The tobacco industry can’t quite shake off its shady image.
Two months ago there was an assassination attempt on Zimbabwe-based Simon Rudland, CEO of Gold Leaf Tobacco, as he and his attorney were entering the driveway of the Johannesburg offices of the Fair Trade Independent Tobacco Association (Fita), which represents smaller cigarette producers.
Read: Tobacco wars turn deadly
When Moneyweb visited him at his Johannesburg factory a short while back, he stuck to his initial claim that a competitor was trying to rub him out. He survived the assassination attempt but now travels with a convoy of private bodyguards when in SA and has his own private investigators on the case.
This says something about the state of the cigarette business in SA. Johann van Loggerenberg’s book ‘Tobacco Wars’ lays out the field of battle and who the main players are. It’s a dirty business, but we’ll come to that in a minute.
On November 4 Fita served a Promotion of Access to Information Act (Paia) request on British American Tobacco SA (Batsa) to make public the findings of an investigation into the cigarette giant’s alleged conduct several years ago against its smaller competitors.
In September 2016 Batsa announced that it had severed ties with forensic investigation firm Forensic Security Services (FSS), which has been accused of dirty tricks against smaller producers.
The ‘rogue unit’ supposedly operating within the South African Revenue Service (Sars) emanates from a mix of shady sources and contributed hugely to the state capture project, Van Loggerenberg told Moneyweb.
A former tax investigator for Sars, he was accused of being part of the rogue unit, a story now debunked (and for which the Sunday Times, Carte Blanche, KPMG and Judge Frank Kroon have apologised). It had all the elements of a counterintelligence operation, but the real purpose was to kill off a devastatingly successful investigation unit that had tightened the noose on criminals and big-time tax dodgers.
Van Loggerenberg estimates that the spiking of this Sars unit has probably cost SA R3 billion in tax revenue.
The rogue unit story was kept alive for years, and implicated Van Loggerenberg, fellow Sars officials Ivan Pillay and Andries Janse van Rensburg, as well as Public Enterprises Minister Pravin Gordhan, who was previously in charge of the tax agency. It was claimed the unit bugged the offices of senior politicians, including former President Jacob Zuma, and operated an illegal brothel. These claims have since been debunked. Gordhan has repeatedly claimed this rogue unit story was floated by those opposed to ridding the country of corruption.
According to Tobacco Wars, FSS recruited former cops and spooks ostensibly to stop illicit trading in cigarettes, but one of its key tasks was to spy on Batsa’s competitors. A key piece of evidence in support of this claim is an affidavit from former FSS employee Francois van der Westhuizen, in which he says he was told that all his actions – including the interception of communications and breaches of the right to privacy – were sanctioned by the law.
In hindsight, he says, the purpose of his employment was for Batsa to use his investigative skills, with back-up from corrupt police and Sars officials, “to disrupt the business of Batsa’s competitors”.
All this is detailed in Tobacco Wars and has yet to be refuted by Batsa, says Van Loggerenberg, probably because the evidence and documentary back-up is substantial.
The alleged reach of the FSS was astonishing, and included Sars, the Hawks, the South African Police Service, the Crime Intelligence Unit, the Asset Forfeiture Unit, and the Customs and Traffic Control Policing Unit.
Batsa head of external affairs Johnny Moloto replied that the report in question “is legally privileged and was prepared for the purpose of British American Tobacco obtaining legal advice”, stating: “The contents of the report may be relevant to ongoing investigations and litigation. British American Tobacco has made disclosures to the appropriate South African and other law enforcement authorities.”
Moloto then fired off some accusations of his own against Fita, whose members have come under increasing scrutiny by Sars. He says Fita’s allegations against Batsa are an attempt to deflect attention away from themselves, by dredging up allegations that have been in the public domain for more than five years.
Says Moloto: “British American Tobacco has and will continue to co-operate with any investigation by law enforcement authorities in South Africa or anywhere else.”
In support of Moloto’s claims of smaller producers attempting to deflect attention away from themselves, Batsa points to a 2018 study by the Economics of Tobacco Control Project (ETCP) at UCT, headed by Professor Corné van Walbeek, which shows a steady decline in excise tax revenue from tobacco products.
“Excise tax revenue from tobacco products decreased by approximately 10% between the financial years 2016/17 and 2017/18, despite an 8% increase in the excise tax per pack of cigarettes in that period. Overall, between 2016 and 2018, there was a 20% decrease in the number of tax declared cigarettes,” says the UCT report.
The graph below is taken from the report and shows the decline in excise revenue since 2015.
“Such a rapid decrease in consumption over this short period cannot be explained by changes in people’s smoking patterns alone,” van Walbeek contends. “Instead, it points to a large increase in the illicit cigarette market.”
Data from SA’s poorest areas shows packets of cigarettes selling for R10 when the excise alone was R15.52 per pack.
The evidence is that illicit sales of cigarettes and smuggling are rampant, despite efforts by Sars to snuff it out. A position paper released by the Tobacco Institute of SA this year suggested illicit cigarettes in the informal sector accounted for 42% of the market, and a third of the national market. Some packs are selling for as little as R5 when the excise payable to Sars is R17.85 per pack. This suggests a loss to the fiscus of R40 billion since 2010.
Sars is taking action
Sars has started to act on this massive leakage. When Moneyweb visited Gold Leaf Tobacco in Johannesburg recently, Sars inspection teams were visible on the factory premises, and Rudland confirmed they were permanently encamped (and welcomed). Batsa likewise confirmed the presence of Sars teams at its production facilities. Sars officials have been despatched to all cigarette factories in SA, and this reportedly had an immediate impact on revenue collection. It could be that Sars is at last starting to the turn the tide against illicit cigarette sales.
The reason Sars has a special interest in the tobacco industry is its rich history of smuggling and illicit trade, as Van Loggerenberg makes plain in his book.
Back to Fita’s PAIA application and its attempt to get access to Batsa’s internal investigation into the now reasonably well-documented activities of FSS. Its operatives are alleged, by former employee Van der Westhuizen, to have placed tracking devices on competitor trucks to monitor their frequency, type of stock and to see who was receiving the goods.
They intercepted phone calls, placed hidden cameras at competitors’ workplaces and homes, and followed their vehicles around.
The spies also stole commercially sensitive documents, such as production schedules and invoices, and handed these to their FSS ‘handlers’ who would then allegedly pass them on to Batsa.
Tobacco companies were also making donations to political parties.
“It is no secret that the small manufacturer Carnilinx has made donations to the EFF [Economic Freedom Fighters] or that Yusuf Kajee of Amalgamated Tobacco Manufacturers was an outspoken supporter of Jacob Zuma’s presidency. But we do not really know to whom the big boys have donated money, or how much and for what reasons,” according to Van Loggerenberg in Tobacco Wars.
Fita and Carnilinx have since apologised to Sars and the affected officials for any role they may have played in advancing the rogue unit story. The tobacco sector was crawling with double agents, and some of the players got duped, says Van Loggerenberg.
The statement issued by Fita two weeks ago says that after the allegations of spying by FSS became public knowledge in 2016, Batsa had instructed three sets of attorneys in SA and the UK – Norton Rose Fulbright, Linklaters and Slaughter and May – to conduct investigations on their behalf “in respect of allegations that implicated Batsa and/or British American Tobacco plc and its agents and/or service providers of conduct, including but not limited to unlawful surveillance, unlawful interception of private communications, corruption, money laundering, tax evasion, unfair trade practices, and undue influence over law enforcement officials in the Republic of South Africa”.
It’s now more than three years since the investigation was announced and the findings have yet to be made public.
Fita’s Paia request seeks to flush it into the open. Financial Mail had previously filed a similar Paia request, to no apparent avail.
“It is our understanding that Batsa prides itself as a law-abiding entity,” adds Fita, “and we, therefore, implore them to do the right thing and to ensure that they keep their reputation intact by not allowing this dark cloud to remain over their heads, and by bringing to light the steps taken in ensuring that those who acted unlawfully and tarnished the name of Batsa and BAT plc have been brought to book.”
Van Loggerenberg says he holds out little hope of Batsa releasing evidence that implicates it or any of its service providers and agents in unlawful activities.
“Nor do I expect Batsa to publicly acknowledge their relationships with, and the roles played by, some of their secret agents, or any other implicated law enforcement and intelligence operatives, such as the unholy and rogue so-called Tobacco Task Team. Doing so would demonstrate how these rogue agents deliberately sought to discredit the SA Revenue Service and its officials from 2014 onwards, purely to distract from and hide away their own sins. The result was that their actions gave birth to the now wholly discredited ‘rogue unit narrative’ which was capitalised upon with great fervour by all and sundry that wished to capture Sars.”
By making disclosures to the authorities and law enforcement officials, Batsa was attempting to wash its hands of past wrongdoing, adds Van Loggerenberg.
“The fact that the Public Investment Corporation holds about R30 billion in shares in Batsa doesn’t seem to matter either. It is for a few privileged persons and lawyers at Batsa to know and nobody else.
“The fact that Fita members have been found wanting on compliance issues in the past, is a complete sideshow and distraction. The public is well aware of their sins and the consequences of these. This is no secret. Fita members collectively hold significantly lower market share [than] Batsa. None are listed multinationals either. Batsa should perhaps focus on their own sins, before pointing fingers at others.”
In November 2013 and April 2014, Sars publicly announced its intention to pounce on spies and dirty tricksters in the tobacco trade. Van Loggerenberg says Sars was about to expose all of them and hold them accountable.
“Their counterattack suited state capture perfectly, and the rest is history. Every South African is now paying for the consequences of these events, whether it is a poorer government, fewer services, increased Vat and lower tax collections. This matter should concern everybody that cares for our country’s future.”