Part 2 – Canada's Tobacco Roads

Canada bears the general strain and impact of illicit tobacco the same as many communities and countries around the world, and yet the conditions in Canada are somewhat unique in that the black market for illegal smokes is largely self-imposed.

In the past five years, some progress has been made but much of the status quo continues. Moreover, some disturbing new trends are emerging that suggest our internal challenges have leaked across our borders and are causing problems to governments and communities abroad. To make matters worse, last year some provinces increased the tax on tobacco products and the federal government recently announced plans to introduce plain packaging. While these and other measures go far in ­regulating lawful products, they are, in fact, welcomed by the criminal element as an opportunity to gain further competitive advantages in the marketplace. In this section, as we look at how the illicit trade of tobacco is currently positioned within our borders, our focus is almost exclusively on illicit cigarettes manufactured in Ontario and Quebec and the factors driving this criminal and lucrative trade. 

PREVALENCE AND VOLUME
One of the first steps in evaluating the illicit trade of tobacco in Canada is to understand its prevalence and volume. Criminals do not self-identify or report the scope and scale of their unlawful activities and so various studies by interest groups are relied on to provide an estimate. Because these “independent” studies generally tend to support the position of the interest group commissioning the study, it is important to examine findings from different camps and consider that the truth likely lies somewhere in between.

Some perspective can be found looking at an annual study funded by the Canadian Cancer Society. Using secondary data sources from 1999 to 2013, the report estimates about 83% of smokers in Canada purchase cigarettes from a store. The remainder purchased their cigarettes from a First Nations reserve, other source, or a source that smuggled cigarettes from outside Canada. Given that non-First Nation consumers are not entitled to purchase tobacco products without paying all federal and provincial taxes, this suggests that the potential for contraband in Canada sits at about 17%.

Regional offices of the Canadian Convenience Stores Association offer a more localized overview. At the end of 2015, discarded cigarette butts were collected and analysed at various locations in different cities across Canada to determine if they were contraband. Depending on the location, results at some sites showed a significantly higher infiltration of contraband cigarettes, including at high schools and hospitals.

The Ontario Convenience Stores Association (OCSA) study found that 22% – more than one in five – of all cigarette butts collected in the province were contraband. According to the Kingston Whig-Standard’s coverage of the OCSA findings, 28.4% of cigarettes smoked in Kingston are contraband. Sudbury topped the list at 32.7%, followed by Orillia at 30.4%, Niagara Falls at 29.6% and Kitchener-Cambridge at 29%.

The Whig-Standard asked OCSA CEO Dave Bryans if Kingston’s rate is higher because contraband cigarettes can be purchased at the nearby Mohawk Territory. “If I go to Ottawa, which is nowhere near a reserve, and you go to the racetrack it’s 41%. These products are being driven to the communities. I don’t think high school students are driving to reserves,” replied Bryans.

The Western Convenience Stores Association found an average of 12% of cigarettes sold in the region were contraband and the Atlantic Convenience Stores Association reported about 15%. Of particular interest, in New Brunswick the average was 22%, which is most likely due to its shared thoroughfares with Quebec.

Source: “Illegal cigarette use on rise,” Kingston Whig-Standard (2 December 2015)

ILLICIT GAIN POTENTIAL
The press often measures police seizures of raw leaf or fine cut tobacco in pounds or tons, whereas cigarettes are frequently measured by sticks, baggies, cartons, carloads, or even ski sled loads. Few articles explain what these seizures represent in terms of gross revenue for criminals and the potential loss of tax revenue to provincial, territorial or federal governments.

There are snippets of insight, such as from the Winnipeg Sun that reported “illegal tobacco products have an extremely high profit margin. They are purchased in Ontario for as low as $3 per bag of 200 ... and sold in Manitoba for $30 to $50 per bag.” The article concludes that 50 baggies can therefore provide a profit of $1,300 to $2,350. Less sophisticated operations such as these open the door to all types of criminals, and can be carried out with little operating or overhead costs.

Another article by the acclaimed International Consortium of Investigative Journalists states that “a shipping container containing 10 million cigarettes costs as little as $100,000 to produce in China, but can bring as much as $2 million in the United States.” That is twenty times the return of the original investment.

The supply, manufacturing, distribution, and retailing of illicit tobacco products in Canada offer incentives at different stages of the tax evasion process. For this reason, it is difficult to assess a criminal’s net or gross return because each scheme and method can potentially yield a different margin of illicit profit. Various scenarios are presented in the table below and, while largely hypothetical, they are not unlike criminal manœuvres already reported in Canada.

SOURCES AND MOVEMENT OF ILLICIT TOBACCO  

Manufacturing on Reserves
Since 2008, the RCMP has consistently reported that the largest source of illegal tobacco in Canada are manufacturing operations on indigenous territory in Central Canada, specifically Six Nations of the Grand River (Ontario), Tyendinaga (Ontario), Kahnawake (Quebec) and Akwesasne (U.S. side). The RCMP also forecasted that these unlawful manufacturing facilities in Central Canada would grow exponentially, and this has indeed been the case.

http://nada.ca/wp-content/uploads/2016/pdfs/Federal%20Tobacco%20Control%20Strategy/FTCS-Final-Report.pdf “Because the Mohawks have territories in both Canada and the United States, they import much of the tobacco from their territories in the south and have essentially cornered the market on aboriginal cigarettes.” Source: “Kahnawake moves to regulate aboriginal trade in discounted cigarettes,” Montreal Gazette (16 July 2015)

In 2012, Public Safety Canada reported that there were approximately 43 unlicensed manufacturers in indigenous territories in Canada and 8 on the U.S. side of the Akwesasne Mohawk territory. More recent information obtained through access to information legislation estimated an additional 14 unlicensed manufacturing plants in 2014. Specifically, the RCMP’s 2014 assessment states there are about 52 illicit manufacturers located on First Nation territories in Central Canada, and 13 illicit manufacturers on the U.S. side of the Akwesasne Mohawk Territory.

These indigenous reserves have been identified as hubs for the supply of cheap smokes in Canada, but that does not mean they all conduct their tobacco operations in exactly the same way. Manufacturing sites on Six Nations, for example, are federally licensed wherein they have sanctioned tax-exempt access to raw leaf and cut rag from Canada and abroad. This means that the supply of raw materials is not as much of an issue for Six Nations while it is conceivably more of a problem for the tobacco trade in Kahnawake.

A 2015 article in the Montreal Gazette reported that some Kahnawake companies sought and obtained federal tobacco licenses in the early 2000s but many stopped this practice when Quebec tried to enforce provincial taxes on Mohawk cigarettes. It is likely that U.S.-based manufacturing operations in Akwesasne are still relevant to Kahnawake who require a source for its raw materials.

An RCMP document obtained through access to information legislation states that, due to the lower cost for fine cut tobacco, illicit manufacturers in Kahnawake are finding it more profitable to purchase fine-cut tobacco transiting through Akwesasne rather than already-made cigarettes.

The same report shows a 73% increase in seizures of fine cut tobacco from 2013 to 2014. The RCMP attributes this to enforcement efforts and to shifting criminal trends. The increase may suggest that the “exponential” growth of manufacturing operations in Canada have grown roots over the course of a few years. This black market industry is still undergoing transformation wherein its potential – not to mention its impact – has yet to be fully revealed.

Headed west
In October 2015, Global News reported that a Kahnawake-based company was planning to open a cigarette manufacturing plant in southern Alberta. Unable to set up shop in Quebec due to a “moratorium on new tobacco manufacturing” operations, Four Winds Tobacco Products is said to be inquiring about a possible location in Brooks, Alberta. The company has indicated it would potentially encourage Alberta farmers to grow tobacco in that area. In the interim, the plan would be to import tobacco from the U.S. initially, and then from Canadian suppliers.

Four Winds maintains that product would still be subject to full taxation and all federal laws associated with cigarette manufacturing. Should Four Winds get county approval and federal and provincial permits, it has indicated that it would produce cigarettes for export purposes and to wholesalers in Ontario. It also said it may eventually try to market cigarettes on First Nations in Western Canada. The concern voiced by a few critics and sources in law enforcement is that the manufacturing plant is another stepping stone for the distribution of tax-exempt products to non-First Nations consumers. In other words, it is a springboard to the west that broadens the scope and range of illicit and non-taxed tobacco in Canada.

Mobile Manufacturing
Mobile manufacturing refers to the practice by criminals of transporting electronic cigarette-making machines – that are capable of producing anywhere from 3,500 to 5,000 cigarettes a minute – from one location to another. The presumed advantage of this portable type of operation is to make detection and seizure more difficult for law enforcement.

These operations focus solely on the final stage of cigarette production and rely on a small list of supplies that include filter tubes and cut rag (tobacco that has been cut into fine strips for use in cigarettes). While it may not be easy to move some of these units, the logistical challenges can be overcome given the right incentive and profit margin.

Instead of smuggling finished products, such as packs and cartons of cigarettes, there are certain cost savings involved when purchasing cut rag and taking on tail-end manufacturing processes that require little effort. The ease of processing cut rag into cheap smokes makes it an attractive business proposition, especially if moving operations from one warehouse to another can effectively minimize the chances of detection.  

As more electronic equipment and materials needed for making cigarettes become available, it seems entirely possible that a DIY (do it yourself) model will be adopted. If so, it is expected that more cut rag will be travelling from Canada’s central tobacco belt region to distribution networks in the east and west. The ease of a DIY model has the potential of increasing the amount of contraband cigarettes that are available in the black market. Increased law enforcement efforts would be hard pressed to catch up with this type of business model.

The Supply Chain: Raw Leaf

The sand belt in southwestern Ontario is where the majority of Canada’s flue-cured tobacco is grown. According to sources, farmers are allowed to seed as much as 10% above their reported crop yield to allow for poor weather conditions or other unforeseen circumstances that can damage the crop. This potentially leaves 10% of their yield to be sold to illicit manufacturers, who buy raw leaf at $8-$10 dollars a pound instead of the $2 dollars paid by the legitimate industry.

Another possible loophole that can be used to divert raw leaf to the illicit trade is to claim that the tobacco is of poor quality. Refusing or withholding raw leaf may be due to poor quality or other entirely legitimate reasons, however, some industry experts say there is no oversight to ensure that the poor quality produce is actually being destroyed.

Other ways to divert raw leaf to the black market can include the theft of raw leaf tobacco after it has been harvested, as happened recently in Elgin County, Ontario when 24 small bales were allegedly stolen. Another similar incident was famously featured in an exposé by the International Consortium of Investigative Journalists in 2009. The article featured Ontario farmer Gary Godelie who lost about $20,000 of tobacco leaf to thieves. “They stole all 169 bales, which… is (about) 8,000 pounds. It takes about 1.9 pounds to make 1,000 cigarettes. That’s more than 4 million cigarettes. That’s pretty significant. Now we’re talking some serious coin,” said Godelie in the article.

Tracking raw leaf and precursors
As mentioned, Public Safety Canada has identified manufacturing operations on indigenous reserves as the largest source of illegal tobacco in Canada. Therefore, keeping track of what is required for the general production of cigarettes can provide some good intelligence, allowing authorities to detect anomalies and sources of problem areas.

The harmonized tariff schedule of Canada lists both cigarette paper (tariff code 4813) and cellulose acetate tow (tariff code 5502), which are both necessary components of a cigarette. These imports, however, are not currently being measured against any type of domestic manufacturing volumes. Public Safety Canada’s position is that the regulation of precursors used to manufacture tobacco products has “serious limitations” because these precursors are not entirely exclusive to tobacco products.

This conclusion is inconsistent with INTERPOL’s guide for policy makers on countering illicit trade in tobacco products (published in June 2014). It states that “despite the presence in the market of different materials, acetate tow remains the dominant technology for the manufacture of cigarette filters.” Furthermore, INTERPOL recommends national legislation that tracks these precursors as “a concrete and effective tool to fight against the illicit trade in tobacco products.”

The Secretariat of the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC) also encourages countries to monitor these precursors in order to provide additional information about the tobacco trade. By way of example, the FCTC website states that “30,715 tons of acetate tow were imported into Belarus in 2012-13, nearly 10 times the amount required for the domestic cigarette production.” The current lack of regulation in Canada is clearly welcomed by cigarette manufacturers as there is no requirement for them to reconcile any such discrepancies.

The Ontario government recently indicated that it is looking at labelling requirements for bales and packages of raw leaf tobacco and opportunities to regulate tobacco product components such as cellulose acetate tow. The problem is that independent provincial regulation of acetate tow is futile if federally authorized manufacturers choose not to cooperate. Without a harmonious federal and provincial approach, it will be difficult to bridge these gaps in regulatory oversight.

Enforcement Loopholes
Ontario Ministry of Finance

The Ontario government transferred the responsibility for licensing raw leaf tobacco to the Ministry of Finance as of October 2012. The oversight of raw leaf tobacco, however, did not actually begin until January 2015. After nearly a three-year slumber, the Ministry’s website finally indicates that a process is in place to license tobacco growers, control the production, distribution, sale and purchase of raw leaf tobacco to help ensure the supply of raw leaf tobacco stays in the legal market.

The Ontario government’s budget also indicates that it will identify possible additional legislative measures to strengthen the raw leaf oversight regime. In addition to proposing labelling requirements for bales and packages of raw leaf tobacco, it will examine proposals to change the “enforcement personnel” designation to that of “peace officers”. It will also look at giving its officers the authority to stop, detain and search a vehicle if there are reasonable and probable grounds to believe that it contains raw leaf tobacco.

While the Ministry appears to be hitting the right notes, real progress has yet to take shape. The many challenges that are naturally associated with enforcing raw leaf have yet to be addressed, including strengthening working relationships with government partners, First Nation communities and other stakeholders. The Ministry must address the cumulative effect of three years of neglect and regulatory limbo.

Sources and contacts in Ontario’s tobacco belt have made it clear that farmers are approached quite openly about selling their raw leaf outside their contractual and lawful commitments. The regulatory vacuum that was allowed to take place from 2012 to 2015 provided a savoury opportunity for unlawful conduct and may have generated some entrenched relationships and behaviours with criminal groups.

Raw leaf and cut rag destined for the black market can be sourced from different places depending on bumper crop years, border crossing concerns, the selling price, and law enforcement efforts. For example, in May 2014 the RCMP made nine arrests in the Ontario tobacco farming community. As a result, the RCMP predicted that farmers in Ontario might be less willing to engage in black market activities, and that manufacturers would look to the United States to meet illicit demand.

That prediction turned out to be correct, as evidenced by Operation Mygale which took place on March 30, 2016. In what is being hailed as the largest raid in America, police disrupted a transnational tobacco, drug and money laundering ring that was shipping tobacco to Montreal and Kahnawake areas from North Carolina.

Moving forward, the Ministry of Finance should now be bracing itself for the effects of Operation Mygale. With all eyes on North Carolina and with established routes compromised, it is possible that some farmers in Ontario may now be coerced to make up for some of the supply.

Canada Revenue Agency

In 2010, a new federal stamping regime for tobacco products was hailed as bringing Canada “one step closer against tobacco contraband.” Then Minister Jean-Pierre Blackburn issued a statement saying “these amendments would limit the quantities of stamps that are issued to the manufacturers of tobacco products, would define who can receive and possess the stamps, and would require anyone who has tobacco stamps to account for them.”

In Canada, it is illegal to purchase, possess or sell any quantity of cigarettes or package of fine cut tobacco that are not marked with the appropriate provincial and federal stamps.

Indeed, a stamp regime such as this ensures counterfeit can be detected and that the proper amount of tax has been paid. Its full potential and usefulness, however, relies on the CRA’s authority and continued engagement as a regulator – not to mention its role in working and sharing information with its provincial counterparts.

Unfortunately, the CRA’s accountability, is as it relates to the provinces, is unclear. More remarkably, it appears unresponsive to reports by the RCMP and Public Safety that state the “largest source of illegal tobacco in Canada is manufacturing operations on Aboriginal Territory” – and that they have been growing exponentially.

An RCMP report obtained through access to information legislation indicates that there are approximately 52 unlicensed manufacturers in indigenous territories (on the Canadian side) that help supply the Canadian market. In addition to allowing these gross violations of federal legislation, the CRA does not appear to be effectively auditing the compliance of manufacturing operations on indigenous reserves that it does license. The CRA is not only allowing unfettered access to raw leaf and cut rag from both Canada and abroad but it is sealing the deal by providing licenses to suspected manufacturers of contraband.

In one case, after alleged pressure by the RCMP, the CRA is said to have revoked the federal license of a tobacco company in the territory of Kahnawake in 2012. The head of Rainbow Tobacco Company was charged in 2011 for importing millions of cigarettes without a licence for resale in central Alberta. Documents filed in court revealed several communications by the RCMP to the CRA expressing concern over the Agency’s decision to license Kahnawake cigarette manufacturers.

The CRA has the authority to impact major contraband activity nationally and internationally, however, it has been lacklustre in using its authority to effectively regulate the licensing of tobacco manufacturers. The result is a bizarre situation wherein some contraband tobacco products in Canada are federally licensed.

It is likely that indigenous land claim issues, and the unwillingness of the federal government to deal with these matters, has resulted in turning a blind eye to enforcing tobacco manufacturing regulations.

Border Security

The St. Lawrence Seaway is spanned by the Seaway International Bridge, a vital road link and border crossing that connects Cornwall, Ontario (Canada) and Massena, New York (U.S.). In between, the bridge also connects to Cornwall Island, which forms part of the Akwesasne Mohawk reserve.

Previously known as the Cornwall-Massena International Bridge, this road link was renamed in 2000 to the Three Nations Crossing in recognition of the Mohawks of Akwesasne. In fact, much of the traffic over this crossing – that carries more passenger vehicles than any other crossing in northern New York – is local.
 

Currently, there are controls on each end of the bridge. However, “the eventual plan is to move both the U.S. and Canadian ports to Massena but it could take many years to resolve this issue and construct a permanent port,” according to ezbordercrossing, a website dedicated to providing information about the 4,000 miles of border that the United States and Canada share.

Removing oversight by Canadian law enforcement over a major road crossing will create yet another loophole for smugglers to conduct their illicit activity. It will also put more pressure on the Akwesasne Mohawk Police Service and Cornwall Regional Task Force (CRTF), a joint forces partnership that is responsible for surveillance all along the St Lawrence Seaway near Cornwall.

Even the re-location of the CBSA facility from Cornwall Island to the City of Cornwall in 2009 caused some concern to the Mohawk Council of Akwesasne. “The unexpected relocation of the CBSA and the role of ensuring border integrity have placed a strain on the 24-member Akwesasne Mohawk Police Service. To effectively respond to the additional responsibility, AMPS requires funding for additional patrol officers and the creation of a full-time marine unit. It will enable our local police department to continue having a major impact on criminal organizations that seek to exploit our community,” according to a statement by the Council.

It is clear that indigenous community members in the area do not support the illegal operations taking place off their shores, and yet, criminal elements continue to take advantage of the geographic and jurisdictional challenges of the region.

The federal government made a commitment in its 2014 budget that suggests surveillance along the border will be reinforced through high tech solutions. At the time, the RCMP received installments of $92 million over five years to support this project. More detail is needed about this high tech plan, however, it appears poised to replace the efforts of police and boots on the ground. According to the Akwesasne Council, however, funding to police services will “cost far less and will be more effective than what is being proposed in the RCMP’s plan.”

FIRST NATIONS CONTEXT

Allocation of Cigarettes
The Ontario government launched a formal assessment of the First Nations Cigarette Allocation System (which attempts to calculate and set quotas on the amount of untaxed cigarettes sold and consumed by First Nations). In March 2016, a report was submitted as part of the government’s review. Through interviews with interested stakeholders, the report lays out the issues and makes recommendations for the Government’s consideration.

The report mentions the growth of manufacturing operations on First Nations reserves and that the manufacture, distribution and sale of tobacco products on reserves in Ontario “has not only emerged but, in some communities, solidified itself as an important economy.” This economic prosperity, however, is largely based on sales to non-First Nation consumers.

The regulation of cigarette quotas on reserve is not enforced due in large part to the tension regarding the legitimacy of provincial authorities to regulate matters of First Nations trade and commerce. This tension is historical and pervasive, as was recently illustrated by a Belleville News article on the topic of cheap cigarettes on Tyendinaga Territory, in which the local Medical Officer of Health confirmed that his health unit would not be bringing up the matter of contraband with the band council out of concern for his staff’s safety. “I think it’s fair to say we were warned off of Tyendinaga Territory from enforcing these laws,” he is quoted as saying as he recalled the last time he raised the issue of contraband cigarettes.

An editorial in the Belleville News concluded that “contraband cigarettes may be a recognized problem but with no ability to enforce their entry into the community the numbers will only remain unsurprising and, likely growing.”

It is precisely the potential of selling outside the prescribed cigarette allocation system to non-First Nations consumers that makes the contraband problem in Canada unique to most other countries. Canada’s tenuous laissez-faire approach with First Nations, together with the broad capacity to manufacture cigarettes on reserves, has attracted organized crime groups who are interested in using the reserves as a type of sanctuary to conduct their activities. The operations are growing roots domestically, gaining ground across Canada’s borders and are highly structured – often overlapping with other criminal markets such as money laundering, the sale of firearms and illicit drugs.

Unless there is a way to enforce cigarette quotas, introduce effective regulation on reserves, or somehow make prices not so disparate, individuals and groups will continue seeking ways to benefit from price differences on reserves and the profits of tax evasion – a window of opportunity that is uniquely Canadian.

First Nations Taxation & Regulation
The Cowichan in British Columbia is the only First Nation community to employ a tobacco sales tax that is said to be “at a level equal to the province, but that remains in the First Nations treasury” (Review of the First Nations Cigarette Allocation System in Ontario, March 2016). While provincial governments may be seeking these types of “revenue sharing” solutions, it may prove difficult for a First Nations community that has an established tobacco industry and proximity to non-First Nations consumers to agree to this arrangement. There is just too much money at stake.

According to Grand Chief Joe Norton, the Mohawks of Kahnawake do not have an abundance of natural resources that create employment opportunities or a competitive advantage in the marketplace. “The only natural resource we have is the 100,000 cars that criss-cross our territory every day,” he said in an interview with the Montreal Gazette.
 
In lieu of revenue sharing agreements, Six Nations, Kahnawake and Akwesasne are focusing efforts on indigenous-led rules of conduct for the tobacco industry. The Haudenosaunee Confederacy Chiefs Council (HCCC) has been working on a strategy since 2013, meeting with chiefs and other indigenous communities who are interested in adopting tobacco guidelines.

Tobacco laws are being pursued by indigenous communities in part to ensure some revenue is directed towards local development projects and other initiatives. They are also being advanced to protect the rights of local tobacco trade workers, legitimize the multi-million tobacco commerce on reserves, and to ward off interference from non-native police and governments. Far from revenue sharing taxation agreements, these tobacco laws intend to provide a window of legitimacy. One legal expert said that it may not affect the crackdown on indigenous tobacco but that it could be used to challenge federal laws (Montreal Gazette, 16 July 2015).

The development of a regulatory framework for the indigenous tobacco industry is clearly in direct response to the Tackling Contraband Tobacco Act (TCTA), which started in 2013 as part of Bill C-10. Prior to the Bill coming into force in April 2015, First Nation communities had requested that the federal government make legal considerations for indigenous tobacco manufacturers and said they would oppose any legislation that would penalize their right to free trade with other indigenous partners.

In March 2016, a few First Nations members were arrested during Operation Mygale, which was a massive multi-jurisdictional raid targeting contraband tobacco. Had the indigenous tobacco laws been enacted before Operation Mygale, the legitimacy of the arrests could have potentially been challenged in court. It is likely that each of the communities will be interested in ratifying a legal and regulatory framework for their respective tobacco industries with more urgency in anticipation of other future and potential law enforcement action.

In Kahnawake, tobacco laws are in the final stages of ratification. Its laws propose a nine-member, elected commission to set prices, certify, and revoke licenses – the latter of which might prove to be difficult given that six of the nine committee members are affiliated with the cigarette trade.

In Ontario, First Nations of the Grand River is laying down the framework for the implementation of tobacco laws. The Mohawk Council of Akwesasne, which had received a $476,115 two-year grant from the Government of Ontario in 2013 to support its development of the Akwesasne Tobacco Law and Regulatory Framework, also nears a formal adoption of its laws.

It remains to be seen what these indigenous tobacco laws will mean when put to the test. They are clearly statements about indigenous rights, and are poised to challenge what is otherwise referred to as “the largest sources of illegal tobacco in Canada.”

IMPACTS OF ILLICIT TOBACCO

Across our borders

The 2016 Budget announced by the federal government in March states that “Canada needs to ensure that its exports do not pose health, safety or security threats to Canadians and its allies and that Canada continues to respect international commitments.” Instead, recent international news indicates Canada’s indigenous policies have allowed contraband cigarettes to be exported to other nations such as Guatemala, Costa Rica, and Mexico.

Public Safety

How ill-gotten gains are used is one of the ways in which organized crime differs from national security. Where organized crime groups may be motivated to use illicit gains for social or economic status, others involved in the same unlawful activity may be in it to advance or impose ideological beliefs. Regardless of motivation, the objective for most criminal minded individuals is to find a way to get money with as little risk and as high a profit margin as possible.

Organized Crime

As mentioned, the illicit gain potential of contraband and counterfeit cigarettes invites the participation of all types of criminals. The Public Safety Canada report, 2012-2013 Horizontal Evaluation of the Measures to Address Contraband Tobacco (MACT), states that organized criminal networks are increasingly becoming involved in the contraband tobacco trade. Further, the report indicates organized crime activities extend beyond interprovincial and international borders and that federal involvement is important more than ever.

This is illustrated by the numerous interdiction efforts of law enforcement over the past few years, including the massive raid that took place on March 30, 2016. Dubbed Operation Mygale, this takedown was said to be the largest raid in North America targeting contraband tobacco, drug trafficking and money laundering, involving operations in North America, South America and Europe.

According to the Montreal Gazette, police seized $13.5 million worth of tobacco, more than $3 million in U.S. cash, $1.5 million in Canadian cash and more than 800 kilograms of cocaine. Reports also indicate that the network that was targeted had ties to both biker gangs and Aboriginal organized crime.

The involvement of known criminal organizations with the contraband trade has been exposed in other major takedowns, such as the one in 2009 that led to 40 arrests, including that of Salvatore Cazzetta, the reputed leader of the Montreal chapter of the Hells Angels. In addition to these large takedowns that can take up to two to three years to investigate, there have been numerous other policing efforts, some of which are mentioned throughout this report.

The RCMP’s 2014 Federal Tobacco Control Strategy (FTCS) report, states that various organized crime groups are involved in the contraband tobacco market alone or in combination with other criminal activities such as drug production and trafficking, money laundering, firearms trafficking, and theft. “Revenues from illicit manufacturing and smuggling are funneled, in some cases, to organized crime groups including, but not limited to, outlaw motorcycle groups,” according to the RCMP report.

Unique conditions exist in Canada that attract organized crime groups to contraband tobacco – which continues to be a relevant criminal market with increasing national and international consequences.

National Security
Contraband is a low risk, high profit criminal enterprise that can finance or fund a range of different interests. The same way that contraband tobacco is attractive to organized crime groups to finance their particular interests, it is also capable of financing home grown radicals and supporting ideological beliefs that threaten public safety in Canada and abroad.

Like other parts of the world, Canada is not immune to radicalism or domestic terrorist threats. This is why Canada developed a national strategy on countering violent extremism to, among other things, understand why a 23-year-old former University of Ottawa student decided to join the jihadist movement and die fighting for the Islamic State of Iraq and Syria (ISIS) in Syria last year. His beliefs were tragically rerouted to other parts of the world, however, the Paris attacks of November 2015 provide a vivid example of the threat posed by home grown radicals.

In the United States, a former school teacher, Theophilus Burroughs, was the target of a 2010 sting operation designed to catch cigarette smugglers. Prior to his arrest, he is heard on videotape offering weapons to confidential informants that he believed were with Hamas.

Unlike illicit drugs, cigarettes are legal and the black market in tobacco products is generally marginalized as a lesser law enforcement concern and largely misunderstood by the public to be a victimless crime. There are numerous reports and abundant law enforcement action linking organized crime to the illicit trade in tobacco, and yet the notion of linking contraband to terrorism or extremism is largely dismissed by some groups as an exaggeration, even though it is clear that it is a lucrative criminal enterprise.

Operation Mygale and countless other take-downs show precisely how much profit can be achieved from contraband cigarettes and, if coordinated properly, how it extends beyond jurisdictions and international borders. Once criminals amass their particular fortunes in the unlawful trade of cheap smokes, what is done with the money afterwards is a matter of personal choice.

Moreover, it is important to recognize that organized crime rings and international networks that fund terrorism do not necessarily operate in isolation and can benefit from offering services in exchange for others on a quid pro quo basis.

Economic impact

The provincial and federal governments rely on tobacco taxation as a source of funding to support a range of programs and public services for Canadians. Contraband tobacco, however, diverts a significant amount of revenue from this source of public funding. Various interest groups have attempted to evaluate just how much is diverted by contraband.

In a 2009 press release by the Non-Smokers’ Rights Association, it estimated that “the federal government is losing an estimated one billion dollars per year in unpaid tobacco taxes. Moreover, the Ontario Auditor General reported in December 2008 that Ontario is losing an additional $500 million annually.” An article by the International Consortium of Investigative Journalists in 2009 conservatively estimated the black market of contraband cigarettes in all of Canada “at C$1.3 billion, with profit margins rivaling those of narcotics.”

The Canadian Taxpayers Federation (CTF) released a report in 2012 showing that in Ontario alone, the provincial and federal governments are losing between $742 million and $1.2 billion a year annually in tobacco tax revenues due to contraband tobacco sales. The Revenue Québec website indicates that about $125 million in tax revenue is lost each year.

The calculations vary from group to group, however, a tally of the most conservative estimates suggests that the black market is siphoning a significant amount of revenue from both provincial and federal governments. Of more concern is that this conservative estimate simultaneously reveals the operating budget of criminals involved in the illicit tobacco trade.

Social fracture
One of the greatest concerns about the prevalence and volume of contraband and counterfeit tobacco is that these products get into the hands of minors and compromise the efforts of anti-smoking measures that are put in place to reduce overall tobacco consumption in Canada. Less obvious are a host of other impacts on society due to the direct or indirect influence of contraband tobacco.

In 2010, the National Post delivered a five-part series on the contraband tobacco industry, wherein tobacco growers from Ontario’s farming community in Tillsonburg and other areas were interviewed. The article states that the “lure of big money from First Nations manufacturers is breeding a deep-seated corruption in the tobacco triangle below Brantford, Ontario.”

Since publication of the National Post article in 2010, there have been years of total abandon in regulating the amount of tobacco grown by farmers. Sources in the tobacco region indicate that farmers who had otherwise not participated in diverting their raw leaf tobacco to the black market have joined what now constitutes a majority. Regulation in this corroded environment will prove difficult.

Other than the health issues associated with smoking, consumers of illicit tobacco are impacted in other ways. People who smoke are often found in the lower income bracket and may feel compelled to find cheaper smokes. This invariably introduces them not only to a criminal element but also to other sources of illicit products. Moreover, exposure to these street peddlers may act as recruitment call for some to enter the low risk, high profit criminal venture of selling contraband tobacco products.

Looking at various iterations of the RCMP’s tobacco control strategy, it references the concept of associated criminality and how acts of intimidation and violence have been used in tobacco related crimes. Just across Canada’s border, Chicago offers a compelling look at the gross impact of illicit tobacco on society. Last year, Mayor Rahm Emanuel proposed anti-tobacco ordinances but some aldermen rejected them arguing that it would hurt convenience stores in their wards while driving people to the black market for single tobacco cigarettes, or so-called “loosies.” The aldermen also vividly recalled the much publicized and violent 2014 death of Eric Garner who was killed by police while selling loosies.

A prominent pastor in the Chicago area published an open letter that summed up the social impact taxation policies have on communities in Chicago: “When nearly half of all young black men in Chicago are unemployed and living in poverty, it is understandable how engaging in these petty crimes would be an attractive path to follow. The proposal will also impact local businesses in these communities that will not be able to compete with prices in the suburbs or Indiana. If we want to stop the violence, we must not create dynamics that will encourage it to grow.”

MITIGATION EFFORTS

Federal commitment
Border Security
Based on a commitment in the 2014 budget, the RCMP was set to receive $92 million over five years to support a high tech surveillance network along the Central Canada border with the United States. Scheduled to be completed in 2017/2018, the project was framed as a way to improve the RCMP’s ability to combat contraband cigarette smuggling.

In 2014, the National Post reported that this initiative involves employing unattended ground sensors, cameras, radar, and licence plate readers (both covert and overt), to detect suspicious activity in high-risk areas along the border. The National Post also reported that the RCMP was conducting site surveys, undergoing procurement and implementation strategies and studying operational requirements.

Documentation was requested on the high tech surveillance project through access-to-information legislation, however, no reports on this project were identified as a result of the request and so the progress and status of this important project remain obscure. According to the RCMP website, however, “innovative operational responses are being developed to stop the flow of contraband tobacco entering Canada in the Central St Lawrence Valley Corridor.”

Should the project for a high tech surveillance network be on schedule as originally planned, it will provide much needed tools to enhance law enforcement efforts along the border. The lingering concern is that this technology may be viewed as a means to replace and reduce resources and boots on the ground.

On a related note, in 2011 the federal government had committed to 50 additional resources in the RCMP to focus exclusively on the involvement of organized crime groups in the contraband tobacco market. In 2013, the RCMP rolled out an Anti-Contraband Force, however, just as this team is said to be reaching capacity, it is unclear if new national security priorities at the RCMP have re-directed these resources elsewhere.

Both the federal government and the RCMP are sorely lacking in providing updates to the public on commitments and promises, which are customarily introduced with much vigor. In this way, it is difficult to report actual progress on these important initiatives.

Bill C-10
In November 2013, Bill-C 10 was introduced by then Justice Minister Peter MacKay and the Tackling Contraband Tobacco Act (TCTA) came into force by April 2015. The amendments to the Criminal Code make the “selling, offering for sale, transportation, delivery, distribution or possession for the purposes of sale of the [non-regulation] tobacco product or raw leaf tobacco” a criminal offence.

The importance of this is that municipal, provincial and federal police can now enforce provisions of the Criminal Code. It also means that any unstamped tobacco being transported off indigenous reserve is now liable to seizure and criminal conviction.

The First Nations were vocal in their opposition to Bill C-10 viewing it as a persecution of their inherent right to participate in the tobacco trade. “The longstanding political position regarding tobacco in our community will not change due to C-10,” according to a statement released by the Mohawk Council of Kahnawake right after Bill C-10 came in to force.

In many ways, the federal government is enhancing law enforcement authority without actually addressing the root concerns. There is a gross disconnect between what the Canadian government and First Nations considers legal and illegal, which ideally would need to be resolved prior to giving law enforcement its marching orders.

Law enforcement and regulation
Quebec
The ACCES Tabac program in Quebec was launched in 2001 to disrupt the illegal tobacco trade. Coordinated by the Ministry of Public Security and funded entirely by the Ministry of Finance, ACCES Tabac brings together different federal and provincial law enforcement agencies at the strategic, operational and tactical levels.

It was not until 2009, however, that Quebec amended its Tobacco Tax Act, which gave local police more authority to investigate and prosecute contraband tobacco cases. Prior to this, the RCMP had ex­clusive authority to investigate these matters in Quebec. Empowering the police of local jurisdiction is clearly a more direct approach to making offenders in the area more accountable. It also allows police on the ground to collect information and develop important intelligence that informs and prioritizes police investigations.

The recent massive takedown targeting a transnational tobacco ring required the participation of multiple police forces. It is important to recognize the role of the Quebec police, however, who are outpacing their counterparts as experts in the contraband market due largely to their hands-on approach.  

The measures introduced in 2009 also allowed the local municipalities that are prosecuting contraband tobacco cases to keep any proceeds. A spokesperson for Quebec’s Public Security Ministry said “the measures Quebec has taken to fight contraband tobacco have led to positive results and that providing financial support to municipalities to get involved in the fight has been key to that,” according to a CBC report in April 2016.

The Quebec model is gaining ground in other provinces as a best practice. Ontario is pursuing this model and New Brunswick has established a dedicated enforcement unit to identify and investigate individuals involved in contraband tobacco activities.

Ontario
In January 2016, the Ministry of Community Safety and Correctional Services in Ontario announced it is creating a new Contraband Tobacco Enforcement Team within the Ontario Provincial Police (OPP). According to sources, the new OPP team consists of five officers who will work in conjunction with the Cornwall Regional Task Force (CRTF). The team will also be sharing information with Ministry of Finance, which can only be a boon to the Ministry’s lacklustre record at this particular juncture.

In addition, a new bill is being considered by the Ontario Legislature that proposes amendments to its Tobacco Tax Act. Among other measures, it is seeking to increase the penalties that apply to tobacco related offences and give police officers more power enforcing unmarked tobacco products. Of significance, however, the amendments should allow the proceeds of forfeited property to be shared with police forces who participate in the investigation – very similar to measures in Quebec’s Bill 59.

Traditionally, the RCMP has been viewed as the authority on contraband tobacco wherein many police agencies have not been as interested or fully informed on the scope and threat of the issue. Giving police officers more authority and incentive to investigate these offences will shift the tide and allow other police agencies the possibility of contributing to the national effort.

FANNING THE FLAMES

Many anti-smoking measures are unfortunately but inescapably tied to how much more effective illegal tobacco products sell in the marketplace. A hit to Big Tobacco is, in many ways, a boon to the black market. The drive to eradicate an industry where demand still exists has consequences and will be eagerly met by criminals who welcome any type of control or regulation on legal products. Before well-intentioned policies are put into play, it is important to understand the outcome and implement reasonable solutions that are informed by the Canadian context.

Taxation
American economist Arthur B. Laffer popularized an eponymous mathematical curve that suggests there is a point at which increasing taxes will no longer result in increased government revenues. Laffer provided a guest column piece to the Canada Free Press suggesting that the Ontario government is at a tipping point wherein another tobacco tax increase would shift more consumers to illicit tobacco products. He suggests setting tax increases at the rate of inflation to provide a steady flow of revenue to the government and to contribute to curbing the demand for illegal contraband tobacco.

A number of Canadian economists are also critical of persistent tax increases on “sin” products, suggesting that at a certain point people will find a way around tax policies. An economic note by the Montreal Economic Institute argues that smokers with entrenched behaviours are likely to turn to other legal or illegal sources like the black market or cross-border shopping when confronted with a tax increase that interferes with their budgetary constraints.

Some critics argue that it is not taxation as much as access that drives the supply and demand of the black market. And yet, the two are not mutually exclusive. The black market is not so focused on reaching out to consumers who already have access to nearby reserves and who already have the option of buying a carton of cigarettes for $35 or a baggie of 200 cigarettes for $10 to $12.

Providing a steady source of “cheap smokes” to communities that do not have direct access is what criminals must sort out. Of course, the business proposition becomes that much easier when you are offering your product at a considerably lower cost than the legitimate market. It is not an overly sophisticated operation, especially if there are the right financial incentives to do so.

Another unstable feature of taxation relates to the range of prices for legal cigarettes. Canadian economist and contributor to the Huffington Post, Salim Sakir, wrote a piece about disparate rates of taxation in Canada and warned the government to be wary of the unintended consequences when using taxation as a policy tool. The federal rate is consistent across Canada, however, the provinces and territories each calculate their own tax for a carton of cigarettes, which can be as high as $95 or as low as $55. Legally purchasing a quantity of cigarettes in Quebec and reselling them illegally in Manitoba, for example, can be viewed as a strong financial incentive for some individuals.
 

Plain Packaging
Prime Minister Justin Trudeau plans to introduce the plain packaging of tobacco products in Canada. While health advocates say these are effective tobacco control measures, it is important to consider the consequences.

As it stands, the indigenous tobacco trade does not comply with current legislation or regulation. Adding more regulation, such as plain packaging, will only polarize the growing influence of contraband. A number of reports already claim that Canadian consumers in general are not as brand conscious as their U.S. counterparts. As it relates to tobacco products, clear plastic “baggies” are, in many ways, the “brand” for cheap smokes that sell in smoke shacks across Canada.

Consider the business model used by superstores to attract customers. In an effort to provide value to customers, a number of major supermarkets undermine brand loyalty by introducing a “no-name” brand of discount products. These no-name brands, ironically, have become the brand of choice for many consumers who are more interested in price than brand or packaging. In the case of contraband cigarettes, by switching to baggies, consumers would not only be paying much less but would dodge any exposure to explicit and graphic health warnings.

The Ontario Tobacco Research Unit (OTRU) has already indicated in one of its reports that “several key informants noted the growth of a market for baggies of loose cigarettes in Canada.” This is, of course, consistent with reports by the RCMP that identify manufacturing operations on indigenous territory in Central Canada as the largest source of illegal tobacco in Canada.

Canada is not the same as Australia or other countries that have introduced or are attempting to implement plain packaging. It is an important piece of legislation that must be preceded by meaningful discussions with First Nations. Unless the government resolves longstanding land claim issues with First Nations or at least comes to common agreement regarding what is considered legal and illegal tobacco, the indigenous tobacco trade will continue to leverage its tax exempt status and use Canada’s tobacco control measures to broaden its consumer base.

Diversifying the black market
To generate tax revenues and ensure control, the supply chain has to be secure from start to finish. This is according to an article in the Law Times by Ian Harvey, who is not referring to tobacco products but to the federal government’s move to regulate the marijuana market. Harvey argues the government will be competing against an established and highly efficient black market, and sees many parallels with the tobacco trade. “We only need to look at the smoke shacks across Ontario and the pathetic attempts to enforce tobacco taxes to get a sense of how it might play out,” he says.

Organized crime groups involved in contraband tobacco products extend their trade routes and efforts to other criminal markets, which already includes marijuana. Should marijuana become legal, it would simply be a matter of selling marijuana for less than the government sells it.

In July last year, Vice News reported that federal law enforcement officers in the United States seized more than 12,000 cannabis plants from two farming operations on tribal land in California. The connection to Canada is that the operation was allegedly financed by Jerry Montour, CEO Grand River Enterprises, a cigarette manufacturer based in Six Nations, Ontario. The article suggests that Montour’s alleged connection is one of the first seemingly concrete examples of the tobacco industry diversifying its portfolio.

Moving forward, it will be interesting to see if the federal government in Canada deals with this diversification in the same manner it does with tobacco, where the accused argue that federal authorities don’t have jurisdiction.

To read all four parts plus the introduction of this report, see related links below.