Contraband Tobacco in Canada: An Assessment on the 5th Anniversary of the RCMPs Contraband Tobacco Enforcement Strategy

7/30/2019 Contraband Tobacco in Canada: An Assessment on the 5th Anniversary of the RCMPs Contraband Tobacco Enforc

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Contraband Tobacco in CanadaAn Assessment on the Fifth Anniversary of the RCMPs

Contraband Tobacco Enforcement Strategy

The National Coalition Against Contraband Tobacco

Ottawa, ON

May 7th

, 2013


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Introduction

May 7thmarks 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 .
http://www.stopcontrabandtobacco.ca/http://www.stopcontrabandtobacco.ca/http://www.stopcontrabandtobacco.ca/http://www.stopcontrabandtobacco.ca/


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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 oneof 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

1Mecredy, 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

2How Much is Contraband Tobacco Costing Taxpayers in Ontario? Canadian Taxpayers Federation, 2012


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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. Todecrease it there is a need to increase these outfits risk by, among other things, disrupting thesupply chain and shutting down illegal manufacturing facilities.

- Coordination, collaboration and partnership development. Recognizing that no one entity isable to address the problem in isolation, the strategy committed to working together with othergovernment and non-government partners to address it.

- Outreach. Working with First Nations communities and leadership is essential to addressing thisproblem. 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 primarilyaffects Ontario and Quebec; there is a need to apportion resources accordingly.

- Impact crime through education and awareness. The public is often confused as to whatconstitutes contraband tobacco. Raising awareness of what contraband is and its effect were

considered an important part of curbing demand. Government departments and agenciesawareness also needed to be improved.

- Contribute to the Development of legislative and regulatory tools. Regulatory tools can reducethe 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 implicationsfor 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 strateg ys

review was to be released at the end of 2012. At of May 2013, it has yet to be released.


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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

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


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provinces since January of 2012, or about 13% of all cigarettes seizures tracked, making per capitacontraband 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 Securityalso 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

4Canadian Convenience Stores Association submission to the

5Alberta charges chief in cigarette seizure CBC News, April 15, 2011.

6Testimony by Geoff Lockey, Director General, Enforcement and Intelligence Operations, Canadian Border

Services, to the Senate Standing Committee on Legislative and Constitutional Affairs, May 2nd

2013.

7Daudelin, Jean Border Integrity, Illicity Tobacco, and Canadas Secuirty Macdonald-Laurier Institute, 2013

8Illicit Tobacco, What's the Big Deal? Frontline Security, Vol. 7 No. 3


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Smuggling is the pipeline through which illegal cigarettes are spread from factory to communities acrossCanada. 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 smokeshacks. 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 maybe 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


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smoke shacks, nor are resources realistically available to do so. Jurisdictional problems for enforcingCanadian 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.

9How Much is Contraband Tobacco Costing Taxpayers in Ontario? Canadian Taxpayers Federation, 2012


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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 Actand 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.


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The 2012 provincial budget bolstered these further, giving municipal police power to launch anti-contraband 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. Thislegislation 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.


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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 long-

lasting, 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.

10Budget 2012-2013: Budget Plan Finances Qubec. Page F.33


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In 2011, The National Assembly of Quebec held legislative hearings on contraband tobacco, specificallylooking 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-contrabandtobacco 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 thisimportant problem.

First Nations communities must play an important part in any solution. Government should lookfor innovative ways to integrate them into the process.

The province on Ontario should implement new anti-contraband tobacco measures as outlinedin the provincial budget

The province of Quebec should implement the recommendations of the Public FinanceCommission 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 Actshould be

reduced by half

11tude des mesures pour contrer la consommation du tabac de contrebande Commission des finances

publiques, Assemble Nationale, February 2012


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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.


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Contact

To reach the National Coalition Against Contraband Tobacco, please contact:

Web: www.stopcontrabandtobacco.ca

Email: [email protected]

Telephone: 1-866-950-5551

Twitter: @stopcontraband
mailto:[email protected]:[email protected]:[email protected]

Documents

Contraband Tobacco in Canada: An Assessment on the 5th Anniversary of the RCMPs Contraband Tobacco Enforcement Strategy