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South Africa Smuggling
>From Business Day (Johannesburg)
05 May 1998
Smuggling benefits
tobacco firms
Is the tobacco industry, directly or indirectly,
helping to fuel the lucrative trade in cigarette
smuggling, asks Nic Turner
THE thorny issue of smuggling has emerged to plague the
American and British tobacco industries as they push
aggressively into new markets.
About one-third of all exported cigarettes end up being
smuggled every year and questions about the rampant
trade in contraband are increasingly being directed at the
source of the product.
Although manufacturers say smuggling damages
legitimate trade, research from inside and outside the
industry shows that smuggled cigarettes help the
companies establish a competitive edge in new markets.
Recent court cases that link tobacco industry executives
with smuggling syndicates have added to the suspicion
that tobacco companies not only benefit from smuggling,
but that in some cases, there may be complicity with the
illegal trade.
In the US, present and former employees of Brown and
Williamson, a subsidiary of British American Tobacco
(BAT), have been charged with smuggling cigarettes into
Canada, while in Hong Kong courts have charged a
former commercial director of BAT with accepting
bribes from a smuggling syndicate.
The case in Hong Kong, involving $1,2bn worth of BAT
cigarettes smuggled into China, has seen charges laid
which include smuggling, corruption, and tax evasion, the
murder of a witness and the disappearance of 11 others.
Asian Consultancy on Tobacco Control head Judith
Mackay is an expert witness in the trial of Jerry Lui, the
BAT executive who faces charges of corruption. "People
are being killed. The world is going to see the outrageous
behaviour that is going on," she said.
In SA, where smuggled cigarettes are estimated to cost
the government more than R100m in lost revenue each
year, antitobacco organisations have stopped just short
of accusing tobacco barons of complicity. However,
Yussuf Saloojee, the executive director of the National
Council Against Smoking, said smuggling was a
win-win-win situation for the industry because, firstly, it
continued to sell cigarettes; secondly the confiscation of
smuggled cigarettes did not mean loss of revenue to the
industry; and thirdly, smuggled cigarettes entering a
country at lower prices would fuel demand and increase
sales.
The industry itself has acknowledged that smuggling
helps establish a market presence. A 1995 report
compiled for BAT by NatWest Securities stated that in
China legal imports were restricted. "However, since
BAT cigarettes reach the Chinese market through
informal channels, mostly from Hong Kong, this had little
effect on volumes."
The local tobacco industry says that smuggling hurts
business and that they have tried to stop it. Stephen
Jurgens, MD of BAT SA, said his company did
everything in its power to control its distribution
networks and that smuggling occurred as a result of
higher taxes on cigarettes. "Where you have a price
differential, you will find people interested in exploiting
that. But we, as legal manufacturers, do not support that
business," he said.
Cigarettes are smuggled into SA through "round
tripping". They are exported to neighbouring countries,
only to reappear on SA streets, often at cut-rate prices
and without the required health warnings. Because taxes
on cigarettes in SA are higher than its neighbours,
smugglers stand to make a huge profit.
It is estimated that about 2-billion cigarettes are
smuggled into SA each year, which represents a
contraband market share of between 5% and 7%. The
smuggling is arranged through crime syndicates, passed
through a wide range of owners and distributed in
nonofficial outlets. When the tobacco industry undertook
its own investigation last year, it found more than 1 000
outlets selling smuggled cigarettes.
Mozambique is known to be a smuggling hot spot. Last
year customs officials at the border post between
Mpumalanga and Mozambique confiscated cigarettes
worth more than R11m. A transnational syndicate is
believed to have recruited Spoornet employees and their
counterparts in Mozambique. The cigarettes are
smuggled in false compartments in trains and trucks and
eventually make their way to street vendors. It is
believed containers of smuggled cigarettes also enter SA
through Durban harbour.
In a submission to government in December, the tobacco
industry said no local manufacturers were directly
involved in exporting cigarettes as they sold to
wholesalers and that smuggling caused major upsets to
the distribution system. The industry said it co-operated
fully with the SA Revenue Service to combat smuggling.
The tobacco distribution system in SA is fragmented.
With more than 400 wholesalers competing for business
from about 90 000 businesses, it is easy for rogue
wholesalers to undercut legitimate sellers. Value-added
tax related fraud and smuggling are considered key
factors in the closure of Suzmans, one of the largest local
distributors.
VAT fraud, estimated to cost government more than
R150m annually, saw traders claiming VAT on cigarettes
intended for export, without the cigarettes ever leaving
the country. New measures were announced in this
year's budget to counter this. The industry supports these
moves, but says excise taxes must also be lowered to
stop smuggling.
In fact, higher taxes on tobacco saw an increase in
government revenue of R400m last year, while tobacco
consumption dropped by 8%. According to the National
Council Against Smoking, taxes in SA are comparably
low and a breakdown of last year's increase on a pack
of cigarettes shows that 54% was due to industry price
hikes, while taxes accounted for only 35% of the price
increase.
Researcher Luk Joossens, who published a study on
smuggling patterns in Europe, said that while it was true
that the incentive for smuggling was tax avoidance, it was
not true that smuggling was linked to the level of taxes.
"In countries with the highest taxes in Europe, such as the
Scandinavian countries, there is little evidence of
smuggling, while in Spain, Italy and many central and
eastern European countries, where taxes and prices are
much lower, the illegal sale of international brands is
widespread," he said.
Saloojee said a recent London case showed that
tobacco companies did have the power to stop the illicit
trade.
"After Marlboro products started to appear on southern
African markets, Rembrandt asked Phillip Morris to take
action to stop illegal imports into SA. Marlboro is now
less easily available in SA.
Neil Collishaw, a researcher for the World Health
Organisation, found that about 300-billion cigarettes
went missing every year. He concluded that a large
number were smuggled. A US foreign agricultural
services attaché report on the tobacco trade in 1994 said
that of SA's total tobacco exports, which amounted to
21 859 tons, a staggering 18 409 tons went to
Mozambique.
SaloSalojee questioned how smugglers were getting hold
of these products.
"If the tobacco companies are doing all they can, then
their accounting practices are useless. I just do not
accept that they are doing all they can."
"Governments and not tobacco companies create the
climate in which smuggling takes off...This means that
governments must take responsibility for these policies,"
he said.
Joossens said "the truth about smuggling is that the
tobacco companies are the chief beneficiaries of this
trade".
Turner is a freelance journalist.
Ross Hammond
88 Norwich Street
San Francisco, CA 94110
USA
tel/fax: 1-415-695-7492 (office)
internet: margross@igc.org