Smoking Gun: Strategic Containment of Contraband Tobacco and Cigarette Trafficking in Canada
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A Macdonald-Laurier Institute Publication SMOKING GUN: STRATEGIC CONTAINMENT OF CONTRABAND TOBACCO AND CIGARETTE TRAFFICKING IN CANADA Christian Leuprecht MARCH 2016 5 Years of True North in Canadian Public Policy Board of Directors Hon. David Emerson Former federal cabinet minister, corporate director and public policy adviser CHAIR Rob Wildeboer Brian Flemming Executive Chairman, Martinrea International Inc. International lawyer, writer, and policy advisor Robert Fulford VICE CHAIR Former Editor of Saturday Night magazine, columnist with Jacquelyn Thayer Scott the National Post Past President and Professor, Wayne Gudbranson Cape Breton University, Sydney CEO, Branham Group Inc., Ottawa MANAGING DIRECTOR Stanley Hartt Brian Lee Crowley Counsel, Norton Rose LLP Calvin Helin SECRETARY International speaker, best-selling author, entrepreneur Lincoln Caylor and lawyer. Partner, Bennett Jones LLP, Toronto Peter John Nicholson Former President, Canadian Council of Academies, Ottawa TREASURER Martin MacKinnon Hon. Jim Peterson CFO, Black Bull Resources Inc., Halifax Former federal cabinet minister, Counsel at Fasken Martineau, Toronto DIRECTORS Maurice B. Tobin the Tobin Foundation, Washington DC Pierre Casgrain Director and Corporate Secretary of Casgrain & Company Limited Research Advisory Board Erin Chutter President and CEO of Global Cobalt Corporation Janet Ajzenstat Professor Emeritus of Politics, McMaster University Laura Jones Executive Vice-President of the Canadian Federation Brian Ferguson Professor, Health Care Economics, University of Guelph of Independent Business (CFIB). Jack Granatstein Vaughn MacLellan Historian and former head of the Canadian War Museum DLA Piper (Canada) LLP Patrick James Professor, University of Southern California Rainer Knopff Advisory Council Professor of Politics, University of Calgary Larry Martin John Beck Principal, Dr. Larry Martin and Associates and Partner, Chairman and CEO, Aecon Construction Ltd., Toronto Agri-Food Management Excellence, Inc. Navjeet (Bob) Dhillon Christopher Sands President and CEO, Mainstreet Equity Corp., Calgary Senior Fellow, Hudson Institute, Washington DC Jim Dinning William Watson Former Treasurer of Alberta Associate Professor of Economics, McGill University TABLE OF CONTENTS Executive Summary ................................... 2 Part 4: Sommaire ................................................... 4 Terrorism .................................................. 27 Introduction ............................................... 6 Part 5: Part 1: Policy Options .......................................... 29 Contraband Tobacco .................................. 9 5.1 Taxation ................................................29 1.1. Commodificaton ...................................9 5.2 Legislative Developments ....................33 1.2 Studying Contraband ...........................10 5.3 Revenue Sharing ..................................37 1.3 The Market ...........................................13 5.4 Tracking and Tracing............................41 1.4 The Supply Chain ................................15 5.5 Input Controls .....................................42 1.5 Legitimate Farmers and Contraband 5.6 Enforcement ........................................42 Tobacco ................................................17 5.7 Canadian Tobacco Ombudsman ..........45 Part 2: 5.8 Public Awareness .................................47 First Nations and contraband .................. 19 5.9 Research and Data Analysis ..................48 2.1 Tobacco and Cultural Heritage ............19 Part 6: 2.2 Reserve Geography and Tobacco Conclusion and recommendations .......... 49 Smuggling ............................................19 About the Author .................................... 52 2.3 The Business of Contraband on Reserve............................................21 Acknowledgements .................................. 52 Part 3: References ................................................ 53 Organized crime and contraband ............ 22 Endnotes .................................................. 60 The authors of this document have worked independently and are solely responsible for the views presented here. The opinions are not necessarily those of the Macdonald-Laurier Institute, their Directors or Supporters. Copyright © 2016 Macdonald-Laurier Institute. May be reproduced freely for non-profit and educational purposes. EXECUTIVE SUMMARY* anadians think of contraband tobacco and cigarettes as a nuisance at best, or a tax-revenue C problem at worst, not in terms of organized crime or terrorism. This authoritative study of the size, scope, and operations of contraband tobacco and cigarettes in Canada reveals this to be a false dichotomy. Canadian law enforcement seizures of contraband tobacco routinely include high-powered weapons, hard and designer drugs, stolen vehicles and other merchandise, and lots of cash. Indeed the week this report was released, police in Quebec carried out 70 raids and made 60 arrests against an international criminal network involved in drug and contraband tobacco trafficking, and money laundering, in the largest anti-contraband operation to date. Contraband tobacco is lucrative, it is produced and trafficked systematically alongside other illicit goods, and Canadian crime syndicates are heavily invested in its proceeds. Globally, money from contraband tobacco and cigarettes is a major source of revenue for the likes of ISIS, al-Qaeda, and Hezbollah, whose contraband fundraising activities in North America have been subject to indictments. Producers and traffickers of contraband prey on the most vulnerable population groups in Canadian society. They brazenly flaunt restrictions on procurement, manufacturing, packaging, promotion, and * This section has been revised. An earlier version of this paper conflated the provincial excise tax with the size of the illicit market and an Ontario tax loss figure with the national tax loss figure. These figures have also been adjusted on page 7. 2 SMOKING GUN Christian Leuprecht – March 2016 3 sale of tobacco and cigarettes. Their ranks count hardened Mafioso and notorious criminal bikers who exploit Native communities. Tobacco farmers divert crops to the illicit market; some cooperate to reap higher profits, some uncooperative ones are coerced or have their tobacco stolen. Compared to illicit drugs, materials and manufacture are readily accessible, and the market for contraband tobacco and cigarettes is huge, highly profitable and easy to reach. The loss factor is minimal because chances of detection are small, penalties lenient (if any are imposed at all), and social stigma less than for alternative illicit activities. Canada’s contraband market in tobacco and cigarettes has been estimated at more than $1.3 billion, which rivals the narcotics market and is likely an underestimate. In Ontario alone, roughly $500 million in excise taxes are lost annually, and total forgone tax revenue has been estimated at over $1 billion. Nationally the figure is as high as $3 billion. Enforcement is hampered by entangled ju- ris-dictional issues, collective action problems within and across jurisdictions, scarce enforce- ment resources, legislative gaps, and, it seems, Contraband tobacco is lack of a comprehensive plan, let alone strategy. lucrative, produced and There has been some institutional learning, and trafficked systematically worthwhile innovations at different jurisdic- tional levels – federal, provincial, and First Na- alongside other illicit goods, tions. This study explores and compares some and Canadian crime syndicates of these innovations to forge a comprehensive are heavily invested in approach to contraband tobacco and cigarettes. its proceeds. Although law enforcement has a role to play, like so much other criminal activity, we are clearly not going to arrest our way out of this problem. Ultimately, a comprehensive strategy needs to change the incentive structures in place on both the demand and supply sides, optimize legislative and regulatory frameworks, and improve inter-agency and inter-jurisdictional coordination. Key recommendations include: Revenue sharing with First Nations The collection and administration of an excise tax by First Nations governments promises a sustained stream of revenue for community development and infrastructure projects and a significant incentive to reduce tax evasion in cigarette sales to non-Natives. In return for greater fiscal autonomy, sales to ineligible customers would be curbed by reducing the quota allocation to First Nations. Halting diversion from legitimate growers in Ontario Ontario is the only Canadian jurisdiction where tobacco is grown. Although the transition from the Ontario Flue-Cured Tobacco Growers’ Marketing Board to the Ontario Ministry of Finance has tightened monitoring and enforcement of raw leaf tobacco, three changes will hamper the ability to investigate and interrupt diversion of tobacco to illicit markets: once harvested, growers no longer need to identify the source and the final destination of raw leaf; labelling information that tracks baled raw leaf tobacco is no longer required; and reporting frequency has been loosened from weekly to quarterly. Criminalizing the unlicensed growth, sale, purchase, and/or transport of raw leaf would acknowledge the serious consequences of diverted raw leaf and empower police to reinforce the licensing regime. Federal coordination and a Tobacco Ombudsman C-10 opens the opportunity for the federal government