Sin-Tax Failure: The Market in Contraband Tobacco and Public Safety

[An Introduction to the Black Market] [The Size of the Market] [The Engine of Growth] [The Trail of Contraband] [The Native Dimension] [Other Native Involvement in Contraband] [The Warrior’s Society and the Black Market] [Other Dimensions of Violence] [Guns in Canadian Cities] [Organized Crime] [Countering the Black Market] [The High-Price, High-Tax Strategy] [Reducing the Contraband Market]

Chapter Three

The Trail of Contraband

The sources of Black Market cigarettes in Canada include the following:

• Most of the supply of contraband cigarettes comes from Canadian manufacturers. They ship cigarettes into the United States, mostly to wholesalers in Upstate New York. Others go to Duty free shops or American outlets near the Canadian border;
• American brands (Marlboros are especially popular with Asian-Canadian smokers, but have a small market among other Canadians);
• Brands produced by the members of the Iroquois Confederacy, many of which were originally intended to mimic popular Canadian brands;
• Counterfeit brands produced either outside or inside the country;
• Fenced cigarettes which have been hijacked from shipments or stolen from warehouses and stores.

Groups like the Canadian Cancer Society and the Non-Smoker’s Rights Association point out that the Canadian tobacco companies are accomplices in the contraband market. The argument runs that Canadian manufacturers know that their cigarettes will be smuggled back into Canada. Any counter-argument is no more defensible than is the production of cigarettes, yet the tobacco companies are operating within the letter of the law. There is no way legally to stop them from exporting to the US to seemingly-respectable customers.

Cigarettes enter Canada in a number of ways, some of which are technically legal. Returning residents, diplomats, Armed Forces personnel and crews on Canadian aircraft can purchase duty-free products. Diplomats and military personnel are small communities in Canada. The Lindquist Avey Macdonald Baskerville study reported a sharp increase in consumption by the foreign diplomatic community after 1990 and it is believed that many diplomats are selling cigarettes. The study indicated that this traffic amounted to 557,000 cartons in 1991. Consumption in the Armed Forces has diminished during the same time, and duty-free cigarettes are no longer supplied to naval personnel at sea. On the other hand, the cafeteria in National Defence Headquarters was rumoured to be selling contraband cigarettes in the summer of 1993. Canadian air crews can bring back cigarettes but their consumption is minor.

Returning Canadian residents are allowed to bring back one carton or its equivalent if they were out of Canada for more than 48 hours and are over the age of 18. Approximately 16 million Canadians made trips outside the country in 1992, 75% of them should be adults (Statistics Canada indicates that 24% of the population is under the age of 16). Assuming that half of the remainder returned with a carton of cigarettes, only 6 million of the 53.1 million cartons which were shipped to the US returned to Canada via returning residents in 1992.

Canadians have been smuggling cigarettes privately. Tens of thousands of Canadians cross the US border to buy taxed cigarettes from American stores or un-taxed cigarettes on Reserves. There are between 100 and 200 unwatched roads cross the border between New Brunswick and British Columbia, although a temporary Customs checkpoint might be established from time-to-time. Most individuals go through the main checkpoints — many of which are too crowded to allow Canada Customs to check most cars. However, individual smugglers are being squeezed in two directions if they try to bring significant amounts of contraband. First, while the risk of being caught by Canada Customs is small, every successive crossing increases the risk, while the penalties for being caught are growing to the point where they can ruin an independent operator. On the other hand, independent smugglers are facing increasing competition form organized crime. They have been "stung" in attempting to purchase contraband in large amounts and many have been robbed after taking delivery.

Many individuals run cigarettes by aircraft or boat into Canada, but it is difficult for them to compete with the large smugglers. Private smugglers in the Maritime Provinces are common — in many ways this is a traditional industry. Much of Newfoundland is supplied by boat out of the French-owned Islands of St. Pierre and Miquelon. Part of the Nova Scotia and New Brunswick contraband markets are supplied by boats from Maine. The western end of Lake Ontario has been a significant route for contraband from New York into Ontario — especially as summer-time pleasure boat traffic provides good cover and Customs regulations are often casually enforced. However, in 1993, this aspect of contraband smuggling seemed to fall-off. This may be due to the experiences other small-time smugglers have been facing. In late 1991, three Toronto-area men apparently drowned while trying to run cigarettes across Lake Ontario. The waters between Washington State and Vancouver are plied by smugglers who mix in with the heavy traffic in small craft.

Some independent operators and small gangs have become bold since 1990 and use tractor-trailer trucks and standard shipping containers. This requires some organization and logistical support — most probably from organized crime. On January 5^th, 1994 the RCMP arrested four men (apparently all from Chicago) and seized nearly 18,000 cartons of cigarettes in the Toronto area. False manifests and an outer-cargo of bulky products shield contraband, and some Customs Officers report bribery attempts have been made. Incidentally, bribery and corruption of minor officials is a common aspect of any major smuggling industry and it is unlikely that all Canadian officials are immune to temptation. One Warrior on the Six Nations Reserve near Brantford was heard to brag that an RCMP officer near Cornwall was being paid $1,000 a week to provide early warning of police activities-this may have been bravado, an attempt at disinformation, or may have been entirely true.

Outside of Quebec and Ontario, much of the Black Market is still serviced by small operators who make their own border crossings. In Ontario and Quebec, they find it difficult to operate in competition with organized crime and the Native tobacco millionaires on Iroquois Reserves. The Akwesasne Reserve at the intersection of the borders of Quebec, Ontario and New York may be the route through which fully half the contraband supply arrives in Canada. Smuggling through the Walpole Island Reserve near Windsor or shipments to the Six Nations Reserve adds to the total. Another source of contraband comes via ship from overseas ports or through the hands of organized crime.

Once contraband cigarettes arrive in Canada, they are distributed through myriad ways. Consumers make their own purchases of untaxed cigarettes on Canadian Reserves, others make bulk purchases and ferry them about to their friends, neighbours and co-workers. Many distributors are supplied by organized criminal groups — Bikers, Viet Gangs, Posses, Triads, the Mafia, the ever-shifting underworld in Toronto and Montreal and others. These smuggle their own cigarettes or buy from the Reserves and run their own distribution networks based on stores operated by members of the same ethnic group, or through small-time dealers who may or may not belong to the same minority. Consumers may be offered cigarettes from roving vendors at work, in shopping centres, or can find them at their convenience store.

In many ways, some vendors resemble drug dealers and are just adaptable. Tough legislation in Ontario promises heavy penalties for convenience store owners who sell tobacco to minors. Vendors who sell to teenagers out of gym bags and car trunks are now common around many schools. In fact, growing public disapproval of tobacco smoking is leading to increased consumption among minors. A teacher in suburban Toronto doesn’t mind this either… "If they’re going to rebel, they’re going to rebel and I’d rather that they did it with cigarettes. A cigarette pusher outside the school is a lot better then a crack dealer." The teacher does not smoke and his daughters (14 and 16) say they do not, but he knows that both of them do.

The first victims of any Black Market are the legal outlets for the products the underground economy has become involved with. In December 1993, the Ontario Convenience Stores Association spoke on behalf of 6,000 small stores to a Committee on the Underground Economy commissioned by the Ontario Government. They estimated a third of the cigarettes sold in Ontario were contraband. There is great pressure on many corner stores to sell contraband, up to 30% of their income may come from tobacco and a loss of as much as 10% of their trade would drive most of them out of business.

Many store owners become involved in the Black Market. Contraband cigarettes require less paperwork and the profits are better. Most store owners live frugally and many have families to support. The untaxed profits are very welcome. Moreover, if a store owner refuses to sell contraband, he may be certain that a rival will do so and undermine his livelihood. Some store owners are also exposed to organized crime. The traditional reticence of Chinese, Vietnamese and southern Italian has long left them exposed to coercion from ethically-based criminal groups. Many have been induced to sell contraband.

Convenience store owners face another threat with high cigarettes taxes. A corner store may have less than $200 in the till at night, a duffle bag full of cigarettes is worth much more. Robberies are often directed at the store’s inventory of cigarettes. In 1990, 11 million cartons of stolen cigarettes were fenced in Canada. An article in June 1991, in Western Report, described how Calgary experienced six robbers every day involving cigarettes. In February 1991, 13 people tried to hijack $3.6 million in cigarettes from two trains. In Vancouver in February 1993, teenagers with a machete and a shotgun beat up a 45 years-old store owner and his daughter for some packs of cigarettes and $90. In February 1993, a Toronto store clerk had his head blown off by three robbers for several cartons of cigarettes. Two other Toronto convenience store clerks were killed in robberies in 1993.

Tobacco farmers are hurt by smuggling. According to the June 24^th, 1993 edition of the Brantford Expositor, farmers were paid $1 less per pound than the $2.60 they received for tobacco sold for domestic use. They face increased security costs because the theft of tobacco bales is growing. Some tobacco farmers have been offered the chance to make direct sales to the underground market — the price is better and "how can you say no to a guy with a gun?"

This complaint has been voiced by the community which has been most affected by Canada’s appetite for contraband — the Iroquois peoples who have to live among the suppliers of contraband every day. Some Iroquois have said "No" to a guy with a gun and have paid for it. Others did not say No; they are paying for it in unimaginable ways every day.

[Page 1] [Page 2] [Page 3] [Page 4] [Page 5] [Page 6] [Page 7] [Page 8] [Page 9] [Page 10] [Page 11] [Page 12] [Page 13]

John Thompson is President of the Mackenzie Institute which studies political instability and terrorism. He can be reached at: mackenzieinstitute@bellnet.ca