Tracking and tracing of tobacco products: South African tax administration against the wall

Adapted translation of the case study:

“ Tobacco tracking and tracing: South Africa's revenue service is at a crossroads »

of the organization STOP (Stopping Tobacco organizations & products)

STOP is an international watchdog that tracks tobacco industry interference in public policy. STOP is a partnership between the Tobacco Control Research Group at the University of Bath, the Global Centre for Good Governance in Tobacco Control, The Union and Vital Strategies.

September 2020

Acronyms

BAT: British American Tobacco

BATSA: British American Tobacco South Africa

CCLAT: Framework Convention on Tobacco Control

FITA: Fair Trade Independent Tobacco Association

JTI: Japan Tobacco International

WCO: World Customs Organization

PMI: Philip Morris International

SARS: South African Revenue Service

TISA: Tobacco Institute of Southern Africa

Summary

1. The legal framework supporting the establishment of an independent monitoring and tracing system
2. The Tobacco Industry's Multiple Interference in the Country's Anti-Illicit Trade Policy
3. Industry interference in the internal workings of SARS.
4. South Africa's need for an industry-independent tracking and tracing system

Summary

The problem of illicit trade in tobacco products largely concerns the African continent and South Africa in particular. In addition to the health impact, this traffic represents a significant loss of tax revenue. South Africa is also marked by the deployment of intense lobbying by the tobacco industry. The country, a party to the WHO international treaty, the Framework Convention on Tobacco Control, has been working for several years to put an end to these practices that are detrimental to the general interest. The country has thus embarked on the process of setting up a system for monitoring and tracing tobacco products in order to better control the supply chain. A call for tenders was launched in April 2019 at the initiative of the public authorities at the SARS level, specifying that the system, by definition, had to be independent of tobacco manufacturers. However, as soon as the call for tenders was announced, the process was quickly undermined by the tobacco industry. The latter has ensured that the process has been delayed, which the body representing manufacturers, TISA, has deemed “rushed and costly”. In reality, this initiative is not rushed when one knows that the decision to change the current obsolete system of tax stamps dates back 10 years. In addition, South Africa ratified the WHO treaty, the FCTC in 2005 and the country is a signatory to the Protocol to Eliminate Illicit Trade in Tobacco Products adopted in 2013. Beyond this rhetoric, however, the tobacco industry has resorted to all sorts of tactics to have this call for tenders cancelled, including the organisation of an unfounded accusation of members of the public service concerned. By discrediting and weakening this service intended to control its activities, it has succeeded in destabilising the policy of combating illicit trade in the country. SARS, the service concerned, is in the process of being reconstituted under the direction of a new commissioner, Edward Kieswetter. The tobacco industry is, however, already trying to get across the idea that such a system would not be necessary. It is in fact essential for South Africa to protect itself from this type of interference and the government is now up against the wall with the need to succeed in setting up such a system independent of the manufacturers.

The problem of illicit trade in tobacco products largely concerns the African continent and South Africa in particular. In addition to the health impact, this traffic represents a significant loss of tax revenue. South Africa is also marked by the deployment of intense lobbying by the tobacco industry. The country, a party to the WHO international treaty, the Framework Convention on Tobacco Control, has been working for several years to put an end to these practices that are detrimental to the general interest. The country has thus embarked on the process of setting up a system for monitoring and tracing tobacco products in order to better control the supply chain. A call for tenders was launched in April 2019 at the initiative of the public authorities at the SARS level, specifying that the system, by definition, had to be independent of tobacco manufacturers. However, as soon as the call for tenders was announced, the process was quickly undermined by the tobacco industry. The latter has ensured that the process has been delayed, which the body representing manufacturers, TISA, has deemed “rushed and costly”. In reality, this initiative is not rushed when one knows that the decision to change the current obsolete system of tax stamps dates back 10 years. In addition, South Africa ratified the WHO treaty, the FCTC in 2005 and the country is a signatory to the Protocol to Eliminate Illicit Trade in Tobacco Products adopted in 2013. Beyond this rhetoric, however, the tobacco industry has resorted to all sorts of tactics to have this call for tenders cancelled, including the organisation of an unfounded accusation of members of the public service concerned. By discrediting and weakening this service intended to control its activities, it has succeeded in destabilising the policy of combating illicit trade in the country. SARS, the service concerned, is in the process of being reconstituted under the direction of a new commissioner, Edward Kieswetter. The tobacco industry is, however, already trying to get across the idea that such a system would not be necessary. It is in fact essential for South Africa to protect itself from this type of interference and the government is now up against the wall with the need to succeed in setting up such a system independent of the manufacturers.

1. The legal framework supporting the establishment of an independent monitoring and tracing system

South Africa has ratified the Framework Convention on Tobacco Control (FCLAT) in 2005, and the country has been working to combat the illicit tobacco trade ever since. In 2013, South Africa signed the Protocol to eliminate illicit trade in tobacco products. This protocol was negotiated in support of Article 15 of the FCTC, requiring countries that have ratified it to implement strict controls on tobacco products at different stages of the supply chain. These controls include ensuring that each pack of cigarettes has a unique identification code (similar to a serial number), has features that make copying and counterfeiting impossible. It also makes it possible to verify whether taxes related to the pack have been paid or not and at what point the pack left the legal circuit. The objective is therefore to set up a process of monitoring (movements of products) and traceability (origin of products) which facilitates the ability of governments to curb the illicit trade in tobacco products.

The fight against illicit trade in tobacco products has recently been undermined. In May 2020, The South African Revenue Service (SARS) has cancelled its tender for a track and trace system after being postponed the deadline several timesThe move came amid a fragile political climate and a confrontation with the tobacco industry. Current SARS Commissioner Edward Kieswetter has since said[1] that SARS' illicit trade strategy "may or may not require tracking and tracing." Challenging such a system independent of tobacco manufacturers would call into question South Africa's ability to combat illicit trade. It demonstrates the tobacco industry's ability to interfere in government policies to advance its interests over the public interest.

The call for tenders for the SARS tracking and tracing system, published in April 2019[2], aimed to establish a tracking and tracing system for tobacco products but also to replace the old tax stamps[3] of the country with more secure models. This new system would have incorporated the main provisions of the Protocol relating to the supply chain. It would have dramatically improved the South African government's efforts in its fight against illicit trade.

2. The tobacco industry's multiple interference in the country's policy to combat illicit trade

South Africa is one of the 10 countries most at risk of tobacco industry interference, according to the Global Tobacco Industry Interference Index and it appears that the country's progress in combating illicit trade has not withstood this interference. SARS has been building relationships with the tobacco industry in recent years through regular meetings[4] with the old one Southern African Tobacco Institute (TISA) whose members were British American Tobacco South Africa (BATSA), Philip Morris South Africa, Japan Tobacco International and Imperial Tobacco.

In fact, it has been proven that the tobacco industry influenced the South African government's decision in a way that favoured its interests. This is particularly worrying because Article 5.3 of the FCTC is specifically aimed at protecting public health policies from the commercial and other interests of the tobacco industry. The implementing guidelines for this Article require that the country's policy makers limit their relations with the tobacco industry to the strict minimum and under conditions of transparency. The current symbiotic relationship between BAT and SARS is contrary to the spirit of Article 5.3.

In addition to regularly engaging and collaborating with SARS during the development of the tender, tobacco companies also exerted their influence when the tender process was announced in April 2019. Opposition to the announcement was led by TISA[5], which described the tender as a "rushed process" that would "impose excessive and unworkable regulatory burdens on small retailers" and "incentivize retailers to sell illegal products." Fair Trade Independent Tobacco Association (FITA), which claims to represent 80% of South Africa's licensed cigarette manufacturers, argued that the tender was cancelled because of the tobacco companies' influence over the South African government.

TISA’s efforts to undermine the tender after its announcement are not surprising. There is a historical involvement of tobacco companies in smuggling these products across Africa[6]BAT used illegal channels to supply African markets throughout the 1980s and 1990s, with smuggling a crucial part of the company's business strategy. This allowed the company to compete with other tobacco companies and gain market dominance, exert influence in government negotiations and circumvent local import restrictions.

3. Industry interference in the internal workings of SARS

The tobacco industry's interference was thus reflected in the announcement of the launch of a call for tenders to set up a tracking and tracing system. However, upstream, the massive lobby deployed by the cigarette manufacturer BAT eclipsed it. Indeed, the management of SARS has undergone changes with the appointment of the current commissioner, Edward Kieswetter. According to a former senior SARS official[7], Johann Van Loggerenberg, tobacco industry officials sought to use their high-level political connections to shut down SARS investigations into the tobacco industry with this new appointment.

In 2013, SARS set up a project specifically aimed at investigating[8] on the illicit tobacco trade in South Africa. Such an investigation led the government to look into the practices of the tobacco company BAT SA which was the subject of an in-depth audit by SARS. In 2014, an employee of BAT (as well as TISA and the South African Government Security Agency) who had had a personal/close relationship with Van Loggerenberg, accused Van Loggerenberg’s unit at SARS of using corrupt practices and spying on high-ranking politicians.

These accusations led to prosecutions against Van Loggerenberg and several of his SARS colleagues for corruption. These charges have since been dropped. The media also acknowledged blunders in their sources and apologised.[9]. According to Van Loggerenberg, these accusations were simply an operation mounted by the tobacco industry aimed at discrediting the SARS people.[10]-[11].

However, these allegations were extremely damaging and led to the suspension of the entire SARS executive committee, including its acting commissioner, and the scrapping of the investigation into illicit trade. The last SARS official implicated in the investigation was suspended in 2017[12]. Changes at SARS, with a reduction in staff numbers and the disbandment of the Special Investigation Unit, have weakened its ability to combat illicit trade. This is a direct result of the industry’s actions. In May 2018, SARS announced that it was in the process of rebuild teams dedicated investigations to tackle the problem of illicit trade in tobacco products.

The SARS track and trace tender was developed shortly after this difficult period and before Kieswetter became commissioner. Speculatively, this may explain why Kieswetter cancelled it. The fact remains that South Africa needs an effective system for tracking and tracing tobacco products. This is why Kieswetter’s statement that SARS’ illicit trade strategy “may or may not require tracking and tracing” is concerning.

4. The need for South Africa to have an industry-independent tracking and tracing system

Without a tracking and tracing system, SARS would have to rely on the presence of customs officers at production facilities and a regulation which requires counting devices to monitor cigarette production. Both measures are insufficient to combat illicit trade and result in favourable outcomes for the industry. This practice is not not recommended by the World Customs Organization (WCO). Automated approaches provide a clearer audit trail and lead to reduced corruption as face-to-face interactions are reduced. The counting devices in cigarette production were recommended by TISA in the months preceding the call for tenders but do not refer to any good practice and international text (in particular the Protocol to Combat Illicit Trade in Tobacco Products). TISA and FITA, however, continue to support these devices.

If SARS fails to implement best practices in tobacco supply chain control as required by Article 15 of the FCTC and the associated Protocol, the tobacco industry will have succeeded in undermining SARS as an institution and in undermining government efforts to combat illicit tobacco trade. This has implications not only for South Africa’s commitment to Articles 5.3 and 15 of the FCTC, but also for government revenue. (The Kenya data, for example, show that implementing a tracking and tracing system increases tax revenues through a reduction in smuggling).

Today’s cancellation of the tender allows SARS to begin a new open and transparent tender process that incorporates both the provisions of Article 15 of the FCTC and the requirements of the Protocol. This would address the relatively unique situation of illicit trade in South Africa. Failure by SARS to seize this opportunity will confirm the tobacco industry’s involvement in the South African government’s fight against illicit trade.[13].

The issue of setting up monitoring and tracing systems independent of tobacco manufacturers directly calls into question the control exercised by them in these parallel markets. That is why they are trying to keep or take control of these systems in countries around the world. That is why it is essential that SARS launches a new tender process but also protects the process and the resulting tracking and tracing system from interference by the tobacco industry.[14].

Keywords: South Africa, Tracking and Tracing, Tobacco Products, Interference, Tobacco Industry ©Tobacco Free Generation

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[1] Abram Mashego, Sars boss accused of bowing to big tobacco, News 24, May 10, 2020, accessed October 16, 2020 [2] Abenathi Gqomo, SARS issues “track-and-trace” tender to tackle illegal cigarette trade, Political Analysis, April 30, 2019, accessed October 16, 2020 [3] Michael Eads, Hana Ross and Savera Kalideen, Shameless and blameless: how big tobacco is trying to dupe everyone — and what SARS should do about it, Daily Maverick, June 9, 2019, accessed October 16, 2020 [4] Ibid [5] Tobacco institute warns against 'rushed' system for tracking illegal cigarettes, The Citizen, August 24, 2019, accessed October 16, 2020 [6] LeGresley E, Lee K, Muggli ME, et al British American Tobacco and the “insidious impact of illicit trade” in cigarettes across Africa Tobacco Control 2008;17:339-346. [7] Rob Rose, How British American Tobacco torpedoed Sars's efforts to reclaim tax owed, Business live, September 19, 2019, consulted on October 16, 2020 ^[8] Illicit cigarette traders permitted to operate with impunity – tobacco body, The Citizen, July 5, 2018, accessed October 16, 2020 [9] Marianne Thamm, House of Cards: What does the Sunday Times apology mean for the rest of the pack, Daily Maverick, April 3, 2016, accessed October 16, 2020 [10] Former Sunday Times journalist apologizes to Van Loggerenberg for 'apartheid spy' comment, The Citizen, August 10, 2019, accessed October 16, 2020 [11] Pieter-Louis Myburgh, Angelique Serrao and Adriaan Basson, Tobacco industry insiders behind 'initial attacks on Sars' – former unit head, news 24, August 24, 2016, accessed October 16, 2020 [12] Marianne Thamm, SARS WARS: Suspension of the last remaining key official jeopards 'Tobacco War' cases, Daily Maverick, February 17, 2017, accessed October 16, 2020 [13] Vellios N, van Walbeek C, Ross H, Illicit cigarette trade in South Africa: 2002–2017 Tobacco Control 2020;29:s234-s242. [14] Gilmore AB, Gallagher AWA, Rowell A, Tobacco industry's elaborate attempts to control a global track and trace system and fundamentally undermine the Illicit Trade Protocol Tobacco Control 2019;28:127-140.