity or manpower to check cigarette prices in stores, but reported some that sold cigarettes for R10, although the tax on these boxes is more than R17.

Khana suggested that industry bodies such as TISA and the Fair-Trade Independent Tobacco Association (FTIA) audit manufacturers to determine how many cigarettes are sold and how much revenue is generated. He said the Hawks would willingly investigate instances of tax evasion that were reported to them.

However, he pointed to a significant problem. Section 4 of the SARS Act, which deals with protection of information, means the Hawks cannot carry out investigations because SARS officials cannot share information about taxpayers.

He has written to the Law Reform Commission to request guidance on the interpretation of the section, he told the Committee, emphasising that to effectively regulate the tobacco industry stakeholders would had to work together and deal with the challenge more decisively.

Common to all presentations and the Committee discussion that followed, was the need for better cooperation between SARS, SAPS, the Hawks and the National Prosecuting Authority (NPA). It was also stated repeatedly that there was a need to get to the bottom of the allegations with an inquiry into SARS.

The Committee felt that SARS should get the total revenue due to it from the industry, especially in the light of current revenue shortfalls. There was a strong feeling that SARS’s capacity, especially in intelligence, needs to be upgraded.

Mpho Legote, the Director of Excise Duties and Subnational Taxes in National Treasury, also called for called developing SARS’ capacity, particularly in intelligence, and greater co-operation with other law enforcement authorities to investigate allegations related to ITT.

He said the fiscus had been hit hard, with a 26% drop in excise duty which has been attributed not to decline in the consumption of tobacco but to increases in illicit trade which increases the accessibility and affordability of tobacco products, fuelling the tobacco epidemic and undermining tobacco control policies.

Treasury was not only concerned with revenue implications. Also of concern was ITT’s undermining of the government’s efforts to implement health regulations. South Africa was a signatory to the World Health Organisation’s Protocol to Eliminate Illicit Trade in Tobacco Products, he said, which required “the National Treasury and the Department of Health [to] explore additional measures to reduce consumption of tobacco products, including a minimum price and stronger enforcement.”

Chris Axelson, Director: Personal Income Taxes and Savings at National Treasury, agreed there was need for an increase in capacity at SARS and other enforcement agencies to tackle ITT and better cooperation between SARS, SAPS and the NPA. He also made the point that the main was to get to the bottom of the allegations about SARS’s role in this criminal activity.

Sinenhlanhla Mnguni, the Chairperson of the Fair Trade Independent Tobacco Association, said its members were hardest hit by the illicit tobacco trade, which he described as monopolistic, anti-competitive and “riddled with unethical practices”. Mnguni spoke of huge, sophisticated illegal factories in Lesotho and Zimbabwe that produced counterfeit FITA member brands and smuggled them into the country.

FITA said it was getting no help from law enforcement agencies, despite efforts to engage with SAPS and others to deal with problems like porous borders. Over and above illicit trade, FITA said it was time for all stakeholders to deal with other challenges affecting the local tobacco industry to ensure that the playing field is levelled for all, including emerging producers.

Even the Financial Intelligence Committee (FIC) made an input to the Committee hearing, saying that while it is not an investigative authority, it supports investigations using financial intelligence. It has held meetings with various law enforcement agencies and worked closely on these matters with SARS, the Hawks, the State Security Agency, and South African Reserve Bank’s Financial Surveillance. It expressed its commitment to continue engaging all stakeholders in countering the threat of organised crime, particularly ITT.

Adv Malini Govender, Specialised Commercial Crimes Unit of the NPA, said the NPA has been dealing with illicit traders since its inception, with the oldest case on the matter dating back to 2000. The NPA established a specialised tax unit in conjunction with SARS in 2003, which deals with criminal matters affecting revenue of the country.

Govender said the role of the NPA was to provide guidance for investigations and not necessarily to conduct investigations. It relied on investigations by SARS and SAPS in order to pursue prosecutions.

In 2017, 124 cases were referred to the NPA, 43 had been finalised with guilty outcomes, and other cases were still being litigated. She suggested the different stakeholders should set joint targets, because each is seeking different outcomes. The NPA, for example, has an objective to achieve convictions, while SARS has an objective to recover revenue. She added that there is a benefit of having joint operations to address organised crime and corruption relating to the tax system.

Adv Govender said South Africa ranked among the top five countries in the world engaged in trade in illicit cigarettes, along with Malaysia, Iraq, Brazil and Pakistan.

Moira Levy

Additional information sourced from the Parliamentary Monitoring Group

Additional Info

  • Author: Moira Levy

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