Customs fraud: SARS progress report in response to ‘Framework for SA's response to international economic crisis'

Meeting report

South African Revenue Service (SARS) on Customs Fraud
Mr Gene Ravele, Chief Officer: Customs, SARS, gave a presentation on SARS progress with regard to customs fraud on taking forward the ‘Framework for SA’s response to the international economic crisis’. South Africa’s clothing trade was the worst hit by illegal imports. Clothing and textiles contributed about 2% to the total value of national imports (slide 10). 

SARS Customs had a national footprint, with 42 SARS Customs branch offices, typically situated at regional centres, transport nodes and designated harbours. Customs maintained operations at 10 international airports, 19 designated land border posts, five sea ports, two inland rail ports, two inland sea ports, and three international mail centres, including the Durban post office (slide 2). South Africa’s main port was Durban, where SARS Customs resources were concentrated.

SARS strategic mandate was to facilitate legitimate trade, protect the economy and society from the illegal importation of goods and dumping, and contribute to border security by working with border agencies and implementing the National Integrated Border Management Strategy (slide 3). To this end SARS applied several modern techniques, including online release notes.  Also SARS mobile scanning machine was illustrated (slide 19). Since the 11 September 2001 event the role of customs administrations had changed to become a country’s first line of protection. Customs administrations now collaborated internationally; for example, containers of goods leaving South African ports for the United States of America were now scanned in South Africa.

The respective roles of the Department of Trade and Industry (DTI) and SARS were indicated (slide 4). The DTI’s roles were development of policy and negotiation of agreements. DTI also developed regional strategies, incentive schemes, and import control measures. On the other hand SARS’s role was to implement customs tariff, trade agreements, and industry incentive schemes, detect and prevent import fraud. 

SARS defined the problem that it had identified through its own research: illicit trade, such as poached abalone to the east, counterfeit goods, such as cigarettes from Zimbabwe, clothing, or motor vehicle parts, especially tyres, from the east, had increased rapidly. There were justifiable demands from legitimate commerce for action. However, levels of compliance were low, and the lack of a systemic and unified approach by government, public ignorance, and the global economic meltdown aggravated the situation. The root causes were the opening of the South African market to international trade, the sustained and steep surge of cheap imports, mainly from China, corrupt officials, and widespread and systematic under-declaration. Illegal imports were commonly undervalued, falsely declared as to origin and tariff, rerouted via third countries, subject to misuse of duty rebates and credits, and often counterfeit goods.  The adverse economic impact was a continuous erosion of the revenue base, closure of clothing and textile factories, and sustained job losses within CFTL (slide 5). Currently the law did not allow SARS to ‘name and shame’ offending traders.

Mr Ravele identified gaps in legislation and policy, for example, provision of dedicated ports and treating customs transgressions as criminal offences; ineffective application of trade agreements, for example, the inability to source original export documents in terms of co-operation between customs authorities; failure to share information and intelligence between government, business and labour; lack of requisite skills in valuation, tariff, origin, and other areas of enforcement, such as audit and criminal investigations; and inadequate criminal prosecution capability within the National Prosecuting Authority (NPA) (slide 6).  Historically there had been a disconnection between Customs and the DTI, and it was a reality that Customs did not have enough skills. SARS book of tariffs took years to master. There was no single educational institution for studying trade facilitation and customs administration. Officers were required to learn on the job. Before 1994 border control was the responsibility of the police and defence force.

Other abuses in the region included re-routing to South Africa from Malawi, Namibia, Lesotho, Botswana, and Zimbabwe. Another abuse was ‘round tripping’ at Beit Bridge with the help of corrupt officials. Bogus exporters thereby reclaimed VAT on ‘exported goods’. There was furthermore abuse of trade agreements and the Common Customs Union, and entering into individual agreements by the BLNS states: this led to further abuses of duty systems (slide 7). There was a memorandum of understanding on joint operations regarding trade between Lesotho and Botswana, in which Lesotho had made considerable effort.

China contributed about 40% of Section 11 imports, namely textiles and clothing (slide 8). SARS sought the co-operation of China’s customs administration. If SARS suspected that goods were undervalued or declared at the wrong tariff it was required to detain the goods and obtain the original invoice.  However, the Chinese government stipulated that such documentation could not be used in legal proceedings. Therefore SARS found itself filling warehouses with many of these clothes but unable to convict the importers.  A further problem was that the big four retailers always used a middle entity. The importer imports the goods and sold them to an intermediary, from whom the retailer bought. The retailer could then deny any connection with the importer. Thus legally, SARS had no recourse against the retailer. It was the importer who bore the risk. SARS had raised this issue with NEDLAC.

Most leather imports come from China. From April 2009 SARS had launched a special focus on footwear. What normally happened was that goods arrived from the east at Beira. There they were conveyed by goods train to Harare, repacked, and labelled ‘made in Zimbabwe. There had also been a problem with imports of clothes allegedly made in Malawi. Such clothes were in reality imported from the east incomplete and merely finished in Malawi. Such importers abused the rules of origin.

SARS role in combating commercial import fraud was described. SARS had a responsibility to oversee different programmes aimed at stopping unfair trade practices that threatened economic stability, restricted the competitiveness of industries in world markets, and threatened the public health and safety of citizens. This included prevention of dumping and trafficking in endangered species.  SARS had a statutory obligation to deal with tax and customs related crimes. 17 illicit economy segments had been identified as key focus areas of significance had been identified: clothing and textiles, tobacco, abalone, electronic goods, and motor vehicle components, for example, tyres. SARS had instituted targeted enforcement interventions on customs and tax contraventions, and established partnerships with other regulatory government departments, business and labour, with a focus on significant industries (slide 12).

SARS’s response was firstly to form strategic partnerships, in which the key driver was partnership, co-operation and collaboration in areas of research, inputs to legislation, and deliberations on policy, enhancements to systems, operations, and human capacity between government departments, labour and business.

To this end SARS had strengthened its strategic partnership by enhancing its relations with the DTI, trade, organised labour, and other customs administrations – for example exchanging trade data with China. SARS had also enhanced its participation in NEDLAC structures, and signed bilateral and multilateral agreements, for example with Lesotho to include specific co-operation on clothing and textiles, and made an agreement at the level of the Southern African Customs Union (SACU) for the prioritisation of the clothing and textile and cigarette and tobacco sectors (slide 13.

SARS’s response was secondly by way of operational reconfiguration. It had strengthened its capacity to combat import fraud by launching an integrated clothing and textile project campaign in April 2009. It had also appointed a dedicated programme director, posted dedicated teams and particular ports of entry, gained access to industry experts on valuation issues, developed a ‘price referencing’ risk selection tool, and introduced sector specific risk-rules. Furthermore, it had instituted risk and intelligence enforcement actions. It had increased audit coverage – the audit of entities in the sector across geographic and value chain (importers, warehousing, transporters, suppliers, shops, flea-markets and traders, wholesalers, and retailers). It had increased inspections, developed greater co-operation with the NPA, and instituted criminal investigations and prosecutions of non-compliance (slide 14) in preference for simply imposing financial penalties, as it had in the past. Rogue importers were now sent to jail.

NEDLAC engagement considerations were detailed (slide 15) and statistical data provided (slide 16). The new Customs Administrative Monetary Penalty System was being developed. A copy of the new provisions had been provided to NEDLAC for comment. SARS planned significantly to intensify its cross-border inspections of factories in neighbouring countries.

Mr Ravele gave statistical data on disposals of confiscated goods (slide 17). The aim in disposing of such goods was to avoid disrupting the local market by allowing release of such goods into the local market. Therefore they were used for disaster relief, or sold by auction to a trader north of the equator, or destroyed. An administrative burden was second hand clothing brought in by the NGO movement, from countries such as Turkey or the United States of America. South Africa was not allowed to accept such shipments except for use by charitable organisations. Such shipments were examined and detained until a release was obtained from the Department of Trade and Industry. SARS disposed of some of these goods for disaster relief purposes. 

Discussion
Dr P Rabie (DA) observing that 50 000 jobs had been lost in South Africa’s textile industry, asked how much revenue had been lost because of the widespread under-declaration of imports, and for SARS’ views on the response from India and China, which according to SARS had been less than satisfactory. He had spoken to a manufacturer of shoes who had told him that the shoes imported from India were cheaper than the rawhide that could be purchased in South Africa. He asked why there was such a discrepancy in prices, and if it was not possible to control the porous Zimbabwe border.

Mr Z Ntuli (ANC) also asked about border control.

Mr Ravele responded to Dr Rabie that SARS had commissioned a study on the value of illicit trade, but this was still in progress; when a quantum had been determined, it would be analysed, and specific information would then be available. SARS would thereby determine the tax gap to ascertain how much revenue it was losing by not collecting customs duties. SARS was trying, in conjunction with other authorities, to establish benchmarks. 

The Chairperson asked Mr Ravele when SARS would complete its study on the value of illicit trade.

Mr Ravele replied that SARS would convey to the Committee the results of the study in a written response.

Mr Ravele further responded to Dr Rabie on the discrepancy in pricing; however, Mr Ravele said that he himself was not an expert in that field. Clothing from countries like India, China, Indonesia and, lately, Turkey was very cheap, since they pushed for productivity at any cost. They made their profits by selling in volume. Some of those countries’ human rights record, in their manufacturing sector, was questionable. Production costs, including labour, determined the price of the product. It was important to draw that line between cheap imports and undervalued goods, but which were not counterfeit in any way. Countries with low production costs would always have a competitive edge over South Africa.

Dr Ravele responded to Dr Rabie and Mr Ntuli on porous border lines. Until the present, patrolling the border lines had been the responsibility of the South African Police Service (SAPS). The South African National Defence Force (SANDF) was not a policing unit; it was trained to fight wars. Many of these people crossing the border were civilians, some of whom were unaccompanied minors. At the ports of entry, control had been conducted by the Department of Home Affairs until January 2007; thereafter it had been transferred to SARS. On the borders, double checking of imported goods, by SARS and then by the Police hampered trade. However, SAPS and SARS co-operated to prevalent delays. However, more recently, some of those crossing the border were armed and were involved in smuggling and human-trafficking. Therefore the Army would return to border patrol duties shortly, according to Mr Ravele’s information.  SARS was involved in the discussions led by the Minister of State Security to establish a single border management agency to handle customs and migration in time for the 2010 Fifa World Cup. 

Dr S Huang (ANC) appreciated the presentation, but asked how many SARS officials had been caught and charged internally for aiding and abetting fraud, and about undervaluing of imported goods. In this regard it should be noted that goods were made very cheaply in India, and he could not understand how such goods could be undervalued. He complained about the 50 000 jobs lost in South Africa’s textile industry. He pointed out that chain stores bought stock very cheaply, and made big profits. He fully understood that it was difficult to control imports from Mozambique and Zimbabwe; however, there was no textile manufacturing in Zimbabwe. He complained about the damage to South Africa’s image caused by the alleged attitude of some customs officers to overseas visitors. This was important in view of 2010’s world soccer cup event.

The Chairperson stopped Dr Huang and said that some of the issues that he had raised could be discussed outside the meeting.

Mr Ravele responded that SARS would supply figures to the Committee. SARS statistics did not reflect a problem with imports from Indonesia as mentioned by Dr Huang. The greatest volume was from China, but not all goods from China were undervalued. There were some borderline cases, and some goods were intrinsically cheap. He speculated that China’s role was based on the business model and on an open economy. Australia, Canada, the United States, New Zealand, and everyone in the Sterling Area, would agree – that there was a surge in cheap imports. In an open market economy that was what happened; where there was a demand, the supply would always increase. This problem was worldwide because of the business model. South Africa needed a stronger trade policy. Its memorandum of understanding (MOU) with China had lapsed early in 2009. SARS needed co-operation with the DTI to achieve other measures. Mr Ravele said that SARS had responded to Dr Huang’s concern about the treatment of some Chinese nationals at the airport and would work with Dr Haung to resolve the matter. 

Mr Ngonyama (COPE) thought it strange that South Africa lacked a training institute for customs officers and relied to a great extent on the technical expertise and experience of  old employees. SARS had raised the issue of technical expertise, and he wanted it emphasised.  Given that South Africa was a strong economy, he asked how much more of a challenge the growth in illegal imports would be to other economies. He asked if there was no special security unit available to combat this problem rather than the various branches of the police, such as the unit for drugs. It should be a matter of top priority since customs fraud was a major drain on the economy and the Gross Domestic Product (GDP). There was a sense of need for a special security unit, and it could not depend on the whims of officials. He asked about rogue exporters based in the country of origin. ‘We cannot wear gloves on these issues’.

Mr Ravele responded to Mr Ngonyama (COPE). SARS had initiated discussions with the University of Johannesburg and the University of Pretoria to create schools of customs administration. Already SARS had succeeded in establishing a tax institute at the latter. From the viewpoint of the technicalities of customs administration, it could thus far obtain agreement only with some of the universities outside South Africa. It had established a strategic alliance with the University of Canberra for distance learning towards a master’s degree in customs administration. The ideal would be a similar programme in a local university. One of the universities in Zimbabwe had found it too costly to establish and maintain such an institute. SARS had established a customs academy which trained up to 500 customs officers a year. From November 2009, 220 new recruits, who would be paid a stipend, would be trained in a cadet programme. Those recruits who wanted to serve on the borders would be given paramilitary training for a period of not less than 12 weeks. SARS also welcomed to its cadet programme B. Comm. graduates so that SARS could harness their technical expertise in valuing. SARS had also signed an MOU with the SANDF to deploy in customs men and women who had returned from peace missions abroad and would otherwise be laid off until required again. To date 300 such individuals had been deployed. Customs staff numbered only 2 600 employees out of a total of 14 000 employed by SARS. It was hoped to increase this number.

The Chairperson asked SARS if that was its ideal number.

Mr Ravele responded that SARS wanted to increase the number of customs staff to 5 000 by the year 2011. It wanted its staff to specialize in technical areas. Currently, too many employees were pushing paper. As many as 1 000 people could be released from paper work and redeployed in the front line. He agreed with Nr Ngonyama on SARS role in combating fraud. He said that the Hawks predecessor, the Scorpions, had used the top five accounting firms for investigation to supplement’s government’s expertise. 

Mr X Mabaso (ANC) said that world trade and competition could be ambitious and harmful. He asked if was not in the interests of countries with strong economies, like those of Europe, to exaggerate the weaknesses of developing countries like China in order to maintain their market share. With regard to SARS’ security measures, when he saw huge trucks on the road, he asked himself if they contained drugs. He asked if it was SARS’ responsibility or the South African Police Service (SAPS)’s to check such vehicles. Unemployment of the youth after graduation was a serious concern, with regard to which he asked if SARS did not have internships and learnerships. If not, he asked if the issue could be explored in consultation with the Department of Labour. He asked about bilateral agreements with other countries.

Mr Eric Kieck, Group Executive Customs Policy, South African Revenue Service, said that it was necessary to be comprehensive. Most trade crossing South Africa’s border was legitimate. That trade did not take place in a vacuum. It was necessary to realize that there were competing interests in the policy and regulatory framework. In the Uruguay Round of the World Trade Organisation in 1994, South Africa made deep commitments to the Organisation in regard to tariffs. Some countries were highly competitive and this would inevitably have an impact on uncompetitive sectors of the South African economy. Most of the 50 000 job losses in the textile and clothing industry were because of legitimate trade in a sector which had formerly been protected by tariffs. Keeping tariffs high was not the answer, because tariffs were reciprocal. This was the dynamism of international trade from a regulatory perspective. China might be an emerging economy, but, from the current year, it had become the number one trader in the world in terms of value. Previously it had been Germany, because of its high added-value products such as motor vehicles and precision instruments. Many of the issues raised were not unique to South Africa. SARS was happy that the customs administrative issues had been recognised, as they had long been ignored. South Africa was one of the top thirty trading nations in the world. It was not enough to develop policies and legislation, but provide finance for the necessary administrative effort to ensure that all trade was legitimate.

Mr Patrick Matlosi, Executive Risk: SARS, responded on whether SARS could intervene and check consignments on the road. In short, SARS could intervene, but only on the basis of information received from the intelligence services or from members of civil society.

Ms H Line (ANC) asked about SARS role in NEDLAC.

Mr Ravele responded that all changes to legislation governing customs had to be discussed in NEDLAC.

Ms D Tsotetsi (ANC) asked if SARS was ‘winning the battle’.

Mr Ravele responded that if SARS’ plans materialised, it would be able to say confidently that it was ‘winning the war’. However, South Africa had to change the way it did business. There were South Africans who believed that clothing was overpriced, and on this basis justified their purchases of imported clothing. NEDLAC needed to examine this issue. Either South African-made clothes were over-priced, or people preferred foreign-made clothes.  It was necessary to change hearts and minds. The Proudly South African campaign had been launched, but it had become just a slogan. It was necessary to support local markets. The impact of job losses was magnified by the obligation of each employee who lost his job to support several dependents.

Mr Ntuli asked if SARS’ approach to the motor car sector was sound and logical and asked about compliance.

Mr Ravele replied that if motor manufacturers such as Nissan, BMW or Ford made cars for export, they could claim a certain tax rebate. Some motor manufacturers, from time to time, would try to cut corners by not complying with the conditions for such a rebate.

Mr Kieck added that if tariffs were removed, then the market was opened up to increased competition.
 
The Chairperson asked Mr Ravele if she would be correct in saying that the system had its own challenges, to correct her if she has misunderstood him, and to explain acronyms. She asked for clarification on SARS’ view that the root cause of the problem was South Africa’s opening up to international trade and for information on corrupt officials in tabular form. She agreed with Mr Ravele about the gaps in legislation. She agreed with Members on the need for higher studies for customs administration, suggested that SARS was ‘recycling officials’, that employees with as many as 40 years service might exploit their experience to the detriment of the service, and that such employees, if guilty of transgressions, were more difficult to identify than less experienced officials. She advised SARS to take note urgently of Mr Mabaso’s suggestions for learnerships to be offered to the unemployed youth as an interim measure while SARS considered courses in customs administration in institutions of higher learning. She said that SARS had highlighted main ports of entry (slide 11), but asked why other entry points were apparently not given enough attention in terms of surveillance, for example, there was much traffic between Mozambique and South Africa, a border area should be carefully examined. She was happy that Mr Ravele had included data on the disposal of confiscated goods (slide 17). She did not have the facts before her; but said that so many suspect goods seemed to be in circulation. ‘The concern of business is real, but are they not culprits in this respect? They are to me the main culprits.’ She said that it was important to focus on them more than ever, asked if SARS monitored continuously the goods in its warehouses and if a record existed. The Committee would appreciate a copy of a sample of this record; so that it could be assured that a system had been established. She criticised SARS for scepticism on naming and shaming offending traders, and if the organisation was protected ‘under the disguise of law’.  If SARS alleged that the law did not allow naming and shaming, there might be other legislation under which SARS could do so. This was important; otherwise such traders would be difficult to deal with. She asked for the names of countries into which SARS planned cross border inspections and for the likely date of implementation. She noted that SARS had, in its presentation, anticipated her question about the tracking system for charitable institutions, which were allowed to import second hand clothing. She asked for clarity on statistical data; ‘March to date – June 2009’ was an obscure time reference; did audits follow examinations, or vice versa? (slide 18); and how accurate SARS’ scanner was (slide 19). She said that the Committee’s main focus currently was customs fraud. 

Mr Ravele replied that SARS needed Parliament’s wisdom on two bills – on customs control and on customs duty - to be tabled in the near future. Facilitating trade and securing the borders were not mutually exclusive. The single border agency concept sought to address security concerns but also to facilitate trade. 

Mr Mcebisi Basi, Senior Manager, Customs, South African Revenue Services, responded that the value of goods in the figures was based on the nature of the goods.  Not all the goods were of similar value. It was possible to have a large quantity of low value goods, or a small quantity of high value. This might explain discrepancies.

Mr Ravele said that the preferred target of armed robbers when they stole from SARS warehouses was cigarettes, followed by counterfeit clothing. SARS was trying to improve its security.

Consideration and adoption of the Committee programme for the remainder of the third term
The Committee considered and adopted, with minor corrections, its programme.

The meeting was adjourned.