BORDER INTEGRITY, ILLICIT TOBACCO, AND CANADA’S SECURITY Jean Daudelin with Stephanie Soiffer and Jeff Willows NATIONAL SECURITY STRATEGY 4 FOR CANADA SERIES 1 Andrew Graham Canada's CriticalCanada's Infrastructure: Critical When Infrastructure: is Safe Enough When Safeis Safe Enough? Enough Safe Enough Andrew Graham 1 True North in Canadian Public Policy Board of Directors Advisory Council CHAIR Purdy Crawford Rob Wildeboer Former CEO, Imasco, Counsel at Osler Hoskins Chairman, Martinrea International Inc., Toronto Jim Dinning Former Treasurer of Alberta MANAGING DIRECTOR Brian Lee Crowley Don Drummond Former Clifford Clark Visiting Economist Economics Advisor to the TD Bank, Matthews Fellow in at Finance Canada Global Policy and Distinguished Visiting Scholar at the School of Policy Studies at Queen’s University SECRETARY Brian Flemming Lincoln Caylor International lawyer, writer and policy advisor Partner, Bennett Jones, Toronto Robert Fulford Former editor of Saturday Night magazine, columnist TREASURER with the National Post, Toronto Martin MacKinnon CFO, Black Bull Resources Inc., Halifax Calvin Helin Aboriginal author and entrepreneur, Vancouver DIRECTORS Hon. Jim Peterson John Beck Former federal cabinet minister, Partner at Chairman and CEO, Aecon Construction Ltd., Fasken Martineau, Toronto Toronto Maurice B. Tobin Erin Chutter The Tobin Foundation, Washington DC President and CEO, Puget Ventures Inc., Vancouver Navjeet (Bob) Dhillon Research Advisory Board CEO, Mainstreet Equity Corp., Calgary Janet Ajzenstat Keith Gillam Professor Emeritus of Politics, McMaster University Former CEO of VanBot Construction Ltd., Toronto Brian Ferguson Wayne Gudbranson Professor, health care economics, University of Guelph CEO, Branham Group, Ottawa Jack Granatstein Stanley Hartt Historian and former head of the Canadian Chair, Macquarie Capital Markets Canada War Museum Les Kom Patrick James BMO Nesbitt Burns, Ottawa Professor, University of Southern California Peter John Nicholson Rainer Knopff Former President, Canadian Council of Academies, Professor of Politics, University of Calgary Ottawa Larry Martin Rick Peterson George Morris Centre, University of Guelph President, Peterson Capital, Vancouver Christopher Sands Jacquelyn Thayer Scott Senior Fellow, Hudson Institute, Washington DC Past President, Professor, Cape Breton University, William Watson Sydney Associate Professor of Economics, McGill University For more information visit: www.MacdonaldLaurier.ca Table of Contents Executive Summary ........................................... 4 4.2 Reduced tobacco consumption ................ 24 Sommaire ........................................................... 5 4.3 Taxation .................................................... 24 Introduction ....................................................... 6 4.3 Stronger enforcement of prohibition ....... 24 1 Background: Illicit Trade and the Tobacco 4.4 Limiting illicit profit margins ................... 26 Economy in Canada ..................................... 7 4.5 Confronting broader criminal side effects.. 27 2 The Workings of the Illicit Tobacco Trade .. 9 4.6 Containing the potential for major 2.1 The political economy of illicit tobacco ...... 9 security challenges ......................................... 28 2.2 Illicit tobacco in Canada ........................... 11 4.7 Avoiding US discontent with border security ............................................... 28 3 The Security Implications of Illicit Tobacco ........................................................14 Conclusion ....................................................... 29 3.1 Illicit tobacco ............................................. 15 Author Biographies .......................................... 30 3.2 Collateral crime ......................................... 18 References .............................................................. 31 3.3 Mixed smuggling: drugs, weapons, and Appendix 1 2012 Taxes on Cigarettes in humans ............................................................ 18 North America ........................................................ 34 3.4 Support for other criminal activities ......... 20 Appendix 2 Policy Framework Governing Tobacco and Narcotics Enforcement in Canada and the US ..35 3.5 Financing terrorism? ................................. 21 Appendix 3 Administrative Framework Governing 3.6 Sovereignty and territorial control ........... 21 Tobacco and Narcotics Enforcement in Canada and 3.7 An indirect threat through its impact on the the US ..................................................................... 36 US and the reaction this may provoke ............ 22 Appendix 4 Sources Used for Establishing the Policy 4 Current Policies and Options ...................... 23 and Administrative Frameworks ............................ 37 4.1 A complex policy environment ................. 23 Endnotes ................................................................ 39 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, its Directors or Supporters. Executive Summary The Seaway International Bridge over the St.Lawrence River connecting the city of Cornwall, Ontario in Canada to the town of Massena, New York in the US. he small town of Cornwall in eastern Ontario the border area. In addition, US authorities are pre- can be considered the contraband capital of occupied with the movement of illegal drugs and hu- T Canada, thanks to the high volume of cross- mans through Cornwall: any measures they take to border smuggling and illicit trade in the area. The stem the flow would hurt Canada economically by problem has two sources: the unique local geog- inhibiting the free circulation of goods and people raphy combined with practical, legal, and political across the border. problems that make it easy to bypass border con- trols; and the tolerance of Canadian and US law en- Illicit tobacco accounts for about 15 percent of cig- forcement toward the illicit manufacture and sale arette sales in Canada, a large proportion of which of tobacco products on the Mohawk territory that comes through Cornwall. Attempts to constrict that straddles the Canada-US border between Ontario, flow have failed. However, the pressure exerted on Quebec, and New York State. the trade has helped keep profits much lower than they could have been. Given the sensitive political Much of the local problem revolves around tobacco; situation and the overlapping jurisdictions and le- however, significant amounts of illegal drugs, weap- gal frameworks, enforcement authorities have been ons, and humans have been trafficked through the remarkably effective in containing broader security area, all of these accounting for a chain of collateral fallout. We found little evidence of extensive smug- crime in the surrounding region. The gross value of these illegal practices reaches into the hundreds of gling of drugs, weapons, and humans in recent years, millions of dollars. and the large-scale involvement of organized crime appears to have been curtailed. Tensions with the Contraband has national security implications for Mohawk community have been rare, confrontations Canada. Tobacco and its trade generate important largely avoided, and a fluid and effective relationship economic benefits for the Mohawk community that with the Mohawk police on everything but tobacco lives on the Akwesasne (Canada) and St. Regis (US) on reserve has been built. Mohawk reserves that straddle the border. A sub- stantial part of the production and sale is legal, but In summary, federal authorities on both sides of the the Mohawk generally refuse to apply taxes to their border appear to tolerate the illicit tobacco trade in legal tobacco products, and they tolerate the illegal favour of containing the broader criminal and secu- production and sale of tobacco. As a result, a direct rity dangers that smuggling and its repression repre- attack on those activities may provoke confronta- sent. On that count, current efforts have been quite tions, and possibly even a loss of federal control over successful. 4 Border Integrity, Illicit Tobacco, and Canada’s Security Sommaire a petite ville de Cornwall, dans l’Est de l’Ontario, la perte de contrôle fédéral sur la zone frontalière. peut être considérée comme la capitale de la con- En outre, les drogues illicites et les migrants clandes- trebande au Canada, en raison de l’importance tins qui pourraient transiter par la région de Cornwall L préoccupent les autorités américaines, et des mesures du volume du commerce et des échanges transfront- aliers réalisés illégalement dans la région. Le problème mise en place par les États-Unis en vue d’endiguer a deux sources. D’abord, une géographie locale unique ces flux risqueraient de nuire au Canada sur le plan se conjugue à des problèmes pratiques, légaux et poli- économique en entravant la libre circulation des biens tiques de mise en œuvre des contrôles frontaliers et des personnes aux frontières. pour faciliter le contournement de ceux-ci. Ensuite, les produits du tabac fabriqués et vendus de manière Le tabac vendu illégalement, qui représente environ illicite sur le territoire mohawk qui jouxte la ville, et 15 % du commerce de cigarettes au Canada, tran- chevauche la frontière canado-américaine séparant site en grande partie par Cornwall, et les tentatives les provinces de l’Ontario et du Québec de l’État de d’endiguer ce flux ont