South Africa and Pakistan might seem worlds apart, but they are kindred spirits when it comes to their exposure to the illicit trade, which is out of control in both countries. Not only that: South Africa is in the top three most criminal countries in the whole of Africa – and one of the world’s top 10.

Without political will, and collaboration across government, business and society, it will be impossible for South Africa to get off the Financial Action Task Force’s (FATF) greylist – despite the country’s ambitious stated goal to do so by 2025.

At the Europe, the Middle East and Africa (EMEA) Security Conference on high-security printing, anti-counterfeiting and brand protection held last week in Dubai, delegates heard how illicit trade and counterfeiting was a serious and growing threat to society. 

Smuggling, forgery and tax evasion were costing governments billions in tax revenue, undermining legitimate businesses, and exposing consumers to poorly made and unregulated products. 

Illicit trade was costing South Africa at least $6-billion (or R112-billion) a year in lost revenue, said Stefano Betti, an expert in counter terrorism, transnational criminal law and policy who has worked for Interpol, the United Nations, the World Bank and other entities. 

Betti is also the director-general of the Transnational Alliance to Combat Illicit Trade (Tracit) – an NGO whose membership includes companies from various industry sectors including alcohol, food, cosmetics, tobacco and luxury goods. He is also a senior legal and policy adviser for the Siracusa Institute for Criminal Justice and Human Rights. 

Tracit’s latest report, on the illicit trade in Pakistan, released last week to coincide with the conference, reveals how the convergence of various structural weaknesses in that country’s economy undermines its ability to sustain gains in poverty reduction and GDP growth prospects. These factors have helped prepare the perfect fertile ground for illicit markets to become entrenched, with record high inflation the most pressing problem. 

The report notes that in March this year, Pakistan’s inflation rate had reached 35.4% – which is its highest level in half a century. Such high levels of inflation have a disastrous impact on consumer purchasing power and affordability, which is seen as the primary driver for illicit trade. It observes that when prices rise faster than incomes, people can afford to buy fewer goods and services, and cheaper goods – including illicit and black-market products – become more alluring. 

Pakistan’s shadow economy already constitutes about 40% of the country’s GDP, with significant levels of illicit trade found in 10 key and “vulnerable” sectors, with the result being that food fraud, illicit petroleum products, counterfeiting and piracy, and trade in falsified and substandard pharmaceuticals are rife. 

This shadow economy has helped perpetuate a circle of money laundering, organised crime, corruption, and tax evasion, which is said to amount to as about 6% of GDP, driving debt, the devaluation of credit ratings and raising the cost of attracting investment. 

The illicit trade in tea, tyres, car lubricants, cigarettes (where almost half of all cigarettes are sold without paying taxes) and pharmaceuticals (where up to 40% of medicines are deemed to be fake or substandard) has grown to about PKR160-billion (R10.6-billion) a year.

The illicit trade in cigarettes has also increased by about 10% over the past few years, costing the economy – which has been battered by inflation, political instability and a depreciating currency – a further PKR78-billion in uncollected tax revenues by 2021. By June this year, tax losses from the illicit trade in cigarettes were said to have reached PKR240-billion. 

To boost revenue, the government – which has negotiated a $3-billion bailout from the International Monetary Front and sought a further $600-million in loans from two Chinese banks to bridge financing gap, to rapidly hike excise tax rates on sectors such as alcohol, tobacco and petroleum where criminal traders exploit the price differentials accompanying the new tax regimes. 

Betti explained that their Pakistan report had taken three years to compile: “It’s probably the most comprehensive report that we have drafted so far.”

Some of the key trends that emerged from the Pakistan report: 

The illicit trade is shaped by the simultaneous corruption of many geopolitical, social and economic factors. 

Supply chain dynamics are subject to rapid and often unpredictable change, which causes significant challenges not only for regulatory authorities, but also for detection efforts. The problem is compounded by the clandestine nature of illicit trade and significant limitations and problems in data sharing. 

Consumer preferences, product availability and price gaps between illicit and legal products are critical factors in sustaining the demand for illicit goods. 

Every additional layer of complexity is exploited by traffickers, creating new opportunities for infiltrating supply chains. 

Consumer methods can be extremely creative and adjusted, or tailor-made to each individual operation

In order to avoid controls and protections for example, traffickers seek to disguise the country of origin, or simply the origin, of the goods, via the abuse of transshipment procedures.

Warehouses are turning into major logistical hubs for the assembly and repackaging of illicit goods. 

Raw materials, ingredients and components are very often increasingly shipped separately for assembly and packaging in destination countries, to avoid detection. 

Online shopping has significantly affected the way in which this trade is carried out and the way in which traffickers operate. 

And finally: low credit ratings from the three major international credit rating agencies that deem Pakistan a high risk of default, also means that the country is at high risk of default and it has to spend more money to borrow capital from abroad, which makes it more difficult and complicated to attract foreign investment. 

Sound familiar? 

Why this is important in the context of the illicit trade is because high inflation means a reduced purchasing power for consumers: “When consumers have no money to spend on legal goods in general, they go to the black market, which is why high inflationary pressures stimulate the black market.” 

In South Africa, the illicit trade problem was similarly acute, Betti said. It has a vast impact on businesses, because it distorts markets, forces legitimate entrepreneurs to compete with illegal traders who sell similar (but substandard) products without complying with safety, health or environment-related requirements, which ensures that they can produce all these products at a lower cost and therefore unfairly compete with legitimate traders.

However, businesses were making progress in this respect, said Leticia Davids, of the South African Liquor Brand owners Association (Salba). 

Previously, the country had “difficulties” partnering with law enforcement and to get them to admit there was a problem. But in the past year and a half, Salba has successfully partnered with the South African Revenue Service (SARS) in operations, especially with diverted products, which are products that are made for export but bypass the excise taxes or VAT.

“These products are flooded back into the market and then sold obviously at a very low cost, taking out all our other market share of all out other legal producers. We also have been partnering in the past year with the police, keeping in mind they are very resourced at this moment.”

The illicit traders are becoming more sophisticated in the way they are producing products, she noted, adding: “It’s quite difficult for our members to identify. So we’ve been doing a lot of work with our police team as well.” 

While Salba has worked closely with the National Prosecutions Authority’s attorneys, if its cases are not brought to court, it loses the battle. 

“We would like to have more of our cases brought to court. And obviously we’d like to have at least one successful prosecution. I think that will definitely set a very good example that illustrates the illicit trade is taken seriously within South Africa and especially in the liquor environment.”

Philippe van Gils, regional head of illicit trade prevention at tobacco giant Philip Morris International, said brand owners need to partner with online platforms and with the authorities to stamp out the illicit trade. 

“We’ve seen some initiatives like in the EU, where there’s a Memorandum of Understanding on the sales of counterfeit goods, which was facilitated by the European Commission. Here (in Dubai), the Ministry of Economy has a public-private partnership with one where companies can also share information.”

He said they see some progress: in the Philippines, where there was a strong partnership with the government and online platforms, they seized a high number of illicit e-cigarettes that were sold online. 

“Of course, much more needs to be done to address the cross-market shipments that are done using split parcels and more needs to be done to connect the online illicit market with the offline market because people in warehouses are finding ways to deliver and the online platforms to get their products ultimately to the consumers,” said van Gils.

But because criminals aren’t being prosecuted, they are behaving with impunity. “These criminal organisations continue to operate because they know they will not be prosecuted. Why would anyone invest in a country when you know that your competitor will be in the illicit market that sells at unfair rates and poor quality?” he asked.

“It’s a vicious circle because there are other priorities such as electricity, unemployment, crime and socioeconomic issues to deal with. But everything is linked; if you make this problem a fiscal imperative, you can solve all the other problems.”

Friends in low places

Brigadier General Juan Carlos Buitrago Arias, former general director of Fiscal and Customs Police in Colombia and founder of Strategos, an intelligence and security risk management consultancy, warned that the Organised Crime Index, produced by the Global Initiative Against Transnational Organised Crime and released earlier this month, showed South Africa had climbed 12 spots up the criminality index, from 19th in 2021 with a criminality score of 6.63, to seventh place in 2023, with a score of 7.18.

South Africa now has the third-highest criminality score in Africa, after the Democratic Republic of Congo and Nigeria, and, alongside Colombia, is in the worldwide top 10 most criminal (of 193 countries).

“While the regulatory framework in place in South Africa should allow control of the market and address consumer protection, the poor level of implementation will result in high levels of criminality, illicit trade and presence in the market of low-standard illicit products, all benefitting organised crime groups,” he said. 

The illicit trade is neither petty nor victimless, he said. “It is a high-profit, low-risk crime, which serves as a funding source for transnational criminal networks. Criminal organisations – including terrorist groups – are threatening our national and international security, and they are feeding off illicit trade.”

On all fronts

South Africa might be one of the largest and most diversified economies in Africa, but it faces an onslaught from the illicit trade on multiple fronts, including alcohol, cigarettes, fishing, mining, counterfeit electronics, pharmaceuticals, food, and apparel. 

Tracit has called on the government to prioritise efforts to combat the illicit trade and the conditions that facilitate it. The organisation’s director of programmes Esteban Giudici said earlier this year that left unaddressed, illicit trade and its associated criminal activities will continue to rob the government of tax revenue and deter investment in the country. 

Betti noted that the government’s pandemic-era lockdowns had helped criminal networks to consolidate their place in the market.

“We have seen a rise in counterfeiting where large consignments from neighbouring countries are split into smaller packages and brought into South Africa by nefarious means. In this way they manipulate the system and weaken law enforcement’s ability to trace the origin.”

Same, but different

In February, Tracit released its report on the illicit trade in South Africa, which revealed that it is one of the biggest threats to stability and economic growth in the country. It said while the country had taken steps to root out illegal trade, corruption and money laundering, the scope and depth of the illicit economy posed a significant threat to the country and was draining the economy. 

While the proposed deadline of January 2025 for SA to be removed from the grey list was approaching, there was still room for the government to right the ship. 

“Officials need to make better use of the financial intelligence they receive internally and from other countries, and enforce preventive measures. It’s doable. If there’s the political will it can be done,” Betti said. DM

Georgina Crouth was a guest of Philip Morris International at the EMEA Security Conference.