[INTRODUCTION] [The Font of the Black Market] [The Size of the Black Market] [Black Market Spirits] [Beer Beneath the Table] [Turning Water into Wine] [The LCBO] [Turning off the Black Market's Spigots] [TOP of PAGE]
Introduction
October, 1997
In Canada, in Ontario particularly, there is a long tradition of experimentation in social engineering through legislation. Value conflicts, idealistic crusades, a persistent (but changing) political elite and a government sense that the populace must be controlled has had a number of effects. Repeated lessons about the role of paradox in guiding human affairs seem to be forgotten shortly after they are learned.
In recent years, attempts to curb smoking through increasingly heavy sin-taxes may have had some part in gradually diminishing tobacco consumption - but then a huge black market in tobacco appeared. Currently, consecutive federal governments have pushed gun control, only to create a burgeoning black market and drive an unknown percentage of the once legally owned inventory underground. Career criminals were already connected to the firearms black market even before both gun control laws came down.
The classic North American experiment in forcing social change came out of the Prohibition Era. A middle class with recent rural ties attempted to force anti-alcohol "Temperance" values on the whole of society. The United States added the prohibition of alcohol to their Constitution in 1919. Some 13 years later, after teaching millions of citizens to casually break the law and turning scattered poorly organized criminal gangs into a powerful syndicate (the Mafia), the whole experiment was called off.
Various Canadian provinces flirted with temperance laws and prohibitions of their own - usually to find then, as now, that ordinary Canadians can be remarkably subversive when it comes to government regulation of their private affairs.
Ontario itself instituted Prohibition measures from 1916 to 1927. However, Ontario's wineries were specifically exempted, and many breweries and distilleries remained open to serve the export market (anyone with access to a doctor might be able to beg for a prescription of rum or whiskey for "medicinal" purposes). The export market boomed with Prohibition in the United States. Shipment upon shipment left Ontario, with excise taxes paid, handled by residents who were not allowed to touch a drop of the stuff themselves.
The end of Ontario's prohibition experiment only came gradually. Many residents remember an entire series of asinine laws and regulations, many of which were enforced by the newly created Liquor Control Board of Ontario (LCBO) and the Liquor Licensing Board of Ontario (LLBO).
For example, until about 1970, Ontario's bars were required to have a separate Ladies entrance and a room where escorted gentlewomen might enjoy a beverage with a respectable male companion. Otherwise, alcohol-inflamed men might endeavor to take liberties... horrors! Likewise, lest maddened drinkers fall to unseemly brawling, it was forbidden for a patron in a bar to ever stand up with drink in his hand. If the patron wanted to move to another table, the waiter would have to carry his unfinished drinks for him. These measures finally ebbed well in the mid-1970s. Limits on glass sizes for draft beer, and the numbers of drinks per person allowed on a table lasted into the 1980s.
The Lord's Day Act and controls on the public consumption of alcohol lasted until the 1980s. All taverns and bars were closed on Sundays (starting at midnight on Saturday), and no alcohol whatsoever could be sold in restaurants - unless sold with food. This resulted in over-handled food items such as peanut butter sandwiches sitting on the tables of needy drinkers. Outdoor patios, cafes and beer gardens were virtually unknown in Ontario until the 1980s. Likewise, restaurants were forbidden to cook with alcohol until well into the 1970s, lest forbidden nectars suddenly incite good burghers to intemperate behavior while dining.
LCBO stores (the only places were liquor and wines were legally sold) were Calvinisticly dreary places. Consumers were not allowed anywhere near the shelves lest they become inflamed with thirst and temptation - never mind choice. Instead customers had to fill out a little card with their desires and hand it to a clerk, who would then disappear into the rear of the store and hopefully re-emerge with the right products - packed (by law) in a plain brown paper bag. Until the late 1960s, the cards had to be signed and the customer's address had to be clearly marked.
By some curious coincidence, war-time rationing effects on alcohol also extended well into the 1950s at LCBO stores. A customer could leave with two bottles of spirits or two cases of beer, nothing more. Revolutionary marketing concepts as brand displays, comparative pricing, check-out counters and attractive premises made a tentative appearance in the late 1960s and only became universal in the early 1980s.
In addition to all the strange regulations, both the Federal and Provincial government heaped a number of taxes and duties on alcohol, and continue to keep them there. Currently, there are a few remaining restrictions on consumer choice, but prohibition's hangover still affects brewers, vintners and distillers. They continue to endure a number of regulations and curiosities affecting the manufacture and sale of alcohol in the Province. As a result, there is a considerable gap between real production costs and consumer prices. The one certain and sure result of regulation and taxes is today's black market.
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The Font of the Black Market
An underground economy is either based on the provision of wholly illegal products (narcotics and automatic weapons for example) or otherwise legal products through illegal means. The latter kind of black market is invariably the bastard child of over-taxation and over-regulation. Consumers have demands that will be met. If the price is too high or is inflated artificially through taxes and duties, alternative sources will emerge. If compliance with regulations is seen as a burden, consumers and suppliers will subvert or ignore them. If regulations are regarded by some as unfair, or are too complex, they will be bypassed.
Whether this seems fair or not, Ontario's black market in alcohol owes its existence to the Federal and Provincial governments, their taxes, their laws and their regulations. Acting in loose concert, Ottawa and Queen's Park have artificially swollen the price of alcohol with high duties and taxes, while convoluted regulations have created significant problems of their own. The underground economy is a problem throughout Canada, and the sale of illegal or untaxed alcohol is universal. However, the problem seems especially prevalent in Ontario. The province is Canada's most populous (over a third of all citizens live here) and contains 10 of the country's 25 largest metropolitan areas. Communication links to the US are excellent, and some good smuggling routes are very hard to adequately police.
As an example of Canadian taxing structures and alcohol, the Association of Canadian distillers helpfully drew up a little chart in their 1996 Annual Statistical Report. It concerns the pricing of a "typical" 750 ML bottle of standard Canadian spirits:
A completed bottle of Old Panther Sweat Sipping Whisky arrives at the retail outfit. Total production and shipping costs (allowing for a decent profit by the concerned parties) equals some $3.43.
The Federal Government adds $3.32 in Federal Excise Duty
The Provincial Government tacks on $9.63 in sundry taxes
The combined Provincial and Federal Sales taxes add on another $3.12.
It is easy to see where some cunning fellow who can dodge the country's tax structures can make a substantive profit out of a $3.43 bottle of whisky, when the legal price comes out to $19.50. It is also easy to see where many Canadians who (rightly) regard themselves as over-taxed have no problem with the presence of a black market. Beer and wine prices are not quite as inflated by taxes as spirits, but the difference is still enough to create a healthy black market in these commodities.
"The Economic Impact and Taxation Burden From the Distilled Spirits Industry", a January 1996 paper from the Conference Board of Canada, pointed out that a model firm could produce a litre of beer, wine and spirits for $0.62, $1.19, and $1.53 respectively. These figures discount profits, but are illuminating all the same. Once all the duties, levies, Provincial mark-ups and taxes are stirred into the mix, the consumer usually has to choke down prices of $3.58, $7.59 and $26.42 for a litre of these products.
As always, a black market is a danger. Firstly, the necessary laws pertaining to consumer safety are over-looked or evaded. Secondly, a clandestine trade represents free money to those who care to orchestrate it - and those who do so usually come from large and diverse networks of organized crime. The foremost danger from a black market is the effect it has on consumers. It conditions them to evade the law, and hold regulations in contempt. It teaches them that the authorities are slow and almost helpless, and so prepares the way for expanded involvement in an underground economy.
The presence of a black market should automatically force governments to examine their taxation and regulatory structures. Otherwise, they are begging for real trouble.
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The Size of the Black Market
It is invariably difficult to gauge the size of a black market. In 1994, according to Statistics Canada, the average Canadian spent $367 on alcohol. Accordingly, 10,928,0000 Ontario residents would have generated some $4,010,576,000 in sales. Actually, Canadians may be fibbing when talking to Statscan (not a surprise really), as the LCBO insists that the overall Ontario alcohol market is worth about $5.9 Billion a year.
The January 1996 Conference Board of Canada study on the spirits industry estimated that 1993/94 Canadian alcohol sales amounted to $10,523,499,000. However, the study appears to examine only the legal market and does note some incongruities that could only be due to the presence of a large black market.
However much residents drink, the official share of the market was something less than the whole. For example:
The Addiction Research Foundation Research Document 131 estimated that 19.5% of Ontario's market was served by "unrecorded" sources in 1990-95.
The LCBO itself declared in the summer of 1997 that the black market in Ontario was costing the organization some $644 million a year in revenues and accounted for 11% of the market. This may have been a conservative estimate, as it doesn't account for product diversion and the almost unregulated U-Brews/U-Vints.
The Association of Canadian Distillers estimated that 25% of all spirits consumed in Ontario are smuggled.
The Canadian Wine Institute reported a steady decline in the consumption of table wines and bulk table wines from 1990-1993. They surmised that 51% of Ontario's wine was coming from concentrates and grape juice used by the U-Vint industry.
These estimates suggest that the Black Market may divert anything from $782-1,151 million (ARF estimates) to $441-649 million (LCBO estimates) from the province's legal sales. The ARF estimates show their homework, and are probably more accurate. They are also based on data from 1994/95 and the problem has grown since then.
More particularly, the black market is found among consumers. An Etobicoke storeowner, Constantine normally consumes one 1.75 ml bottle of black market vodka every week. Every two weeks, his supplier comes around to his home with two bottles and a carton of contraband Marlboroughs. Constantine feels that "We are taxed too much, way too much, so I keep a little back." He first went onto the black market in 1993 (in response to high cigarette taxes), and has been using it for alcohol and cigarettes ever since. After delivering to Constantine one Monday evening, his supplier went to 17 different homes over the next hour and twenty minutes in the same general neighbourhood.
Mark, an employee of a large auto manufacturer near Oshawa, also stocks black market alcohol in his basement bar. "Some of the guys in the Local ask if you want it. You say how much, they either deliver it, or tell you were to meet them in the parking lot [during shift changes]. One guy, he sells it out of his van, and the thing is so low [so heavily loaded], I don't know how he could make it around." Mike and Constantine only represent the thin edge of the wedge.
Val acts as the hostess and sometime bartender at a small restaurant in northern Toronto. Her admission: "We keep a few bottles of underground liquor, rye and vodka mostly, here. My boss [the restaurant's owner] keeps more of it at home. Some of the other places around here have been caught, but if they have a few bottles on the premises, it's just a fine. They don't lose their licenses." Who does she serve the liquor to? "Well, the guys who don't ask for any brand, or have had a couple already - they never know the difference." Harry, the recently laid off bartender of a now closed restaurant in downtown Toronto, has another take. "We never sold the cheap stuff, guess I should have."
Val's restaurant is not unusual but Harry's might be; LLBO inspectors catch about 370 establishments a year with contraband liquor. However, with only 26 or so inspectors, they are unlikely to catch more. A 1995 KPMG report indicated that LLBO inspectors were finding black market alcohol in the full range of restaurants from "low-class bars to international hotels to major restaurant franchises." Even with only two months of field research backing this study, we can conclusively say that this is the case. The same KPMG report cites the experience of a 1995 Inspection program in Quebec that used identification kits; it found that 64% of inspected bars in Quebec had illegal liquor. The same case might be true in Ontario.
The obvious use of the black market in Ontario's restaurants and bars comes with spirits - on those occasions when smuggled labels can be seen lurking behind the bar. Product substitution is much harder to catch and LLBO inspectors can rarely do so without resorting to a time consuming audit. The use of U-Vint products as house wines is even more difficult to detect. Indeed, many establishments used legally purchased and fully taxed U-Vint products as a house wine. It is virtually impossible to know when un-taxed and illegal U-Vint wines have been substituted.
Many Ontario residents may be consuming black market products without any idea that they are doing so. While the full size of the market is unknown, some observers estimate that between 11-30% of all alcohol consumed in the province comes from black market sources. Ironically, while LCBO-enforced taxes and regulations have a major role in creating this semi-clandestine industry, the only alcohol that a consumer can be truly sure of would come from an LCBO store, or directly from an LCBO-controlled producer.
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Black Market Spirits
The Canadian Distillers are under attack from two directions. Their conventional market share has been declining over the past two decades, as more Canadian drinkers switched to wine and beer. However, they are also facing a ferocious assault from the black market. Distilleries in Ontario have closed or have laid off thousands of employees. Their market share has been depressed because of black market competition for almost a decade now, and the trend seems to be worsening.
Unlike beer and wine, spirits are easy to smuggle. The traditional smuggling routes into Ontario come through the Akwesasne Reserve near Cornwall, the Walpole Island Reserve near Sarnia, and through the Niagara Peninsula. The Niagara route often uses the Tuscarora Reserve near Buffalo and the Six Nations Reserve near Brantford as marshalling and distribution points. In the early 1990s, the touchy dynamics of Native politics and the well-armed presence of Mohawk Warrior's Society left these reserves exposed to exploitation by organized crime - including Aboriginal Mobsters.
In 1993, some $3.6 Billion in untaxed cigarettes came through these Reserves. Narcotics, firearms, stolen cars, counterfeit money, illegal aliens and other criminal enterprises were rife, so long as the Warriors and the "Silkshirts" (criminally oriented entrepreneurs) kept entire communities mutely suppressed. The slashing of cigarette taxes in the Spring of 1994 did much to break the power of the Aboriginal gangsters. It also let elected and traditional leaders re-assert much of their stolen authority.
However, some Aboriginal smugglers stayed in business by concentrating more and more upon distilled spirits. This was not as profitable as tobacco smuggling ("butt-legging") used to be. A carton of cigarettes could fetch about $18-19 dollars from the Bikers or Triads waiting for delivery. A 1.75 litre bottle of premium alcohol would fetch the same price as a carton of cigarettes, but takes up more space, is far heavier, and is subject to breakage. Thus, the logistics of alcohol smuggling do not make it as profitable as butt-legging, but until cigarette taxes are hiked again, booze keeps the smugglers in business.
Tony Laughing, for example, of the Akwesasne Reserve has been all things in all seasons. In the mid-1980s he reappeared on the Reserve to promote gambling houses (with a partner connected to Mafia activities in Las Vegas), by 1987-8, he was allegedly stockpiling arms for the Warriors. After the Oka Crisis, he was marshalling cigarette shipments from his buildings on the American side of the Reserve, and after the 1994 tobacco tax-cut, he switched to orchestrating alcohol shipments over the St. Lawrence. Other figures from the Mohawk community mentioned in earlier Institute reports have likewise been involved in alcohol smuggling.
As recently as 1995, some police estimated that 95% of all smuggled liquor came through the Reserves, with the bulk of the traffic flowing through Akwesasne. Since then, the RCMP and other police forces have made enormous gains in arresting and convicting leading Native mobsters. While the low profile speedboats laden with alcohol (or the snowmobile trains in winter) still cut across the St Lawrence or slip into the reed beds near Walpole Island, other smugglers have to go through the border crossings themselves.
The Fort Erie crossing is the most used one. Smuggler's tricks include the use of horse trailers (Customs officers do not check too closely for fear of hooves, swishing tails or more noisome dangers). Smugglers may hide alcohol in shipments of large heavy bulk products, or inside bulk-liquid containers. These activities are riskier, and less conducive to bulk volumes than shipping through Akwesasne. Yet it is common to brazenly drive right through Canada Customs with a load of liquor and trust in a false manifest.
Shipments of alcohol are usually arranged and co-ordinated by organized criminals - in particular, the Russian Mafiya and the Chinese Triads. Canada's other great organized criminal societies, the Mafia, the Bikers and the Vietnamese, tend to have better relations with the Warriors and normally feed off of this conduit. Given the volumes and routes for the vast bulk of black market spirits, it is safe to assume organized crime controls most of this industry.
A minor source of black market spirits comes from illegal internal stills. This sort of activity has gone on for decades - with varying degrees of professionalism and consumer safety. One still of the author's acquaintance was quite busy in the late 1970s and early 1980s. The self-depreciating makers of "White Cane" were not really involved in a commercial venture and folded up their operations by 1985. Police still find occasional stills, often tied to very specific products and communities. For example, homemade Italian "Grapa" production normally results in one arrest somewhere in southern Ontario every year - often after the distillation process has resulted in a fire in a home or garage.
The volume of spirits seized in the Province can confirm Ontario's place as key part of the route and the principal market for black market alcohol. In 1994-95, the RCMP reported that 486,972 litres of liquor were seized in Canada - of these, 338,900 litres (69.6%) were taken in the Ontario, with a street value of $4,355,000. Canadian authorities normally intercepted less than 5% of black market cigarettes and can expect to recover one smuggled firearm in 15 within a year of its arriving in Canada. However, these alcohol seizures represent perhaps 6% of total amount flowing through the province.
Whether from organized crime or private concerns, black market spirits can be hazardous to the consumer - but most products are generally safe, albeit of low quality. Smuggled spirits typically come in larger, 1.75 litre, plastic bottles and sell for half the price of legal spirits. A bottle of "Dixie Belle Gin" or "McAdams Canadian Whiskey" (both are real black market brands) might fetch $20-$25 dollars when delivered to the consumer. Buying the same amount of equivalent quality spirit in the LCBO may cost $45-50.
These brands, or ones like the equally wholesome "Seafarer Virgin Islands Rum" and "Johnson's Blended Canadian Whiskey" (likewise real black market names) are produced in New Jersey, Montana or other American states. They are legally manufactured there, and are legally sold to distributors - normally connected to the Mafia and/or Aboriginal organized crime - for shipment into Canada. No doubt, the shades of some long departed American officials are chuckling at the irony of US booze being legally handled all the way to the Canadian border before being turned over to smugglers. In America's 1919-1932 Prohibition Era, an identical process occurred in reverse.
Canadian legal distillers, who have lost thousands of employees because of the black market, are powerless to stop this activity. Yet they may wish to turn to civil actions about false advertising. Most of the brands produced for the Canadian black market are described as a Canadian product that has been imported into the United States and rebottled. Some labels describe the product as being distilled in Canada.
Once the product arrives in the country, hundreds, if not thousands, of local petty criminals, undertake its distribution. Passing black market spirits through a licensed tavern, restaurant or hotel is chancy. If the LLBO catches on, the license to sell alcohol might be lifted. However, if only a handful of contraband bottles are behind the bar, the LLBO inspectors normally are content to levy some lesser penalty - rather than go through the enormous work-load of proving a major case.
Some establishments that rely on more location than reputation, will sell black market spirits, lose their license and then close down, to re-open later behind a "new" management team. One restaurant in a seedy Toronto neighbourhood has lost its license four times in two years, but always re-opened. (The law is indifferently enforced in this area. The upstairs part of the property houses ladies of negotiable affection, Bikers sometimes drop in and habitués of the bar were most helpful during the Institute's study on black market firearms. Despite a recent homicide at an establishment next door and a drive-by shooting up the street, the place remains a favorite listening post for the author).
It is not unknown for some restaurants to serve up black market alcohol from behind the bar during large functions. For example, a bottle of "Premium Skol Vodka" (a common black market brand) was spotted at a reception in a most prestigious Toronto hotel during the course of this investigation. Moreover, reception halls, small clubs and other organizations may turn to the Black Market on an occasional basis to supply large gatherings - and numerous sightings were made in the course of this study. Indeed, a senior police officer in Eastern Ontario landed in some hot water after black market alcohol turned up at his daughter's wedding reception. However, the fault may have lain with the caterer.
Normally, black market spirits go direct to individual consumers. Canadian autoworkers in Oshawa, Oakville and in other large plants may be offered them in their workplace (or Union locals), often by the same colleagues who had offered them black market cigarettes in 1992-3. An engineer in a Bell Northern Telecom site is adding to his retirement funds with the same measures. Black market alcohol may be sold under the table at hotels, convenience stores, gas stations, and coffee shops. Again, this is normally done through the conduits that were opened for black market cigarettes earlier in the 1990s. Some consumers have them delivered straight to their own homes by their local distributors. These distributors had generally set up their client networks during the height of the black market in tobacco.
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Beer Beneath the Table
The size of the Ontario market for illegal/contraband beer is hard to estimate. James Villeneuve, the Director of Regulatory Affairs for Labatt Breweries, (an extremely helpful gentleman), estimates that perhaps 3% of the beer market in Ontario is supplied by the black markets. Perhaps this is so, but there may also be more to the picture.
In April 1993, police in Hamilton found 40,000 cases of beer being sold from a warehouse. The sellers included three figures believed to be associated with organized crime and the relative of a senior executive (since retired) from one of Canada's two top brewing companies. The relative apparently arranged for a private sale of the cases to West Africa, and arrangements were facilitated with company executives. The West African address was a diversion (for a consideration, officials in some West African failed states will sign off on anything). The beer apparently never left Canada.
The senior executive was not responsible for the diversion and took pains to let the internal investigation run its course. Normally a story of this magnitude would have captured a fair amount of local media interest - and the corporation was dead set against media coverage of the affair. Unkind gossip in Hamilton newsrooms has it that senior editors and producers debated the merits of covering the story against the real threat of a loss of important advertising revenues. They supposedly decided to let discretion take the better part of valour. The detectives involved in uncovering the black market sales had been involved in a drug probe, otherwise the diverted beer shipment would not have come to their attention.
Beer can be stolen, but this is also a difficult undertaking as beer is heavy and fragile. Most thefts of beer are minor. A 1989 case where some soldiers from the Toronto Scottish Regiment and Royal Regiment of Canada spirited two tons of Molson's beer from their Toronto shipping yard is perhaps one of the larger thefts. In this case, the theft was for private concerns, and the officers of the suspects didn't know whether to be more appalled at the deed or pleasantly surprised by the soldierly standards of its execution.
Breweries in Ontario, from the established giants to the newest microbreweries, are allowed a "production allowance" to account for wastage, breakage and spillage, and for promotional purposes. Three different individuals gave a figure of 3%, 5% and 10% for the allowance. Breweries do tend to use up a lot of the production allowance in breakage - but rarely would the full amount be allotted this way. Indeed, most breweries might break or spill 1% of their production on a very bad day. However, James Villeneuve was quite adamant that the production allowance is properly used. Two former marketing agents said otherwise.
The two former sales reps (one of who worked for one of the giant breweries, the other for a larger microbrewery) confessed that a lot of use was made of the production allowance over the years. In earlier years, preferred customers used to get a 10-15% "bonus" in addition to their regular supplies. This is apparently harder to do now with cases of bottled beer, but the practice appears to be still common with kegs of draft. Several pubs in the Toronto area as well as the managers of some private clubs confess that extra kegs of draft are still available. Only one extremely popular site admitted to receiving frequent "free" cases of beer. Some UofT fraternities often get a keg or two thrown in for free when ordering for large parties.
Other restaurants, clubs and fraternities acknowledge that their sales reps aren't as generous as they used to be and wonder - since the production allowance is apparently still available - where it might be going. Production allowance surpluses are "grey", in that they are untaxed and can represent a subsidy for a larger order. While economies of scale favor the larger producers, almost all of the brewing companies might be involved in the practice. One brew master for a well-known microbrewery privately acknowledged that, "We have a lot of 'breakage' that falls off the back of trucks." In the defence of his company he added that, so far as he knew, the same thing was true of most every brewery.
An aside: For those who believe no major company would risk the wrath of Ottawa by depriving it of excise taxes, the September 1996 Report of the Auditor General of Canada indicates that Revenue Canada has become sloppy. Most large licensees have gone unaudited in the 1990s, and the Department's interest in using information gleaned from other sources has waned. However, the board of directors of the Alberta-based Highwood Distillery was remorselessly hounded by Revenue Canada for missing duties, after the RCMP watched one director divert 13 shipments of alcohol onto the Black Market. (The other directors had no clue that the activity was going on). It does not help when supervising agencies are at once both lax and then unjust when reminded of their duties.
Despite the issue of product diversion, when asked about the leading source of black-market beer, the brewing industry is nearly unanimous in pointing their fingers at the mushrooming U-Brew sector. There are hundreds of U-Brews in the province and the number is growing fast. The industry is not well regulated, and the incentive for U-Brew managers to stay outside of the law is considerable.
U-Brew stores first appeared in the 1960s, and a few continued to function well into the 1970s. These were stores where a customer could buy all the necessary materials to brew beer at home (Home Brew is a separate issue in itself). However, in U-Vint wine stores, a customer normally chose to select a mix of ingredients at the store, and then would let it ferment there for the required time. After some weeks, the customer could return to bottle the finished product. In 1986, the regulations imposed by the Ontario Liquor Act were altered to allow U-Brews to operate along the same lines.
The U-Brews are expected to collect taxes (.13 cents a litre as of April 1994) and are expected to remit them along with a report about how much they produce. There may be some fibbing going on. The Addiction Research Foundation Research Document 131 estimated that, by 1994/95, almost 500,000 adult residents of the province were using U-Brews to produce some 2,280,000 litres of beer. They also estimated that 20-25% of the production had no taxes collected on it. In short, in 1994/95, about 25% of U-Brew beer was black market production.
The problem may have grown much worse since then. Generally, U-Brew beer costs about $15 for 24 half-litre bottles. When taxes are added, the amount would be sold legally for $19.25. At Brewer's Retail or a Brewer's on-site prices 24 half-litre bottles would be subject to levies of $1.20 per litre plus sales taxes and would cost $33.80. The price difference is not lost on Ontario Consumers.
While the ARF study suggested that U-Brews only had about 5-6% of Ontario's beer market -both legally and illegally - in 1995, the number of U-Brews has been increasing rapidly. Moreover, more of them appear to be breaking the law. A 1996 Survey of Ontario U-Brews undertaken by the Essex Group found that customer involvement in the production process (required by law) was expected in "a very small minority of outlets". The rest were breaking the law. Some outlets had no brewing equipment on the site at all, and could be considered to be nothing but an outlet for black market beer and wine.
While an accurate assessment of compliance with the law in U-Brews would be almost impossible to establish, the Essex Group intimated that perhaps about 60% of U-Brew customers were more or less acting in accord with the law at times. A casual survey of 20 U-Brews in the Ottawa-Kingston area in the late summer of 1997 suggested that the Essex Group was being optimistic. In only six U-Brews would a customer be expected to bottle his own product. In seven sites, no brewing equipment was evident on the premises.
Sticking a wet-finger in the air, one might assume that 1-5% of beer from the brewing companies ends up as an un-taxed product. Moreover, perhaps 70% of U-Brew products are not lawfully made (and presumably go untaxed). As of August 1997, Jan Wescott, the Executive Director of the Brewers of Ontario, felt that 5-7% of Ontario's beer market is being served by the U-Brews and illegal production. However, it may be that as much as 6-12% of the Province's demand is met by black market sources. The problem is more severe for the wine industry.
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Turning Water into Wine
"Hey, what's life worth without a little wine, and how come the politicians got to stick their noses into everything?"
- Antonio, a black market wine-maker, expounding his philosophy of life and work.
Ontario's wine industry is rarely what it seems. Wine is big business in Ontario, and Niagara's vineyards are starting to win acclaim for their products. French missionaries produced wine in the Province in the 18th Century, and the first commercial winery appeared in 1811. When Ontario passed the Temperance Act in 1916, wine was excluded - not that this did any good for the standards of Ontario's products, but it did greatly increase production volumes.
Canadian wine consumption is increasing, slowly - according to official sales statistics from the LCBO and affiliated stores. The increasing sophistication and prosperity of Canadian palates are leading to a growing demand for wines from around the world. More importantly, however, is the rapid increase in the recognition of the quality of Ontario wines.
Despite all the little pseudo-fashionable sniping at Ontario's wines (including one comedy team's memorable sneer "I wish they didn't eat the grapes first"), they are becoming internationally recognized for their quality and uniqueness. Indeed, Ontario wines have won hundreds of medals from around the world in the past few years. The province's Chardonnays, Reislings and Icewines are particularly well regarded, and red wines are following behind close in terms of recognition and respect. Yet the growth Ontario's wineries should be enjoying is stunted by the black market and by LCBO regulations.
Wine is difficult to smuggle. Like beer, wine can be fragile and is too heavy for its potential contraband value. With the exception perhaps of some premium wines and prestigious fortified products, few smugglers would be interested in carrying the bottled product. Like breweries, wineries are allowed a small over-production allowance for other purposes. It is apparently not unknown for crates earmarked for "tasting" (which is a legitimate production allowance) to end up elsewhere. With a large winery, dozens of cases of untaxed wine can be accumulated by sales reps. This sort of product diversion does not appear to be a major issue - although it is more of a benefit for big winery chains, than for the small number of truly independent wineries.
The obstacles to smuggling wine limit their appeal to black marketers, but these limitations are not necessarily true of concentrates. Concentrates are even more refined that the pressings of a grapes and can be legally imported. Mixed with water and sugar, concentrates allow any individual to produce almost any sort of wine. The normal production standard for wine is 720 to 1,000 litres per ton of grapes. In the days of Temperance and Prohibition, a ton of grapes could be stretched to make 2,700 litres by adding water, sugar and dyes, and some black market "wine" is almost as diluted. A ton of concentrates (which can come from any wine producing region in the World) can be used to produce 3,200 litres of acceptable wine or twice that with added water and sugar.
U-Vint wine stores have been around Ontario since the 1960s, and have slowly grown in numbers. They are used to supply materials for homemade wines, or customers may choose to leave their production materials in the store. By law, U-Vints use concentrates or pails of unfermented juice from wineries as the base from which wine can be made. By law, "U-Vint" wine (that which is made in the store) requires that the customer be involved in the production of his wine. He must be present to mix the ingredients together, and to bottle the wines once the process is complete.
Almost since their inception, U-Vints were also supporting the home-brew beer industry. After 1986, the U-Brew industry was created when amateur brewmasters became allowed to practice their art under the same conditions as U-Vint customers can practice. The U-Vints and U-Brews are required to collect taxes from their customers and to report the amount they produce. However, an increasing number seem to be ignoring this requirement. As U-Vints (like U-Brews) rely on voluntary compliance with Ontario's laws, the industry is virtually unregulated.
What are the advantages to a U-Vint? Imagine a 750 ML bottle of a cheap wine (call it Chateau de Chat's Eau). Including a healthy profit, it might cost $2.50 at a U-Vint - taking into account all costs of production. The bottle of Chateau de Chat's Eau if sold from a law-abiding U-Vint would be subject to a 51 cent excise tax, a 29 cent bottle levy, a 9 cent environmental tax, PST and GST. This all adds up to $4.10. At the LCBO, the bottle of Chateau de Chat's Eau, would be subjected to a $1.50 merchant fee and a 45-60% mark-up, and would sell for $7.40. A much more palatable Ontario table wine, one of the Province's celebrated Chardonnays, might go for $4.50 at the U-Vint, $6.60 if properly taxed there, or $11.20 in the LCBO.
There is a lot of temptation for U-Vints to ignore Ontario's tax structures and laws. With so little supervision, many have decided to follow that exact course. In the late summer of 1997, 20 U-Vints in the greater Toronto area were approached to determine how many were entirely law-abiding. Of these, only six would both apply all taxes and expect the customer to mix and bottle his own wine. Four of the six appeared to be long-established U-Vint stores. Of the remaining sites, one belongs to a major province-wide chain that apparently has different rules for new customers (to whom the laws are applied), and well-known ones. The latter may normally be able to buy 20 litres of wine for $50, and immediately leave with the product in hand. In all the rest of the U-Vints, wine seemed generally available, sometimes for as little as $1 per litre.
Beyond the U-Vints are the industries that supply them. Many U-Vints use concentrates, but many others use pails of juice from established vineyards and wineries. Juice is not supposed to be fermented, but it often is, either by the wineries, or by a bulk supplier. The few wineries that do not pre-ferment their juice buckets are under tremendous pressure to follow suit - it is hard to compete if they do not.
One of the biggest bootleggers in the Toronto area lives near the heart of the Portuguese and Italian neighbourhoods of west-end Toronto. Mike makes about 30% of his own wine in an industrial park in the City of York and buys the rest from a private winery. Rocky, a notorious Niagara Peninsula bootlegger (who also produces tens of thousands of gallons of wine out of his own warehouses), helps pre-ferment the juices from the winery. He does so from shifting locations in the Vaughan and Markham areas before handing them over to Mike. Rocky is a partner in the private winery. When wine is ready, it is distributed throughout the Toronto area and shipped to urban centres throughout southern Ontario. Total production may amount to 80,000 litres per month. The winery that supplies Mike may produce some 100,00 litres of contraband product per month - based on the hundreds of bags of sugar they buy every month from a nearby produce store.
Tony, a former partner in this winery, now lives in Vaughan and produces an unknown quantity of wine every month for U-Brews in the greater Toronto area. He also deals direct to banquet halls and restaurants. A 20 litre pail of wine normally retails for $40.00 but may wholesale for $30.00. Tony's production sites tend to change with every other major batch. He favours leasing an unused industrial park site or warehouse for a couple of months (apparently under a different name) and then moving on.
Of the bootleg U-Vintners haunting Toronto's downtown core, Antonio was perhaps the only cheerfully gregarious one. He acknowledged using pre-fermented pails of juice from several wineries and normally concentrated on producing a quality product. Antonio was laid off from a construction firm in 1990, and has slowly worked on building up a client base. About 2,000 litres come every month from his set up inside two adjoining garages, and most of his product originally went to neighbours and friends. Currently, he is slowly building up a following in some local restaurants and has a nephew producing labels (declaring the wine to be products of Italy) on his home computer.
Actually, some U-Vints are a real boon to some restaurants, by allowing them to avoid all production taxes but charging their customers as if the product was legitimate. Normally, a restaurant sells wine for two to three times the purchase price. By bypassing their legitimate suppliers, a restaurant can buy a cheap wine at $2.50 per bottle and sell it for $15.00. The owners can pocket all the difference while paying no taxes whatsoever.
Some restaurants are actually brewing their own U-Vint wine. Riley manages a popular enfranchised restaurant in Mississauga and uses his garage at home to produce the restaurant's house red and white wines. He is contemplating using his home computer to produce labels for some bottles and trying to pass them off as imported products on some of his customers. His reasoning is quite basic: "90%-95% of customers don't know what they're drinking, never do. So we go through the motions... they're happy and I don't get burned."
Even those reputable U-Vints that do pay taxes are being abused in some restaurants. U-Vints are supplying a growing number of restaurants - including some of the most prestigious ones in the Province. Perhaps Riley's appreciation of his customers is shared by many a sommelier, but even taxed U-Vint wine yields a substantial profit.
The restaurant industry is especially targeted by one major U-Vint company. The group brings in concentrate mixed with sugar and water from Quebec. To limit detection, the company delivers juice to "ferment" for customers in existing U-Vints, restaurants and banquet halls. After 30 days they send someone to "assist" the client with the last stage of the wine-making process and to deliver "new juice". The supposedly new juice is actually wine that is ready for consumption and the old juice is taken away to finish the fermentation process elsewhere. If and when the company is finally targeted by police, they may have a very difficult time completing their investigations.
U-Vint wines sometimes go walkabouts out the back doors of restaurants as well, as one observer for this study noted at a Toronto landmark. The wine apparently wasn't carried on the legal inventory and could be whisked out to accompany a meal catered by the hotel's chefs. Other restaurants are said to be engaged in similar practices. One of Hamilton's less than choice establishments is rumoured to be flogging U-Vint wine out the back door to the down-town core's street-alcoholics. (Any such establishment in other centres might face stiff competition from the corner stores supplying cheap rice wine and alcohol-enhanced gingsen "tonic" to the same clientele.)
It is unknown just how much of Ontario's wine is bootleg wine, but Ontario's legal wines are not being produced in the quantities that they deserve. U-Vint wine, some 80% of which seems to be contraband production, is taking a very large share of the market. Those who consume wine on a daily basis (particularly the Italian and Portuguese communities) and an increasing number of restaurants seem to be relying on the black market to meet their needs. Some members of Ontario's legitimate wine producing community believe that U-Vints now supply just over 50% of the provincial market - meaning that 40% of all wine in the province must be assumed to be untaxed.
[INTRODUCTION] [The Font of the Black Market] [The Size of the Black Market] [Black Market Spirits] [Beer Beneath the Table] [Turning Water into Wine] [The LCBO] [Turning off the Black Market's Spigots] [TOP of PAGE]
The LCBO
Half a dozen calls to the LCBO requesting interviews from Andy Brandt and the chief of their investigations branch went unanswered. Admittedly, instead of going direct to the appropriate individuals, we played by the book and called the LCBO's public affairs desk. None of the calls were returned. While Mr. Brandt is a widely known as a respectable public figure and the same can be presumed of the LCBO's investigators, the organization will have to conduct its own defence separately.
For a start, the LCBO is a creation of Ontario's Prohibition-era experiment with the Temperance Act of 1916-1927. When the Act was to be discarded, the LCBO was created to regulate the behaviour of the Hoi Polloi. Following the creation of the LCBO came the LLBO to supervise the sale of alcohol in commercial establishments. Some years later, Ontario's major breweries were allowed to set up their own retail chain under the aegis of the Liquor Control Board. The regulations described earlier in the report can be taken to be an accurate reflection of earlier attitudes that had to be enforced by these controlling bodies.
Today, the LCBO regulates the production, importation, distribution and sale of alcoholic beverages in the province on Ontario. It also is the world's largest single buyer of alcohol - as it purchases all the alcohol sold in its own 600 outlets. It is also responsible for keeping an eye on over 900 various other commercial outlets for beer, wine and spirits. These outlets include the permitted wine stores for major chains, Brewers Retails, and commercial stores allowed on the property of breweries and wineries.
In the past, because of its role as a major agency of the Provincial Government, the LCBO has served as a job of last resort for the politically connected. Up until the mid-1980s, the organization was seen by junior apparatchiks as a good place for a summer job or part-time employment. In other cases, it was the place where a good campaign manager's indigent brother might be employed. Although these abuses have ceased (and were certainly never universally true), the uncharitable might conclude that the relentless equal opportunity employment policies in the modern LCBO means that political criteria still plays a major role in personnel selection. In any event, the group did not have a long history of good management - and its current leaders are sometimes left with precedents and regulations that were not established with the soundest of reasonings.
Before a new generation of leadership started to clean up the LCBO in the 1980s, the competition for sales and shelf space often meant that store managers were eagerly wooed by sales reps for distillers, importers and major wineries. Many proved quite open to "gifts" around Christmas time, or "prizes" of colour televisions and $1,500 golf clubs at select golf tournaments. Again, while these abuses were halted in the mid-1980s, they could reappear rather rapidly.
New breweries and wineries have to pick their way through a complex of regulations to get their products carried in LCBO stores. Admittedly this is now easier than in earlier days, but the system remains in place. Administrative preferences can still play a major role, as the LCBO reserves the right to order the amounts and types of wine it desires, leaving some producers to twist in the wind. While requesting quotations for big orders is usual, for example, invitations to submit quotations might be carefully selected ahead of time.
LCBO regulations tend to act as an inhibitor on new products and innovations. Moreover, by controlling wine production, the LCBO may actually be contributing to the black market. Disappointed producers are left with surplus pails of juice that can be diverted into contraband production - sometimes by the wineries themselves.
Political considerations from bygone administrations might explain why, for instance, larger corporations (with a history of generous donations to political parties) have more latitude in the placement of their "on-site" stores than do newer outfits. For example, a major brewery near Barrie was able to get its site store conveniently located beside an exit ramp on a four-lane highway leading north to cottage country. A famous microbrewery, lodged in an old downtown Toronto factory complex, would love to be able to post its "on-site" store at a convenient location at some distance too. Alas, a storefront on a major nearby street would not considered to be a part of their site.
To be fair, the LCBO is a government agency and therefore has to pick its way through more restrictions than most producers would care to worry about. It had (until the current provincial government) to be more sensitive than most private agencies to the demands of its employees union. It has had to consider issues of government policy on trade and employment, and has been used for "politically correct" purposes in the past - a long ban on stocking South African wines and fortified wines being a case in point.
The main role of the LCBO however, appears to be as a revenue collector. Despite the growth of the black market, the organization still turns over between $600 and $750 million in revenues every fiscal year to the Provincial government. Generally, slightly less than half of the retail price of products sold in LCBO stores ends up in government coffers. So long as the revenue stream is strong, governments seem disinclined to tinker with this lucrative agency - regardless of the damage that the black market is doing to Ontario's distilleries and wine industry. Nor might Queen's Park be willing to try a different tax collection system.
A fully rational cost-benefit analysis of the LCBO, its pricing policies and the effect of the black market would merit the attention of skilled economists. It may be that in the larger sense, roughly the same revenues might accrue after a tax-cut - if the Province could count on tax revenues coming in from currently unemployed distillery workers and underemployed vintners.
The Liquor Licensing Board (the LLBO) is the junior partner to the LCBO in policing the Province's drinking habits. The LLBO has some 15,500 licensed establishments to look after across the Province. This includes every licensed bar, tavern, restaurant, and private club that legally sells alcohol in Ontario. To police this vast array of outlets, the organization has less than 30 Inspectors - a few of whom may not be among the most upright of individuals either.
The LLBO grants and renews licenses to sell alcohol. In partnership with police forces, it reacts to complaints about violations of liquor laws - such as selling to minors, selling alcohol off the premises, or running black market alcohol. With regard to the latter, LLBO inspectors are especially over-worked. With over 500 institutions apiece to oversee, most Inspectors are rarely able to provide anything but the most cursory examinations - and a full investigation is time-consuming and expensive. Moreover, many establishments have come to learn how much they can rely on black market products without triggering major penalties.
Inspectors can be subjected to enormous pressures; bribery has been known to occur in the restaurant industry and LLBO inspectors are prime targets. They also come under pressure from elected officials to approve some applications or to help shut down troublesome institutions. In one case, a Toronto restaurant owner is apparently being pressured by a local crime family that has their eyes on his lucrative property. The restaurateur has found that his liquor license has come into question - given some of the rumours about his city councillor's contacts, his belief that the two developments are connected is perhaps not unreasonable. Local detectives are powerless to help the owner.
Clearly, if the LLBO is to be relevant in the battle against the black market, it is going to need more inspectors. However, it may also need to rotate them quickly as a hedge against temptation. Also, the organization could become a lot more open when dealing with the investigation and disposal of complaints.
There is a very real chance that the LLBO's functions may be subsumed into a larger supervising body in coming months. Indeed, even the LCBO might also be drawn under the aegis of an expended Provincial Alcohol and Gaming Commission. It appears the Provincial Government might merge all "sin" related industries into one body. While the Gaming Commission has not been running smoothly, its use of former police officers as inspectors might indicate a new approach to some of the LLBO's traditional functions.