Contraband Tobacco in Canada

An Assessment on the Fifth Anniversary of the RCMPs Contraband Tobacco Enforcement Strategy

The National Coalition Against Contraband Tobacco Ottawa, ON May 7th, 2013

Introduction
May 7th marks the fifth anniversary of the RCMPs Contraband Tobacco Enforcement Strategy, a document that set out the RCMP and governments plans for addressing the serious problem of illegal cigarettes in Canada. Now, half a decade later, it is important to look at what has changed in the illegal cigarette market. What success has government action achieved? How far along have we come? What remains to be done? This report will look at the state of contraband tobacco in Canada today. As was the case in 2008, many questions remain difficult to answer, such as the exact size and scope of the contraband tobacco problem. While exact figures may be difficult to determine, it is very clear that illegal cigarettes are still all-too prevalent in communities across Canada and that illegal cigarette dealers are looking to expand into new markets. Government action, including new police powers at both the federal and provincial levels, has had some effect, but the market continues to evolve and more steps are necessary.

About the National Coalition Against Contraband Tobacco

The National Coalition Against Contraband Tobacco (NCACT) is a Canadian advocacy group formed in 2008 with the participation of businesses, organizations and individuals concerned about the growing danger of contraband cigarettes. The National Coalition Against Contraband Tobaccos fifteen members share the goals of working together to educate people and urge government to take quick action to stop this growing threat. The NCACT works to raise awareness amongst government and the public about contraband tobacco, as well as to encourage meaningful action on this important problem. More information about the coalition can be found on our website, www.stopcontrabandtobacco.ca.

About Contraband Tobacco

Contraband tobacco is any tobacco that does not comply with all federal and provincial laws, including those governing importation, stamping, marking, manufacturing, and taxes and duties. This includes cigarettes and other tobacco products that are sold without having paid both provincial and federal excise taxes. It also includes products that do not meet Canadas strict packaging and display regulations. Contraband tobacco is often sold through criminal distribution networks in transparent plastic bags of 200 cigarettes, with a baggie often costing less than a movie ticket. Contraband tobaccos low price and easy availability make it a prime source for youth smoking. In fact, the Centre for Addiction and Mental Health has indicated that easy access to contraband tobacco is one of the reasons for Ontarios stubbornly high teen smoking rates. Illegal cigarettes also undercut Canadas tobacco control efforts more generally, undermining regulations put in place by governments across the country. This has a real effect: a study published in the Canadian Medical Association Journal found that those that smoked illegal cigarettes were heavier smokers and had a harder time quitting.1 Contraband tobacco is also big business for organized crime. The RCMP estimates that there are about 175 criminal gangs involved in the illegal cigarette trade. They use this lucrative industry as a cash cow for their other activities, including guns, drugs and human smuggling. Illegal cigarettes bring more than just a social cost. They represent a direct revenue loss to government through uncollected tax revenues. The investigative news program W5 reported that contraband tobacco could cost governments in Canada as much as $2.1 billion a year in lost taxes. Similarly, the Canadian Taxpayers Federation found that contraband tobacco in Ontario alone could represent a combined federal and provincial revenue loss of as much as $1.1 billion annually.2

Mecredy, C.; Diemert, L.; Callaghan, R.; and Cohen, J Association between use of contraband tobacco and smoking cessation outcomes: a population-based cohort study CMAJ April 16, 2013 vol. 185 no. 7
2

How Much is Contraband Tobacco Costing Taxpayers in Ontario? Canadian Taxpayers Federation, 2012

RCMP Contraband Tobacco Enforcement Strategy

On May 7th, 2008, recognizing the scope of Canadas contraband tobacco problem, the RCMP launched a contraband tobacco enforcement strategy. The strategy highlighted several priority areas for government to meet the challenge of contraband tobacco. They are: Disrupting organized crime and the supply chain. Criminal gangs dominate the trade. To decrease it there is a need to increase these outfits risk by, among other things, disrupting the supply chain and shutting down illegal manufacturing facilities. Coordination, collaboration and partnership development. Recognizing that no one entity is able to address the problem in isolation, the strategy committed to working together with other government and non-government partners to address it. Outreach. Working with First Nations communities and leadership is essential to addressing this problem. Legal industry stakeholders also have important perspectives to offer on how the trade works. Effective use and allocation of resources. Contraband tobacco was a problem that primarily affects Ontario and Quebec; there is a need to apportion resources accordingly. Impact crime through education and awareness. The public is often confused as to what constitutes contraband tobacco. Raising awareness of what contraband is and its effect were considered an important part of curbing demand. Government departments and agencies awareness also needed to be improved. Contribute to the Development of legislative and regulatory tools. Regulatory tools can reduce the profitability of the illegal market. The RCMP saw itself as well suited to offer insight as to where improvements might be possible. Conducting research. The illegal cigarette market is difficult to measure, which has implications for gauging the size of the problem as well as measuring progress in addressing it. Employee selection and development. Complicated problems require properly trained staff, particularly in light of the cultural and jurisdictional challenges that contraband tobacco presents.

The strategy committed to annual progress reports, as well as a review after three years. The strategys review was to be released at the end of 2012. At of May 2013, it has yet to be released.

Contraband Tobaccos Supply Chain

Where Does Contraband Tobacco Come From?
There are approximately 50 illegal cigarette factories in Canada. They operate outside of any regulatory framework. They produce millions of cigarettes annually that are then smuggled into communities across Canada. Increasingly, contraband tobacco may have been produced in a facility that operates under federal license, but not all provincial taxes have been paid or relevant display or packaging laws followed. The raw tobacco that supplies these factories comes from both foreign and domestic sources. Domestically, the monitoring of raw leaf tobacco farming has a number of loopholes that are easily exploited by criminals. As outlined in the Winter 2012/13 issue of Frontline Security, it is all too easy for tobacco farmers to under report actual tobacco yields, allowing them to divert raw tobacco to illicit manufacturers for as much as four times the price that the legal industry would pay. This can be particularly problematic in years with excellent growing conditions, such as 2012, where actual yields often vastly exceed estimates.3 Shutting down illegal factories was listed as a priority for the RCMP in the 2008 strategy, and must remain a long-term goal for government. The number of factories has actually increased over the last five years. In the interim, government should also explore means of limiting access to cigarette manufacturing materials, including non-tobacco elements such as filters and papers. Government should also inspect licensed manufacturing facilities to ensure that they are complying with relevant federal and provincial regulations.

Smuggling
Five years later, there is little doubt that the smuggling of illegal cigarettes remains a significant problem in Canada. Even from an anecdotal perspective, reports of large cigarette seizures happen on a weekly basis. While the epicenter of the trade remains in Ontario and Quebec, there is no doubt that smuggling activities are expanding into Atlantic Canada, with more and more police interdiction of contraband tobacco bound from Quebec into the Maritime provinces. This should be of little surprise: a single highway connects New Brunswick, Nova Scotia, and PEI to Quebec just as it does to Ontario. In fact, the Canadian Convenience Store Association (CCSA) has tracked seizures over the past several months. They have recorded more than 2.2 million illegal cigarettes seized in the four Atlantic Canadian
3

Illicit Tobacco, What's the Big Deal? Frontline Security, Vol. 7 No. 3

provinces since January of 2012, or about 13% of all cigarettes seizures tracked, making per capita contraband seizures commensurate with what CCSA observed in other provinces.4 Western Canada is not immune from this trend, having experienced a number of high profile cigarette seizures. As an example, in January of 2011, Alberta seized about 14 million illegal cigarettes that were destined for new smoke shacks.5 The Canadian Border Services Agency noted to the Senate Committee on Legal and Constitutional Affairs in May 2013 that seizures of fine-cut tobacco - what illegal product is manufactured from - have actually been increasing over the past number of years. In 2011, 35,000 kilograms were seized; in 2012, that quadrupled to 148,000 kilograms. Already in the first three months of this year, 111,000 kilograms have been seized. This increase in seizures may be a sign of an increase in overall volume.6 There have been a number of recent third-party examinations on the nature of tobacco smuggling in Canada. In March, the Macdonald-Laurier Institute released a paper by Carleton University Professor Jean Daudelin that looks at the nature of cross-border smuggling in the Cornwall, Ontario area. The paper finds that the illegal cigarette trade has created a smuggling pipeline that moves illegal cigarettes from the Cornwall area to other parts of the country. The smuggling of cigarettes, the study suggests, has created an infrastructure that has the capacity to move illegal goods readily throughout the country. While that capacity is used for tobacco products, it also has transported drugs, weapons and people.7 Frontline Security also looked at the causes of the continued viability of tobacco in smuggling in its Winter 2012/13 issue. Again, it points to the attraction of the relatively low risk and high profit of smuggling contraband tobacco for the reason for its continued viability. To this point, it estimates that a van smuggling tobacco can yield as much as $17,500 in profits to the criminals operating the enterprise. A tractor-trailer can be worth almost $2.5 million.8

Canadian Convenience Stores Association submission to the Alberta charges chief in cigarette seizure CBC News, April 15, 2011.

Testimony by Geoff Lockey, Director General, Enforcement and Intelligence Operations, Canadian Border nd Services, to the Senate Standing Committee on Legislative and Constitutional Affairs, May 2 2013.
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Daudelin, Jean Border Integrity, Illicity Tobacco, and Canadas Secuirty Macdonald -Laurier Institute, 2013 Illicit Tobacco, What's the Big Deal? Frontline Security, Vol. 7 No. 3

Smuggling is the pipeline through which illegal cigarettes are spread from factory to communities across Canada. Each seizure represents the outcome of hard work and dedication on the part of law enforcement officials, but also represents just the tip of the larger problem. The RCMP estimates that they catch just 5-6% of the overall trade. As was the case in 2008, the smuggling of contraband tobacco remains a serious problem in Canada. New police powers have added to the tools that police have to disrupt it, but the trade continues to operate more-or-less with impunity and is expanding further into new markets.

Smoke Shacks
A large amount of the contraband tobacco consumed in Canada is purchased at so-called smoke shacks. These are cigarette-selling businesses that are located on or near First Nations communities, usually only a short drive from a major Canadian city. At these outlets, contraband tobacco can come in a variety of forms. The familiar baggies are certainly available, but so too are Native brands that are produced under federal license, but with no provincial taxes paid. When purchased by non-aboriginals or taken off reserve, these brands are just as much contraband tobacco as baggies. At smoke shacks, federal excise stamps are sometimes found on baggies or products that do not carry mandatory federal health warnings, contravening the law. The number and sophistication of smoke shacks have grown. In 2008, the RCMP estimated that there were at least 315 smoke shacks in Canada. Over the intervening 5 years, this number has likely grown to closer to 350. It is also increasingly a misnomer to call them shacks, as a steady stream of profits have been invested into the retail outlets to make them much more permanent and more elaborate. In some cases, they have even expanded their offerings to include other tax-free goods, such as gasoline. Smoke shacks have proven lucrative enough that there have been efforts to expand the model westward. In 2011, a smoke shack opened near Brandon, Manitoba. While the Manitoba government acted quickly to shut it down, efforts continue to open new ones. A previously mentioned major seizure in Alberta in 2011 stopped the flow of contraband tobacco to a nascent set of smoke shacks. This is an area where greater education to the public remains critical. The definition of contraband may be straightforward, but, in practice, it can be confusing. Governments must be careful to make sure that its various excise stamps and bands are being used appropriately and not in ways that may lead to confusion amongst the general public. Similarly, jurisdictional problems remain when dealing with enforcing laws and regulations regarding smoke shacks. Local police often have limited powers to search for contraband from those leaving

smoke shacks, nor are resources realistically available to do so. Jurisdictional problems for enforcing Canadian regulations on First Nation territory also present problems.

Allocation Tobacco
The Canadian Taxpayers Federation (CTF) has looked at the diversion of tobacco from the Cigarette Allocation System in Ontario.9 Under this system, First Nations reserves receive cigarettes tax free for distribution to Status Indians. Managed properly, this system works to guarantee treaty rights. However, the CTF study raises important questions that suggest much of this tax-free tobacco may illegally be making its way off reserve. CTF looked at average smoking rates on reserve as compared to the amount of allocation tobacco that is received, and estimated that as little as 21% of allocation tobacco was being consumed legally. For the entire allocation amount to have been consumed legally, aboriginal smokers living on reserve would have to smoke the equivalent of 70 cigarettes per day, which is 466% the stated on-reserve smoking rate. Clearly, much of allocation tobacco is being sold illegally.

How Much is Contraband Tobacco Costing Taxpayers in Ontario? Canadian Taxpayers Federation, 2012

Government Response
Since 2008, governments in Canada have introduced a number of anti-contraband tobacco measures, including new powers for police, tougher penalties for offenders, and better monitoring of tobacco and non-tobacco cigarette materials. These are some highlights.

Federal Action
In March of 2013, the federal government introduced Bill S-16, the Tackling Contraband Tobacco Act, which creates new Criminal Code penalties for smuggling illegal cigarettes. For a first offence, the bill would set a maximum penalty of six months imprisonment on summary conviction and 5 years imprisonment for criminal conviction. The legislation would also set mandatory minimum penalties for repeat high volume smugglers, currently defined as 10,000 cigarettes or 10kg of other tobacco products. This will create a specific penalty for contraband tobacco. Those convicted of a second offence would receive a minimum of 90 days in jail, at least 180 days for a third conviction and 2 years less a day on subsequent convictions. NCACT supports these penalties, but has suggested that the threshold for high volume be reduced by at least half. 5,000 cigarettes still represents 25 cartons of contraband, which is vastly more than what can reasonably be considered for personal use. The Senate Standing Committee on Legal and Constitutional Affairs is currently studying this legislation. NCACT appeared before the committee on May 2nd. The federal government has also committed to dedicating 50 more RCMP officers to fighting contraband tobacco. It has also dedicated funding for on-reserve police officers to do the same. We look forward to more details about the implementation of this commitment.

Provincial Action
Quebec
In 2009 Quebec passed Bill 59, amending the Tobacco Tax Act and other piece of legislation to combat tobacco smuggling. The legislation granted new powers to local police to investigate and seize illegal cigarettes. It also instituted new penalties for smuggling and, importantly, allowed municipalities to prosecute the offences and keep the proceeds.

The 2012 provincial budget bolstered these further, giving municipal police power to launch anticontraband tobacco investigations on retailers and providing more funding to municipal police officers for their efforts. Bill 59 also put new rules in place requiring a tobacco manufacturers permit to possess or import tobacco manufacturing equipment. This helps to make it more difficult for illegal manufacturers to start operating.

Ontario
In 2011, Ontario passed the Supporting Smoke-Free Ontario by Reducing Contraband Tobacco Act. This legislation allowed police officers to seize illegal cigarettes discovered during the lawful course of their duty; previously they would have had to seek approval of the Ministry of Finance. The legislation also created penalties for the possession of contraband tobacco. Those caught with up to illegal cigarettes can be fined up to $500 plus three times the tax. Ontario has also introduced an improved monitoring system for raw leaf tobacco and is working towards a common federal/provincial excise stamp. Ontarios raw leaf monitoring system will only take effect at the beginning of 2014, requiring vigilance in government monitoring in the interim, particularly in light of strong tobacco crops in recent years. In Ontarios 2013 provincial budget, delivered on May 2nd, the province indicated that it is considering further anti-contraband tobacco measures, including tougher penalties and more power and forfeiture of items seized as evidence. This reaffirms similar commitments that were made in the 2012 provincial budget, and would bring Ontario into line with measures available in Quebec. Ontario is also moving forward on pilot projects with the Mohawk Council of the Akwesasne and the Chippewas of the Thames First Nation. These projects will look at methods for improving the allocation of unmarked tobacco on reserves and new models of First Nations self-regulation of tobacco on-reserve.

What Remains To Be Done?

Collaboration
Contraband tobacco remains a problem that crosses political and departmental jurisdictions. Using the area around Cornwall, Ontario as an example, illegal cigarettes cross the border between Canada and the United States; Ontario, Quebec, and New York; and between aboriginal and non-aboriginal territories. For anti-contraband tobacco efforts to be successful, it is essential that governments work together to ensure that their response is coordinated and effective. The 2008 strategy highlighted this, as did the Ontario and Quebec governments at various times. It is important that concrete action towards such collaboration be taken. Political leadership is needed to kick start this process. It is worth underlining that collaborating with First Nations communities must be central to any solution. All levels of government must work with First Nations leaders and law enforcement officials to find longlasting, comprehensive solutions that will be mutually beneficial.

Legislative
Since 2008, there have been a number of steps taken at the provincial and federal levels to address contraband tobaccos availability. It is clear that they have had some effect: in Quebec, in 2012 the government indicated that it had seen tobacco tax revenues raise by $210 million following introduction of anti-contraband tobacco enforcement measures.10 But more remains to be done. Of note, Ontarios 2011 legislation was an important step in the right direction, but more remains to be done. It is positive that the 2012 and 2013 budgets committed to considering further measures; it is important that these measures be introduced in short order. Similar measures have had success in Quebec, and there is no reason to believe that they would not have similar efficacy in Ontario.

10

Budget 2012-2013: Budget Plan Finances Qubec. Page F.33

In 2011, The National Assembly of Quebec held legislative hearings on contraband tobacco, specifically looking at areas where further measures could be taken. The report from that commission made a number of specific recommendations, including immediate seizure of vehicles used to smuggle tobacco, simplify information sharing between police and Quebec revenue officials and the creation of a mixed commission on contraband tobacco that would include representation from the provinces, the federal government, the U.S. government and First Nation leadership.11 These have yet to be implemented, and should be at the earliest opportunity. The contraband tobacco problem is also expanding to other provinces. More and more, New Brunswick, Nova Scotia, and Prince Edward Islands are seeing an increased contraband tobacco presence. Given their proximity to Quebec, this should be no surprise. There is also a need for tougher anti-contraband tobacco legislation in these provinces, providing greater powers to police and penalties to offenders.

Summary of Recommendations
In this report, the NCACT recommends the following actions: There is a need for greater collaboration amongst all levels of government to deal with this important problem. First Nations communities must play an important part in any solution. Government should look for innovative ways to integrate them into the process. The province on Ontario should implement new anti-contraband tobacco measures as outlined in the provincial budget The province of Quebec should implement the recommendations of the Public Finance Commission study on contraband tobacco. Other provinces that have yet to implement anti-contraband tobacco legislation should do so. The threshold for high volume smuggling in the Tackling Contraband Tobacco Act should be reduced by half

11

tude des mesures pour contrer la consommation du tabac de contrebande Commission des finances publiques, Assemble Nationale, February 2012

Conclusion
Five years after the RCMP launched its contraband tobacco enforcement strategy, illegal cigarettes remains a serious problem in Canada. This is perhaps of little surprise: contraband tobacco is a complicated problem with many causes. It is ongoing in nature. What this means is that governments response must be nimble. It must constantly re-evaluate its techniques and tactics. It must look to see what has worked in other jurisdictions. It must always be on its toes. It is working against a lucrative illegal trade dominated by organized criminal gangs. These crooks will respond to government action by changing their methods and tactics. It is all the more important that governments response also evolve, keeping up existing pressure and looking for new ways to disrupt the trade. The NCACT is pleased to be part of this process, and looks forward to working with government to continue to deal with this problem in the years ahead.

Contact
To reach the National Coalition Against Contraband Tobacco, please contact: Web: Email: Telephone: Twitter: www.stopcontrabandtobacco.ca info@stontrabandtobacco.ca 1-866-950-5551 @stopcontraband