Multinationals use smoke and mirrors in illicit trade

The illicit trade in tobacco may be highly profitable for cigarette manufacturers, including the multinational companies, but is exceedingly dangerous to democracy. Behind the money to be made from selling cheap, illegal cigarettes lies a more sinister agenda of corruption, money laundering and state capture.

British American Tobacco (BAT) has been accused of “corporate espionage” and of infiltrating law enforcement agencies for its own benefit. The kerfuffle at the South African Revenue Service (SARS) originates from investigations into the illicit tobacco trade.

In November 2013, SARS announced it wanted 15 local tobacco manufacturers and importers to be prosecuted for tax evasion and illicit trading. At stake was R12bn in unpaid taxes. About 18 months later, SARS acting commissioner Ivan Pillay, head of enforcement Johan van Loggerenberg and 55 other officials found themselves unemployed as a result of an aggressive campaign against SARS. The prosecutions for illicit trading evaporated.

SARS investigations into the illicit tobacco trade exposed extensive penetration of law enforcement agencies by the multinational tobacco companies. In a court application, a smaller rival, Carnilinx, accused BAT of “corporate espionage” and using government agencies to try to put it out of business.

The Tobacco Institute of SA – supported by BAT – allegedly spent about R50m a year to run an intelligence network to fight the illicit trade, but which ended up spying on competitors.

The money gave the Tobacco Institute and BAT a seat on the official Illicit Tobacco Task Team, which includes representatives from the Hawks, the State Security Agency, the police and the National Prosecuting Authority. Critics say its presence on the task team allows BAT access to confidential state intelligence and the ability to drive the law enforcement agenda to target its smaller competitors.

The major cigarette companies have hijacked the problem of tobacco smuggling, promoting misperceptions of the size of the trade, its costs to the economy, its causes and its own role. One myth is that the major cigarette companies are victims rather than beneficiaries of smuggling. The idea that tobacco companies would facilitate the smuggling of their own brands might seem strange but this is what has been happening for the past two decades. Internal company documents reveal that promoting illegal cigarettes became an integral part of the business strategy.

The shadowy nature of the illegal activities makes it difficult to accurately gauge the true extent of the trade.

BAT and the Tobacco Institute control information about the size of the market. Independent academic research finds large discrepancies between its own and industry estimates. For instance, when the industry was claiming that the illicit trade had reached 20% of market share, the academics’ estimate was 10%. Nonetheless, both the government and the media repeat inflated industry claims that the size of the trade is R5bn annually, an estimate grounded on speculation rather than fact.

Among the reasons for exaggerating the size of the problem is to put pressure on the government not to increase tobacco excise taxes or to enact tobacco control laws such as plain packaging. A knee-jerk industry response to any government policy designed to reduce tobacco consumption is to claim that it will increase illicit trading.

The illicit trade is also beneficial because it adds buoyancy to a market that is shrinking. Since 1994, the prevalence of smoking in SA has fallen about 40%, largely driven by rising cigarette prices.

The availability of cheap cigarettes on the streets encourages smokers to switch to lower-priced illicit brands instead of quitting. So instead of losing customers, smokers stay in the market and with improved economic circumstances will later return to premium brands. A win-win for the industry.