and under-exposed publicly.
Against this backdrop, it is entirely natural to initially be sceptical of claims that big tobacco companies smuggle their own products or in some way supply the illicit market. The optics are all wrong. Why would any company potentially undercut the sales of their own legal products? And indeed, by conventional wisdom, why would a listed company potentially put its reputation at risk?
The answer in a capitalist system is simple: profit. For the most part, tobacco companies effectively make the same profit per pack on smuggled cigarettes as they do on legally sold ones. Smuggling allows tobacco companies to sell their cigarettes in countries that they would otherwise not be able to do business in because of import bans, sanctions and government monopolies. In many countries, smuggling may be the only way for a cigarette company to get their product on the market. In Somalia, documents suggest BAT had a strategy to continue selling its cigarettes in spite of warnings by fundamentalist group Al-Shabaab that it would punish those who sold them under Sharia law. A slide from an internal BAT PowerPoint presentation – revealed in an article by The Guardian – notes ‘The No-Smoking ultimatum made by Al-Shabaab now in effect. Cigarettes are now a black-market commodity. Distribution is being made in black paper bags.’3
Evidence suggests that smuggling also makes it possible for cigarettes to be sold in countries where tax rates and duties would otherwise make legal imports too expensive compared to cheaper domestic brands. Indeed, often the contraband market seems to have been so profitable that it discouraged the companies from entering the legal market, as appears to have been the case for BAT in China: ‘On China, a visit by the Chairman to Beijing in October might actually be counterproductive if he was under pressure to commit to investment … why are we looking at joint ventures rather than a continuation of transit [smuggling]?’4
But smuggling could also simply be a matter of undercutting competitors and maintaining market share. In Colombia PMI had exclusive rights to sell the Belmont brand. BAT continued to make Belmont cigarettes elsewhere, and reportedly simply smuggled them into Colombia, cannibalising PMI’s market share.5
In Canada, Imperial blatantly noted: ‘Although we agreed to support the Federal government’s effort to reduce smuggling by limiting our exports to the USA, our competitors did not. Subsequently, we have decided to remove the limits on our exports to regain our share of Canadian smokers. Until the smuggling issue is resolved, an increasing volume of our domestic sales in Canada will be exported, then smuggled back for sale here.’6
Smuggled cigarettes, of course, are also inherently cheaper than their legal cousins, giving them a competitive advantage against legally sold cigarettes. By helping to keep overall cigarette prices down, tobacco companies get to retain more price-conscious smokers who otherwise may have quit, which helps to increase overall sales.7
The simple fact is that tobacco companies benefit from cigarettes that end up in the hands of smugglers. They sell them at the same prices that they would to legal wholesalers.
As South Africa’s Dr Yussuf Saloojee (the Executive Director of the National Council Against Smoking) succinctly says: ‘The industry worldwide has been found guilty of aiding smuggling, for the simple reason that they get the same amount of money whether they sell to a legal buyer or a smuggler.’8
Still sceptical?
I can’t point to any publicly available information that proves that a company like BAT has been caught with its hand in the proverbial contraband cookie jar in South Africa in particular.
Well, aside from that eye-watering assessment for R214 million (around $15 million) that SARS issued against BAT towards the end of 2018. It related to apparent mismatches between their export declarations and what was actually in the containers, and some other apparent abuses around rebates.9
Or the additional income tax assessments SARS issued against BAT to the value of $124 million for aggressive tax planning using debt financing structures (the single biggest dispute on record between SARS and a taxpayer.)
Or that affidavit, filed as part of a High Court case against BAT, by an ex-employee of their security company that alleged the company bribed police officers and tax officials, including allegations that this was intended to secure a blind eye to BAT’s ‘tax evasion’ and ‘money laundering‘ in South Africa.10 At the time, BAT said it had appointed an independent law firm to investigate whether there were any illegalities in the way the security firm had done its work.
I asked BAT for comment. They never got back to me.
There is also the small problem of the Tobacco Institute of Southern Africa’s missing billions. In Johann van Loggerenberg’s Tobacco Wars, there is this little nugget: TISA apparently said that its members – BAT, JTI and PMI – had manufactured around 19 billion sticks of cigarettes during 2017/18. But for the same fiscal year, only 15,3 billion sticks of cigarettes were reportedly declared to the taxman (at least some of which must have come from the independent manufacturers). Just on big tobacco’s own numbers that’s quite a big gap. A whopping 3,7 billion sticks have gone missing somewhere – 185 million packs that have simply not been accounted for, and R4,625 billion lost (around $320 million).
If the data in Tobacco Wars is correct – and I believe it most likely is – there are only four possible explanations: either TISA made a mistake (but having seen some of the other analysis that TISA has been doing over the years, this seems unlikely); or TISA deliberately gave a wrong number (but why would they?); or TISA’s members are not declaring all of the packs they produce to the taxman; or perhaps they are deliberately inflating their production volumes to demonstrate to shareholders that their operations are on the increase, when in fact they are not (and there seems to be some whispers in the industry of this indeed happening).
I asked TISA for comment. They initially asked whether I was writing this book in my personal capacity or on behalf of another organisation. They then replied as follows: ‘We will not be responding to any of your questions. Most of your questions are loaded and with a clear agenda in mind. TISA represents the legal industry and to this extent we have made many public statements about illicit trade etc. You are welcome to use information on our website.’
(In a surprise twist, on 22 January 2020, a source suggested I have a look at the TISA website again. The entire TISA website had been replaced with a single page, ‘TISA to be wound up,’ it said. TISA was no more. The source also suggested that this was because – in his words – ‘the other members no longer wanted to be associated with BAT South Africa.’ Read the rest of this book, and make up your own mind on the likely reasons behind TISA’s unexpected implosion.11)
Whichever one of the above explanations sits most comfortably with you, there seems to be a snake in the grass in the big boys’ club.
We also know that SARS – before it had its wings clipped – had reportedly been set to take away 15 tobacco manufacturing licences. There are fewer than 15 smaller, independent manufacturers, so perhaps one can conclude that one or more of the multinational tobacco companies also would have faced the threat of having their licence revoked.12
Aside from these clues hinting at something untoward, I really don’t have a smoking gun, perhaps just a really warm barrel (for South Africa anyway).
What I can do, aside from that, is tell you how companies like BAT, PMI, JTI and Imperial developed a global business model that allowed their cigarettes to be smuggled in other countries around the world.
4. Dead easy to cheat
To understand the basics of how a smuggling empire operates, we need at least a rudimentary understanding of how the illicit trade in products like cigarettes
