Illicit trade: problems and solutions

POSTED ON: February 5, 2021 IN , , , by BLSA

The illicit trade webinar organised by BLSA heard that the revenue that SA loses every year to illicit traders, who don’t pay taxes and excise duties, would make a significant difference to the country’s economic wellbeing.

Business Leadership SA hosted a workshop on illicit trade on 3 February, focused on deriving and implementing solutions. Moderated by journalist Karima Brown, the panellists were: Busi Mavuso, BLSA CEO; Yusuf Abramjee, founder, Tax Justice SA; Zacharia Motsumi, director, South African Tobacco Transformation Alliance; Kurt Moore, CEO, South African Liquor Brand Owners Association; and Abraham Nelson, executive head, Consumer Goods Crime Risk Initiative.


The butterfly effect of illicit trade

In a country with high unemployment, poverty and structural inequality, the impact of illicit trade is exacerbated and more damaging to the economy.

The revenue that SA loses every year to illicit traders, who don’t pay taxes and excise duties, would make a significant difference to the country’s wellbeing as it could be used to address these critical problems.

Yusuf Abramjee, founder of Tax Justice SA, estimates that the state lost R5bn in taxes during the tobacco sales ban. Outside of the ban, SA was losing about R8bn a year to the illicit trade in tobacco.

And Kurt Moore, CEO of the SA Liquor Brand Owners Association, says the fiscus lost about R6.45bn due to the alcohol sales ban.

Furthermore, illicit traders have a huge competitive advantage. Moore points out that 36% of the retail price of alcohol is the tax rate so if you don’t pay tax, you have a 36% advantage on price.

“This is everyone’s problem. It is not a victimless crime but is putting people out of jobs,” said event moderator Karima Brown.

While the illicit trade in tobacco and alcohol flourished during the bans as consumers turned to illicit traders, unfortunately these illicit markets have continued growing post the bans – at a time when our economy is at its weakest. Many people continued buying the cheaper, illicit products.

Zacharia Motsumi, director of the South African Tobacco Transformation Alliance, says before lockdown, illicit trading made 24% to 28% of the market. During lockdown this grew to 100% as they were the only ones selling cigarettes. After the ban, however, the figures climbed to about 30%.

So illicit cigarette traders now make up nearly one third of the market in SA.

Tax Justice SA recently released findings of research into the issue. It found that out of 40 stores visited, 39 were selling cigarettes at below the minimum price of R20,01 stipulated by the government.

Motsumi says the effects of the illicit trading are being felt severely in the tobacco industry, where employment numbers have dropped dramatically. The Tobacco Transformation Alliance represents all legal participants in the entire value chain, from farmers to manufacturers and processors. Its members now employ about 8,000 people, down from about 14,500 a few years back.

He called on government to implement a minimum price limit on cigarettes of R25 to R28 a pack. “This will make it easier for law enforcement – if someone is selling for under that they must be arrested.”

Government should also act on the WHO accord it signed in 2013 that seeks to eliminate illicit trade, Motsumi says. It is not doing enough to enforce this

BLSA CEO Busi Mavuso said SA’s biggest weakness, and the reason why things moved so slowly, was a state that was not capable and government with indecisive leadership. These hindered SA from addressing all its problems, including those caused by state capture, which hollowed out many SOEs and state institutions, including SARS and its illicit trade unit, which had been doing a “brilliant job” until about 10 years ago.

SARS was trying to rejuvenate the illicit trade unit but progress was slow. “It is unfortunately a problem that is going to be with us for longer than what it took to bring about their demise.


Identifying the problems

The webinar highlighted core problems that were inhibiting the battle against illicit trade in SA. The primary problems are:

  • SA’s laws are sufficient to combat the scourge but implementation/enforcement of those laws are lacking.
  • Much of this can be attributed to corruption – many corrupt police officers and politicians are part of the illicit trade. If they are not, they are often targeted, even killed and replaced with more pliable people.
  • Those behind the syndicates always get away. Seems to be a lack of will to pursue their prosecutions.
  • Illicit goods are often smuggled into SA with the cooperation of law enforcement personnel.
  • Smugglers also bring high volumes of counterfeit goods into the country. Moore says a plant owned by a member of the SA Liquor Brands Owners Association was burgled and all bottle caps were stolen – to be used in counterfeit products.
  • Counterfeit products are not regulated by SA authorities thus they bring health and other risks.
  • Many consignments of counterfeit or illicit goods come through SA ports, ostensibly for delivery to other countries, but they are sold within the SA market.
  • SARS was hollowed out during state capture and this included shutting down the once-effective illicit trade unit. It is now being rejuvenated but progress is slow.
  • Insufficient coordination between the agencies that fight illicit trade, e.g., SARS and the SAPS.


Core solutions proposed:

  • Partnerships: more collaboration is needed between SARS and SAPS, with business assisting where it can and communities themselves brought in to help identify illicit traders.
  • More collaboration between different sectors is also required – a multisectoral approach.
  • Such collaboration should extend to all areas including sharing information and analysis, funding and education to convey the message to the public as to how damaging the illicit trade is.
  • Education of retailers, many of which are not aware that their products are illicit, explaining how to identify illicit products.
  • Education of communities on how illicit trade affects them directly (through poor service delivery and job losses, for example). Teach them how to identify illicit goods and facilitate and encourage whistle blowing so that people feel they’re doing their duty by reporting it.
  • Bring unregulated informal liquor traders into the system, get them licensed so they abide by the rules and pay taxes. Moore says many do want to be licensed. Here business had a big role to play in developing and facilitating this process.
  • SARS should appoint inspectors at all cigarette manufacturers to monitor what is being produced and where it is being sold.
  • Recapacitate institutions hollowed out by state capture. BLSA is already assisting SARS with recapacitation.
  • Identify the major players and deal with them.
  • Train law enforcement officers who lack knowledge of the laws, so empowering them to perform their duties.

For related posts, click here.

Have your say.
Share your opinion