SARS: Doing a Lot, Just Not Quite Enough

The South African case study on dealing with illicit tobacco continues to be an interesting one to follow.

In 2020, the South African Revenue Service (SARS) Commissioner Edward Kieswetter noted that SARS’ strategy to deal with illicit cigarettes was still being refined. Since then, SARS has steadfastly remained mum. That doesn’t leave us with a whole lot to go on, including where SARS stands on introducing traceability to the tobacco supply chain.

While SARS is playing its cards extremely close to its chest, there are a number of clues on where it is (probably) headed.

Prevalence of illicit tobacco in South Africa

The tobacco industry may well be overstating matters when it claims that 70% of the local cigarette market is illicit. But even the more temperate figure of 54% from recent independent research is still substantially above the global average, and there is broad consensus that illicit tobacco is now deeply rooted in the country.

The tender

More than a decade ago, SARS made vague promises about introducing better traceability to the tobacco supply chain, and to that effect eventually published a tender for a secure marking and traceability solution.

Reportedly following complaints from the now-defunct tobacco industry body Tobacco Institute of Southern Africa (TISA) – which was effectively a proxy for multinational tobacco companies – in 2019, Commissioner Kieswetter appointed accounting firm Grant Thornton to conduct an extensive review of the tender process.

Following this review, Grant Thornton gave SARS the go-ahead to proceed with the tender but warned that there might be pushback from the major tobacco manufacturers (as indeed there was).

Despite the go-ahead having been given, SARS announced in 2020 that it would not be proceeding with the tender. No additional details on the reasons for the cancellation were given at the time.

The cancelling of the tender could perhaps not have come at a worse time for SARS – a ban on tobacco sales under COVID regulations resulted in a revenue shortfall of well over ZAR 1.7 billion ($97.6 million) in lost excise taxes a month, and the illicit trade in cigarettes has seen continued exponential growth.

Whatever their reasons were for putting traceability on hold, this didn’t play well to perceptions, with international body Stopping International Organisations and Products (STOP) noting how the decision ‘calls South Africa’s ability to address illicit trade into question and demonstrates how successful the tobacco industry is in undermining tracking and tracing there’.

Competing priorities

It would be easy to question SARS’ commitment to fighting illicit tobacco, given its lethargy in implementing a proven solution, and one that is in fact required under the WHO Framework Convention on Tobacco Control (FCTC) – but that would be oversimplifying a complex reality.

Context is important, because it gives a level of assurance that SARS is systematically working through its challenges and finding solutions to them.

Commissioner Kieswetter has made striking inroads into rebuilding capacity at SARS, which had been severely depleted under the previous Commissioner, Tom Moyane (on whose watch criminal investigations into tobacco had also been abandoned).

The focus over the past two or so years has been largely on undoing the damage that had been done under Moyane (eg. the disbanding of the entire SARS executive committee and substantial erosion of SARS investigative capacity).

At the same time, SARS continued introducing other modernisation improvements, focusing on initiatives that have value for the majority of taxpayers, or that are likely to have the biggest possible impact on compliance in a broader sense.

These include strengthening SARS’ connection to the country’s National Financial Intelligence System; a data-driven compliance risk detection framework; an enterprise data management self-service functionality; an advanced analytics and machine learning capability; and a stateof-the art national command centre from where all operational activities are scheduled and orchestrated in near-real- time (among many others).

At the same time, while illicit cigarettes may have caught our collective attention, in truth, South Africa is similarly being overrun by a multitude of other illicit commodities, from tyres, red-fronted macaws and fake pharmaceuticals, to smuggled gold and khat (a native plant containing the stimulant alkaloid cathinone). Not to even mention the estimated $7.4 billion lost in tax revenues every year to trade mis-invoicing.

SARS is walking a tightrope while juggling a multitude of competing priorities.

Inroads made in curbing illicit tobacco

With a stacked to-do list, and with excise revenues only constituting a very small percentage of SARS’ revenue collections, it is perhaps not entirely surprising that completely transforming the management of tobacco products was not at the top of the list for the agency in the short term.

Nevertheless, SARS has in fact made progress in the fight against illicit tobacco, both from a capacity and policy perspective, through measures that include increasing the supervision of cigarettes exported via warehouses; working with tobacco industry experts to develop a way of detecting illicit cigarettes; doing more retail inspections; advising the public on how to identify illicit cigarettes; improving the manual tracking of cigarettes in transit through South Africa; and – they say – ‘improving authentication marking on cigarettes’ (although quite what this means is unclear).

In practice, SARS has also introduced production counters onto all (known) manufacturing lines; has tabled draft legislation to also require CCTV cameras to monitor manufacturers; and has finally started regulating tobacco leaf.

Its broader focus on expanding and improving the use of data, data analytics and artificial intelligence capabilities is also enabling SARS to far better detect non- compliance and illicit economic activities.

As a result, it has made impressive inroads into illicit trade more broadly, collecting 331% more in 2022 than in the preceding year, completing 385 investigations, and with an impressive 98% success rate with the prosecutions it pursues.

SARS does, however, continue to require the use of the rudimentary, barely visible and entirely inefficient diamond stamp, which simply makes a physical, unnumbered imprint on cigarette packs.

Worrying disparities between import and export data

The illicit trade in tobacco is predictable in at least one sense: it always finds ways to evade regulatory and enforcement efforts. This is evident in South Africa. As SARS steps up its efforts, sources note that factories are simply being established in neighbouring countries, where SARS policy and enforcement efforts carry no weight.

This poses a fundamental challenge to SARS. By all accounts, a comprehensive strategy is required, which SARS is well on its way to implementing. But in the absence of cigarette packs being securely marked and traceable – across borders – local policies and local enforcement will ultimately be ineffective.

SARS’ main vulnerability most likely lies in shadowy games of roundtripping, ghost exports and over-production. The data speaks for itself.

Globally around one third of cigarette exports go missing somewhere along the supply chain, not ending up where they were supposed to, in classic schemes to avoid taxes and duties. Data points to a similar trend in South Africa.

For instance, in 2019, 66% of cigarettes that were declared as having been exported seem to have gone missing before they could reach their destination (worse, in 2016 and 2017, just under 80% went missing).

In 2019, South Africa shipped 3.7 billion cigarettes to Namibia. Namibians smoke on average around 729 million cigarettes a year. So, what is happening to the remainder of the 2.9 billion cigarettes South African manufacturers are ostensibly shipping to Namibia? Are they actually being diverted tax-free back to the local SA market?

In 2019, SA manufacturers declared that they were exporting 2,276 tons of cigarettes to Lesotho and 3.5 tons to Mali. Neither Lesotho nor Mali records reflect any imports from South Africa.

These disparities are important, because they expose the one key weakness that SARS’ current strategy does not address: traceability, and particularly traceability across borders.

Road ahead

SARS never ruled out the possibility of introducing a secure marking and traceability solution, and indications are that it is still likely to be introduced. It is difficult to see how any comprehensive illicit trade strategy could not include an element of traceability – and even more difficult to see how the country could meet its obligations under the FCTC without a track and trace programme in its strategy.

SARS has made slow and steady progress in the fight against illicit tobacco, introducing a wide range of complementary measures. With some luck, let’s hope it gets around to secure marking before Commissioner Kieswetter’s term runs out in 2024.

Telita Snyckers is an independent illicit trade expert. Key clients include the International Monetary Fund, after having previously worked as an executive at the South African Revenue Service, a compliance manager with the Inland Revenue Authority in Singapore and an associate with niche consulting firm Sovereign Border Solutions. Telita has a master’s degree in constitutional law and fundamental rights, is a certified tax administration assessor, and has had work assignments in over 25 countries around the world. Her exposé on the role of big tobacco in fueling illicit trade – Dirty Tobacco – was shortlisted for the prestigious Alan Paton / Sunday Times non-fiction award.