A recently released report has documented the extent of organised crime in South Africa, and the staggering amounts of money that illicit trade is siphoning out of the economy and from the fiscus.
The report was published by the Transnational Alliance to Combat Illicit Trade (Tracit), which describes itself as independent private sector initiative to drive change to mitigate the economic and social damages of illicit trade by strengthening enforcement mechanisms and mobilising businesses across industry sectors most impacted by illicit trade.
The South African Revenue Service (Sars) estimates that illicit trade costs the economy R100 billion every year. In terms of lost tax revenue, Business Leadership South Africa (BLSA) estimates that the country loses R250 million a day. Furthermore, the Organisation for Economic Co-operation and Development estimates that South Africa is losing $3.5bn to $5bn a year, or more than 1% of its GDP, to illicit financial flows.
The booming illicit economy is being turbo-charged by several new and ongoing challenges, such as inflation, unemployment, corruption, and the lasting effects of the Covid-19 pandemic, the report said.
It said the pandemic provided wide opportunities for illicit traders to expand their operations significantly, as government lockdowns, bans, and other restrictions disrupted markets and created shortages.
South Africa faces challenges from illicit trade on multiple fronts, including alcohol, cigarettes, fishing, mining, counterfeit electronics, pharmaceuticals, food, and apparel. The problem is significant enough that the proliferation of illicit trade poses a significant, “top 5” risk to the economy, according to World Economic Forum.
According to Tacit, South Africa’s regulatory bodies, institutions, and enforcement agencies are “well rounded” and in line with international standards. The existing legislation and regulations aimed at deterring illicit trade are generally viewed as adequate.
The main challenges lie with the application of laws, shortages in capacity and skills, and a lack of co-ordination between the agencies responsible for law enforcement.
The report said the country does not have a strategic, overarching anti-illicit trade framework with clear leadership responsibilities and accountability to guide the enforcement of laws or co-ordinate responsibilities between agencies.
“Co-ordination efforts are further hampered by the ad hoc nature of new initiatives, often politically driven in response to public outcries over accusations of corruption. Without any single entity overseeing the broader institutional security apparatus, temporary interventions can overlap and compete with existing arrangements,” Tacit said.
How extensive is illicit trade?
The report provided an overview of the impact of illicit trade on different sectors of the economy.
Illegal mining
- A 2017 report by the Minerals Council South Africa estimates that the annual commercial value of illegal mining and illicit dealings in precious metals and diamonds is R7bn, including heightened security costs to protect mines from incursions by syndicates.
- As much as 5% of South Africa’s annual gold production is lost to illicit activities.
- Between 8 000 and 30 000 Zama Zamas (illegal miners) are reported to work in South Africa. Zama Zamas can be highly organised and generate significant illicit financial proceeds that are usually exported.
- South Africa is losing billions of rand because of the rampant theft of copper from Eskom and Transnet, much of which is exported abroad. Eskom attributes R5bn to R7bn lost annually due to “unrelenting” copper theft, plus R2bn to replace the stolen cables. Transnet Freight Rail reports a 177% increase in copper theft incidents over the past five years, with a particularly pronounced surge during the pandemic.
- Estimates place the illegal mining and export of chrome ore at nearly 1 million tons a year – more than 10% of South Africa’s legal chrome output.
Counterfeit goods
Counterfeiting has become a major criminal activity that presents unfair trade to almost every consumer products sector in South Africa. The Consumer Goods Council of South Africa estimates that counterfeiting could account for as much as 10% of the economy.
The costs for storage and destruction of seized goods are borne by the rights holder during criminal legal proceedings. It is not uncommon for cases to take several years. As a result, the accumulation of storage costs of seized goods, which in most cases is much higher than destruction costs, represents a significant financial burden on rights holders. The costs for storage and destruction are so high that some brand owners may decide against bringing criminal charges, even when there is overwhelming evidence of an infringement.
Substandard and falsified medicines
- Pharmaceutical products, including veterinary medicines, are increasingly being targeted by counterfeiters who deal in inferior and in some instances toxic counterfeit goods.
- The pandemic saw a surge in fake and substandard medicines and medical equipment in South Africa.
Illicit trade in fuel
- Over the past decade, countries along the Maputo Corridor (South Africa, Eswatini and Mozambique) have become a hotspot in the illicit fuel trade, which is driven by organised criminal networks.
- Transnet, the manager of South Africa’s fuel pipeline system, has seen a sharp surge in theft since 2020. More than 20 million litres of petroleum products worth nearly R250m were stolen between 2019 and 2021.
- Fuel theft, exacerbated by diesel shortages, is jeopardising South Africa’s diesel-dependent agricultural sector.
Wildlife trafficking
- Weak penalties and poor legal enforcement have made wildlife crime a lucrative and low-risk activity for criminal syndicates.
- The increase in illegal harvesting and trade in abalone (the world’s most valuable shellfish) is driving an ecological crisis in South Africa and robbing the economy of about R628m annually. The country’s coasts have lost more than 96 million abalone over the past two decades, with 9.6 million poached in 2016 alone.
- South Africa was ranked as the 13th worst country globally for illegal, unreported, and unregulated (IUU) fishing, according to the 2021 edition of the IUU Fishing Index.
Illicit tobacco
By some estimates, South Africa may be the world’s largest black market for cigarettes.
The illicit trade in cigarettes was given a significant boost by the government’s temporary ban on cigarette sales as part of its lockdown policies. These restrictions drove many consumers to access cigarettes through informal retail outlets.
The entrenchment of illegal cigarette suppliers, combined with growth in consumer demand during the pandemic, was so significant that it has overtaken much of the progress Sars made in rebuilding its capacity to tackle the illicit tobacco trade, following the erosion of its investigative capacity between 2014 and 2018.
BLSA estimated that the tobacco bans during the lockdown cost the government as much as R35m a day in lost excise and other tax revenues.
Illicit alcohol
- It is estimated that Sars is losing out on R11bn in excise tax revenue a year due to illicit alcohol trade.
- By volume, illicit sales currently represent 22% of the South African alcohol market.
- The ban on domestic and export sales of alcohol products and the production and transportation of alcohol products during the pandemic had a significant effect on alcohol consumption patterns and provided a massive boost to organised criminal involvement in the production and supply of illicit alcohol. Illicit traders seized the opportunity to provide cash-strapped consumers with easy access to cheaper alternatives, almost doubling their market share in less than a decade.
What should be done?
The report concluded by making several recommendations on how the authorities could combat illicit trade effectively.
Tacit said any successful strategy against illicit trade will require concerted, sustained, and co-ordinated efforts between all the responsible government bodies, and must be supplemented with adequate budget allocations, proper staffing, and clear objectives.
The government must equip Sars, the South African Reserve Bank, the Financial Intelligence Centre, the Directorate for Priority Crime Investigation, and other regulatory bodies with the resources they need to pursue the criminal profits generated from illicit trade.
South African needed to strengthen co-operation with neighbouring countries and address and address informal cross-border trade, smuggling, tax policies, and subsidy alignments during bilateral and multilateral trade negotiations.
Tacit said any long-term solution to the illicit trade in tangible and intangible goods will depend on sustained collaboration between the government and the private sector.
