SA losing $62bn a year due to illicit financial flows

South Africa is losing more than $62 billion a year because of illicit financial flows (IFFs), which could be used to fund the building of schools, hospitals and safer roads.

This was highlighted at a conference on increased illegal trading in automotive components, at the Automechanika even in Johannesburg.

Tyre Import Association of South Africa (Tiasa) chairperson and MD of Treadzone Charl de Villiers said a pilot study by the United Nations Convention on Trade and Development (Unctad) focused on measuring tax and commercial IFFs, revealed that South Africa is losing out on $21.9 billion per year in inward flows and $40.9 billion in outward flows.

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These inward flows are being lost because of misdeclarations (either on purpose or by mistake), undervaluation of invoices, tax evasion, round tripping and many other things, De Villiers told a conference hosted by the Tyre, Equipment, Parts Association (Tepa) at Automechanika last week.

De Villiers said the majority of outward flows that are being missed involve the minerals sector, with “the mining guys playing games with the values they export”.

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He said misdeclarations in the tyre sector involve people selecting non-tax tyre codes and importing tyres as rice or wheelchair tyres, which do not attract duties.

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De Villiers referred to an example of tyres being imported via Namibia as wheelchair tyres when in fact they were ultra-high-performance tyres.

He said Tiasa is part of a SA Revenue Service (Sars) forum where they share information and knowledge, but highlighted that Sars “don’t understand the data that they see” and do not know what the different tyre sizes mean.

SA Tyre Manufacturing Conference (Satmc) managing executive Nduduzo Chala echoed this point by highlighting two major risks – South Africa’s port operations, and the misdeclarations that take place at the ports, and the lack of understanding of the tyre industry.

Satmc represents the four local tyre manufacturers – Bridgestone, Continental, Goodyear, Sumitomo.

Illegal products

Chala said the people who are auditing or reviewing the containers, which have tyres, do not understand what is declared on the paper versus what they audit or check. This results in more illegal products entering the country “because we have champions who are actually not trained or who do not understand the market”, he said.

“There is a gap in the port operations particularly on those two [issues]. We have reported these items but we never see any traction. That means we are losing income from a country perspective, and we are also losing competitiveness together as local manufacturers and importers that are doing the right thing,” he added.

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South African Association of Freight Forwarders (Saaff) CEO Juanita Maree said about 5% of the trader base is dodgy and the authorities should be focusing on this group through correct risk profiling.

She said an average of about 12 227 containers come into South Africa daily, but a lot of legitimate traders are constantly having their containers stopped for inspections instead of the focus being on the 5% of illicit operators.

Maree said the authorities need to look at the entire supply chain to identify and take out the illicit operators.

“Ultimately we want successful prosecution. We want to make sure there is correct risk targeting at the frontline when the containers come in.”

“If they do that, we need the behaviour loop. We want the people who constantly do the wrong things to be taken out of the system by [the Companies and Intellectual Property Commission] delisting them as directors because, what we can see now is that they just go to another legal entity and that doesn’t help,” she added.

De Villiers said Tiasa has been picking up “strange relationships” between Southern Africa Customs Union (Sacu) members regarding the implementation of recent tyre anti-dumping duties and had discovered that Namibia was not implementing the duty.

“Their take on it is that they have not seen it. Nonsense. They are part of Sacu and know exactly what is going on.

“This is incentivising those importers to bring it [tyres] through Namibia, to try and get it across the border and hoping that our risk engine doesn’t pick this up,” he claimed.

Porous borders

“My concern is if our neighbour Namibia is not implementing the tariff book that they all agreed on, where are we going? South Africa’s borders are already porous in terms of people coming in and products are now going to come in through other avenues as well,” he said.

De Villiers said illegitimate tyre importers are normally between 10% and 20% cheaper than the rest of the legitimate importers, which is impossible because there is not such a big price differential on the tyres coming out of China.

Motus aftermarket parts product marketing manager Shawn Reddy said 75% of automotive parts sold in the Nigerian market are counterfeit and, with South Africa’s porous borders, it’s a real concern that these counterfeit parts are infiltrating into Niger, Cameroon and other neighbouring countries.

“We’ve already seen the counterfeit market getting into ‘lubes’, which are your oil brands, in our neighbouring countries, such as Mozambique and Zimbabwe,” he said.

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Safety risks

Reddy said the illicit parts trade is compromising the performance, reliability and safety of car parts.

Autozone CEO Dion de Graaff said cheap vehicle parts imports or “white box” imports into the country are items that potentially do not meet specifications, but the reality is the industry does not know what the specifications are of many of these items.

De Graaff said South Africa’s poor economic environment is creating a fertile ground for this illicit trade.

“Luckily it’s not a big thing in our industry just yet. But, as we get more and more online trading, it’s just going to increase the opportunity for illicit trade,” he said.

De Graaff said Autozone’s wholesale division conducted a survey nine months ago of independent retailers, asking them about the proportion of their sales of known branded items from reputable organisations compared with “white boxes”.

“It looked like about 55% of what they were selling were unknown imported items. We were quite shocked. We thought this number would be well below 30%. We repeated this survey and in nine months [white box items] increased to 70% of their sales. Unknown brands, unknown specifications, unknown quality,” he said.

De Graaff said these “white box” items had warranty periods ranging from zero to five months.

“If you buy known brands of products, you are getting 12- to 24-month warranties and even higher in many instances.

“[If] anybody is giving you a zero-month warranty on a part, especially if it is a safety-related part, you have to know that something is wrong. Sadly, that is price-led buying,” he said.

Automotive components approval manager at the National Regulator for Compulsory Specifications, Alex Mkondo, said that in the last financial year, products valued at more than R26 million were found to be non-compliant. Potentially 80% of those products may not be able to be corrected and, as such, will be subject to destruction.

Automobile Association (AA) Layton Beard said from a consumer perspective, compliance is incredibly important to ensure there are safer vehicles on the road.

“We can do that in part by ensuring that the parts going into vehicles are the correct parts, they are not illicit parts, they are safe parts and they are not adding to the road safety problem,” he said.

This article is republished from Moneyweb under a Creative Commons licence. Read the original article here.