South Africa's economy is bleeding billions of rands every year due to rampant illicit activities such as illegal mining, trade in counterfeit goods, wildlife trafficking, bootlegged fuel, and illicit alcohol and tobacco.
These are the findings of a new report on “organised crime, corruption and illicit trade” published yesterday by the Transnational Alliance to Combat Illicit Trade (TRACIT).
The report, which was released in partnership with Business Unity South Africa (Busa), shows that illicit trade is one of the biggest threats to stability and economic growth in South Africa.
TRACIT said South Africa faced challenges from illicit trade on multiple fronts, including, but not limited to, alcohol, cigarettes, fishing, mining, counterfeit electronics, pharmaceuticals, food and apparel.
TRACIT director of programs Esteban Giudici said that according to the World Economic Forum, the problem was significant enough that the proliferation of illicit trade posed a significant, “top 5” risk to the South African economy.
Giudici said there was a lack of implementation of the law to effectively fight illicit trade in South Africa.
“We have problems of dealing with corruption which is a facilitator of illicit trade. We see we don’t use resources to fight illicit trade as it is not seen as a priority,” Giudici said.
“We see we don’t have an overarching illicit trade framework. We don’t treat this problem as a criminal phenomenon that affects everyone. We see the problem as sector-specific.”
However, Giudici acknowledged that the government has recently taken important steps towards rooting out corruption, increased the amount of successful cases against serious organised crime, recovered R8.2 billion in revenue from criminal and illicit economic activities in the 2021-2022 financial year – up 331% from the previous year, and instituted a new Border Management Authority to strengthen efforts against the importation of illicit goods into South Africa.
“It is critical that the South African government prioritises efforts to combat illicit trade and the underlying conditions that facilitate it,” Giudici said.
“Left unaddressed, illicit trade and its associated criminal activities will continue to rob the government of essential tax revenue and deter investments in the country.”
According to the report, illegal mining literally robs the government of significant and essential tax revenue; and it costs legitimate mining companies billions in production loss and security expenditures.
On counterfeit goods, the report said organised crime syndicates run the illicit trade operations, often using illegal immigrants as a front for illicit products through areas such as Johannesburg CBD.
It also said limited investigations and minimal deterrence penalties enabled the criminal networks to continue operations with low risk of discovery.
The TRACIT report showed that South Africa’s market for illicit alcohol was historically large, with the SA Revenue Service estimated to be losing out on R11bn in excise tax revenue a year due to illicit alcohol trade, representing the largest fiscal loss from illicit alcohol out of the seven African countries.
But South Africa has a long-standing market for illicit cigarettes, by some estimates potentially the world’s largest black market for cigarettes.
TRACIT said while smuggling of illicit tobacco into South Africa had always been a problem, the illicit market was now in large part driven by under-declaration, where local manufacturers have been accused of evading excise taxes by under-declaring the number of cigarettes produced.
However, one of the largest multinational tobacco producers Philip Morris warned of unintended consequences of regulation in aiding illicit trade.
Philip Morris South Africa said while illicit trade was not a problem unique to South Africa, the report demonstrated that criminal networks had gained a foothold in the market and the impact would take years to reverse.
“Illicit trade harms everyone except criminals. Harm to consumers in terms of products, harm to society overall as illicit tobacco is used to fund other much more serious criminal activity like human trafficking and terrorism,” the tobacco group said.
“If South Africa’s illicit trade is managed and dealt with in a swift, appropriate and necessary actions it will mean that our increased monitoring from the Financial Action Task Force (FATF) will be seen in a more favourable light and could eventually see South Africa move off they grey list.”
South Africa was recently grey-listed by the FATF due to weak controls against combating money laundering
Philip Morris said the problem of illicit trade had been compounded in recent years owing to severely restrictive regulations.
“The practice of excessive cigarette tax increases defeats the goal of harm reduction. Adult smokers who don’t quit will seek cheap illicit cigarettes rather than switching to less harmful products such as scientifically substantiated e-cigarettes or heated tobacco products. Excessive cigarette tax increases or tobacco bans create a free for all for illicit and criminal organisations.”
It said that if anything, this report has demonstrated, that more partnership, engagement, and an effective policy response needed to take place.
“Policymakers must ensure new regulatory measures do not create unintended consequences or incentivise consumers to choose illicit alternatives to available, legitimate products,” the group said.
“It is important to tighten up co-operation between enforcement authorities, which will enable identifying equipment, packaging and raw material suppliers to cut off illicit trade at the source.”
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