which seeks to curb the illicit trade in tobacco
FSS – Forensic Security Services, contracted by BAT
FITA – Fair Trade Independent Tobacco Association, whose members include the smaller independent tobacco manufacturers in South Africa
Imperial – Imperial Tobacco
JTI – Japan Tobacco International
OLAF – European Anti-Fraud Office
PMI – Philip Morris International
SARS – South African Revenue Service
SSA – State Security Agency (South Africa)
TISA – Tobacco Institute of Southern Africa, whose members include BAT, PMI, JTI (now defunct)
Prologue
Globally, big tobacco controls more than 80% of the world’s tobacco market. An estimated 98% of all illicit cigarettes is believed to come from legal, licensed manufacturing facilities,2 and around one third of all exported cigarettes go missing somewhere along the supply chain.3
You do the math.
Indeed, British American Tobacco’s own documents, which date from the early 1990s, suggest that the company may historically have been involved in smuggling in around 30 countries; and suggest that, at the time, as much as 25% of BAT’s profits may have come from selling contraband in China.4
The tobacco trade has been dirty for centuries, effectively breeding an industry that I believe has criminality embedded in its DNA. (Mind you, I’m not suggesting that tobacco is all bad: there was a time when tobacco smoke could reportedly be applied – by way of an enema – to resuscitate drowning victims.)
I had initially written a simple thesis on the instances where big tobacco had been caught smuggling. It was meant to be a moderately academic discourse that really would have just preached to the choir – more boring than brave.
But once you start connecting the dots, you realise that there is far more to the story than just smuggling – there is an entire playbook of strategies, rhetoric and tactics behind the façade that big tobacco puts up, one that seeks to secure its continued success, the demise of its competitors and the downfall of those who stand in its way. A playbook that may, perhaps, be aimed at positioning big tobacco as too big to fail.
Just ask the team of tax investigators that tried to take on the tobacco industry in South Africa.
They faced the wrath of an industry willing to go to almost any lengths to protect its profits. When the pressure became too much, the tobacco industry played a role in the demise of those in power at the South African Revenue Service who could oppose them or expose them. The subsequent implosion at SARS can’t be blamed entirely on them, but their agents lit the match that burnt the SARS house down.
I spent most of my early career at SARS, and since then have had work assignments in more than 25 countries – mostly on tax and customs modernisation initiatives. Using this experience, I wanted to place the events in South Africa in a broader global context. And, so, while much of this story details what happened in SARS’ efforts to take on the illicit trade in tobacco, this is not a South African story – it is a story about how big tobacco acts with impunity, wherever it operates.
By 2011, tax evasion in the tobacco industry was costing SARS around R3 billion ($203 million) a year. With laundering and corruption rife, SARS launched Project Honey Badger, targeting various tobacco industry players – including British American Tobacco (BAT).5 (See addendum 1 for an extract of the letter SARS sent to the industry, where they set out in some detail what they were investigating.)
Honey Badger had the potential to make history as one of SARS’ most effective industry-wide investigations ever. Thanks in large part to Honey Badger, contraband tobacco had dropped from around 26% of the total market in 2013 to 17% in 2014.
Then, as the project’s wings were clipped, illicit trade spiked upwards, and markedly so: By 2017 – the last year for which sound estimates are available – the share of illicit cigarettes in the market had shot up to somewhere between 30-35%,6 and in the space of only two years there was a steep drop of 26% in the quantities of cigarettes declared to the taxman.7
It’s all too easy for our eyes to glaze over when bombarded with figures like these. What does ‘35% of the market is illicit’ translate to in real monetary terms? It means South Africa was losing out on tax revenue of an estimated R7 billion ($350 million) a year. That’s the equivalent of 74 000 new homes that government could have subsidised; 66 500 new policemen that could have been appointed; 277 777 pension grants that could have been paid out; or 400 000 electrical connections that could have been installed.8 But for which there now was no funding, because somebody hadn’t paid the taxes on a pack of smokes.
The data tells a story of how Project Honey Badger made a significant difference, only to lose traction once SARS came under attack, in what one might call big tobacco’s Christmas present to the underworld.
With 15 different criminal cases against tobacco manufacturers and importers ready to be prosecuted, the fiscus should have netted an extra R3 billion (roughly $200 million). But Honey Badger had come too close to the truth, and people like tax detective Johann van Loggerenberg and others had to go. To be fair, they had made enemies far beyond just the tobacco industry. All of them had both the incentive and the power to engineer their demise, but tobacco was the thin end of the wedge that pried open the door for their departure.
To fully grasp how their downfall came about, one needs to understand the power of big tobacco globally. ‘Big tobacco’ commonly refers to multinational companies that control more than 80% of the world’s market, including: British American Tobacco, Philip Morris International, Japan Tobacco International, Imperial, Reynolds. (China Tobacco controls most of the Chinese market and is a book all on its own.)
In an older internal corporate affairs presentation, one of the big tobacco companies – Japan Tobacco International – talks about the importance of ‘finding allies that cannot be ignored’, of ‘building allies across ministries’. It talks about the importance of ‘building complete political power maps’ and how ‘roadblocks are as important as solutions’.9 And it talks about having ‘the best expertise on our side: door-openers, strategists, spin doctors’.10
And in an older quote, one of RJ Reynolds Tobacco Company’s lawyers explains how they win cases: not by spending all of their money, but ‘by making the other son of a bitch spend all of his’.11
And so, when SARS had started digging a bit too close to the tobacco dung heap, it came as little surprise that the industry was ready to retaliate. Because big tobacco had, indeed, found allies that could not be ignored, and had built networks across ministries, and had the best door-openers on its side.
What happened in South Africa is simply part of a bigger story – not an isolated example of the tobacco industry gone rogue. It is a problem that plagues countries the world over, from advanced nations in Europe to those least able to defend themselves in the developing world.
I had started out with the simple hypothesis that much of the illicit trade we see in tobacco is not attributable just to tattooed gangsters, but to big, established, reputable tobacco companies, who are only too happy to pin the rise of illicit tobacco on smaller competitors. Along the way, I discovered a few things that are far, far more interesting, that lets me tell a story that goes beyond a bland academic discourse on
