Where There’s Smoke, There’s Fire – Is South Africa’s Illicit Tobacco Industry Finally Going Up In Flames?

It reads like the plot of a movie or TV drama.

?The bad guys have fleeced billions in unpaid tax from the government. They now face the problem of what to do with all their ill-gotten gains. The only way they can spend it is to launder it into the legitimate banking system.

?So, they hatch a cunning plot to use cash-in-transit companies, who have drivers code-named Snoop, Chubby and Goofy. These drivers collect hundreds of millions of Rands from the bad guys’ warehouses and business premises and pay it into their companies’ bank accounts, pretending it’s their own money.

?They also “sell” the cash to other cash-focused industries, such as gold smelters and traders, that then transfer it, via electronic bank transfers, back to the cash-in-transit companies.

?This is how the dirty money ends up back in the formal banking system and is mixed with legitimate funds.

?It sounds like an action-packed film, doesn’t it?

?Unfortunately, this is not a plot playing out on the big screen. It’s happening right under our noses in the real world of illegal tobacco.

?You know what they say:

?Truth is always stranger than fiction. And here’s the truth:

?On 26 August 2022, The South African Revenue Service (SARS) seized control of all bank accounts and assets of the Gold Leaf Tobacco Company (GLTC), and those of its two directors, Simon Rudland, a Zimbabwean citizen, and South African Ebrahim Adamjee.

?The action came after a years-long (dating back to 2017) investigation into allegations of intentional tax evasion to the tune of around R3 billion – the ill-gotten gains stemming from illicit tobacco sales.

?It was all made possible through large-scale money laundering schemes via the afore-mentioned cash-in-transit companies, the wiping of daily forex reports to the Reserve Bank and Financial Intelligence Centre, and the brazen deletion and reconstruction of banking transactions by several Sasfin officials.

?SARS claims these officials were paid in cash to ensure bank accounts were incomplete, inaccurate, and manipulated.

?According to a report in the respected publication The Daily Maverick, the five Sasfin accused are:

?Brandon Marshall (Head of Trading Desk), Hussain Choonara (Back Office Manager), Lulama Kene (Temenos Treasury Application Specialist), Cheryl Simons (Financial Surveillance) and Merica Kwinika (Exchange Control Vetting).

?It seems incomprehensible, but this is what they managed to achieve:

• Deleted evidence of payments into GLTC’s Sasfin bank account.
• Deleted evidence of corresponding payments moving out of GLTC’s Sasfin account.
• Deleted the Balance of Payment Customer (BoPCUS) reports to the Reserve Bank.

?All of these hid the movement of monies to various offshore companies, mostly located in Switzerland, Dubai, and Mauritius.

?Although Sasfin ended its banking relationship with GLTC in November 2017, Sasfin CEO Michael Sassoon maintains this had nothing to do with the scandal the company now faces.

?Instead, he claims the reason for the closure of the accounts came after Amanda Gie, Sasfin’s Head of Forex operations at the time, noticed discrepancies with invoices linked to payments for GLTC’s offshore “suppliers.”

?Sassoon says its bank managers only realised something truly disastrous was about to happen when SARS “kicked down the doors” in March this year.

?Sadly, South Africa is no stranger to being a lucrative playground for purveyors of illegal cigarettes and the tax evasion that so often seems to go hand in hand with it.

?During the 2020 Covid 19 lockdown, sales of “legitimate” cigarettes were temporarily prohibited. The stated intention, it was alleged, was to improve the health of South Africans, but all it did was cause an explosion in the trade of illegal cigarettes from around 30% to 100% of the total market.

?A quick explainer here:

?You would be forgiven for thinking that illegal cigarettes are either those smuggled into the country or fake versions of legitimate brands. This is not completely incorrect – such cigarettes are illegal, but don’t make up the bulk of illegal cigarettes sold in South Africa.

?Over 90% are manufactured locally, in factories that are quite visible in some of our biggest cities.

?Johnny Moloto, the general manager for British American Tobacco South Africa (BATSA), told news publication Fin24 that almost 70% of all cigarettes consumed in the country now belong to illicit brands.

?This has handed South Africa the dubious honour of being the biggest illicit tobacco market in the world – and the only country globally to allow an illegal brand to become its top-selling cigarette.

?It's easy to spot illegal cigarettes simply by their price. Cigarette manufacturers must pay VAT and excise tax for every pack of 20 cigarettes sold. This translates to around R20 per pack. So, any pack of 20 you see on sale for less than R20 is illegal.

?And the Gold Leaf Tobacco Company is one organisation making a fortune in cash from these kinds of illicit tobacco sales.

?It must be said that the complexity and sheer brazenness of the alleged perpetrators are nothing short of mind-boggling.

?Many newspaper reports go into great detail about how it all went down, including transcripts of WhatsApp conversations between the parties concerned (which are, worryingly, some of the only real “documentation” of the dealings investigators must work with).

?It’s far too long a saga to go into in any real depth in this article, but I would like to highlight a few key issues that stand out in my mind as areas of real concern:

?When questioned about whether Sasfin’s alleged lack of knowledge about any wrongdoing indicated a worrying lapse in internal controls, Sassoon admitted that there “should have been more robust controls in place.” He added that, since 2017, the bank’s external auditors and heads of risk, compliance, and internal audit have been replaced “in a broad restructuring process.”

?These are important positions. The people entrusted with them are accountable to the bank, its clients, and its shareholders. Sasfin claims the replacements were for “other reasons,” but I’m sure I’m not the only one who finds the timing a little too coincidental.

?Then there’s the question of how much of the deleted information Sasfin has managed to salvage to help the SARS investigation.

?Sassoon has clearly stated that “we are 100% cooperating with SARS” and that it has handed over all subpoenaed documents.?

?And yet, in an astonishing admission, Sasfin COO, Roger Dunn said in a letter to SARS earlier this year that the bank’s decidedly belated investigation had found “evidence of deletion of transactions” and reconstruction of bank statements for GLTC.

?Yet, from the court documents, it is unclear whether Sasfin has managed to retrieve all this deleted information.

?And to add insult to injury, investigators have told the court they had “reason to believe that GLTC, assisted by Mr Adamjee and Mr Rudland, is still involved in illicit money laundering and continues to dissipate its assets.”

?Naturally, the default defence of the two main accused – despite an almost daily increase in the number of charges against them – is to feign ignorance and innocence:

• They told the tax inquiry they’ve done nothing wrong and had declared all GLTC’s taxes to SARS.
• They claim GLTC deposited just R162,7-million into its Sasfin accounts between 2016 and 2017 and that “any amount beyond this was not GLTC’s money.”
• They allege that they are ignorant of instances where more money was paid into GLTC accounts than was declared.
• They say that where there was manipulation of its Sasfin bank account, they were “not a party to it and were not aware thereof.”
• They argue GLTC’s accounts have been “hijacked” by Mohammed Khan from SALT Asset Management, appointed as GLTC’s intermediary with Sasfin.

?As I stated in the beginning, it reads like a Hollywood movie script, with so many twists and turns, accusations, and righteous indignation on behalf of the accused it’s hard to keep up.

?But what keeps me awake at night is that this scandal could be just the tip of the proverbial iceberg regarding the continental scourge of illegal cigarettes gripping Africa.

?Recently, the Tax Justice Network Africa (TJNA) said that Africa was losing $88.6 billion in tax revenue to Illicit Financial Flow – much of which comes from the tobacco industry - every year.

?Prof. Waithaka Iraki, from the University of Nairobi, said at the launch of a study report on the Tobacco Industry and Illicit Financial Flows in Africa, “Africa should not be Tobacco’s wild, wild west.”

?I couldn’t agree more.

?So, what is happening to fix it?

?Outwardly, the powers that be are making the right noises.

?SARS Commissioner Edward Kieswetter seems to be taking a strong stance against the illicit trade of goods that bring in revenue from excise duties.

?“Those who systematically and deliberately set out to deprive what is due to fiscus through fraudulent and other non-compliant activities will be dealt with,” he says. “This kind of conduct will be made hard and costly.”

?Which, of course, sounds good on paper. But does the rot go deeper than GLTC and Sasfin? Are there any government officials involved here? And will advocate Dali Mpofu mount a successful defence on behalf of Mr Adamjee and Mr Rudland?

?It has all the makings of a blockbuster sequel, so watch this space…