Comprehensive MLI study examines the scale of this complex and controversial issue, and makes innovative policy recommendations (note correction)*
OTTAWA, March 31, 2016 – Contraband tobacco and cigarettes are more than just a problem of lost revenue for governments – it is a significant enabler of organized crime and terrorism.
The paper is the first authoritative study of the size, scope and functioning of contraband tobacco networks and the danger they pose to the safety of Canadians.
To read the full paper, titled "Smoking Gun: Strategic containment of contraband tobacco and cigarette trafficking in Canada", click here.
Canadians were reminded of the threat contraband tobacco poses this week, when police arrested 60 people and carried out 70 raids across Quebec. The sweep, which police said was the largest against contraband tobacco to date, also took aim at drug trafficking and international money laundering.
Leuprecht finds that cracking down on contraband tobacco is currently hampered by entangled jurisdictional issues and failure to coordinate within and across jurisdictions, scarce enforcement resources and, it seems, lack of a comprehensive plan, let alone strategy.
“Contraband has a more pervasive impact on public safety on Canada, Canadians and Canadian interests than terrorism has ever had”, writes Leuprecht. “If Canadians only knew, they would demand that government act accordingly”.
Where there’s smoke…
Contraband tobacco is more than a nuisance. Leuprecht documents that police seizures that involve contraband tobacco and cigarettes regularly pick up high-powered weapons, hard drugs, stolen vehicles and other merchandise, and millions in cash.
The networks used by tobacco smugglers can move everything from marijuana to human beings, and the proceeds go right back into these dangerous operations. Globally, money from contraband tobacco has found its way to the likes of ISIS, al Qaeda and Hezbollah.
“Contraband has a more pervasive impact on public safety on Canada, Canadians and Canadian interests than terrorism has ever had”
It has drawn hardened Mafioso and criminal bikers into native communities and coaxed legitimate farmers into diverting crops to the illicit market.
Contraband tobacco also results in lost revenue for governments across Canada. While dark markets are notoriously hard to measure, in Ontario, the largest market, the tax losses from contraband are estimated to be around $1 billion.
It also poses major health risks. Young people and the poor disproportionately make use of the lower prices from contraband to take up smoking.
Leuprecht says a more successful strategy needs to change the risk-reward equation for peddlers of contraband tobacco. As it stands now profits are high, penalties the world over are lenient and rarely paid in full, and social stigma less than for alternative illicit activities.
For all the enforcement problems with contraband tobacco, though, there has been some progress at different jurisdictional levels – federal, provincial and First Nations.
Leuprecht seeks to build on this progress with several recommendations:
- 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.
- Halting diversion from legitimate growers in Ontario: Changes to the monitoring and enforcement of raw leaf tobacco in Ontario will hamper the ability to investigate and interrupt diversion of tobacco to illicit markets. They should be reversed.
- Federal co-ordination: The federal government needs to emerge as the central coordination authority of a unified taxation structure for all Canadians, across provinces and reserves. New legislation, Bill C-10, presents that opportunity.
- Enforcement: Provinces like Ontario, which recently announced a Contraband Tobacco Enforcement Team, should draw lessons from Quebec’s Project ACCES. That project has seen a huge return, in the form of a growing tax base as tax evasion decreases, reaping more fines, and seizures.
- Public awareness: Too few consumers of contraband tobacco are aware their habits may be supporting organized crime.
Christian Leuprecht is Professor in the Department of Political Science at the Royal Military College of Canada, and cross-appointed to the Department of Political Studies and the School of Policy Studies at Queen’s University. He is a Senior Fellow with the Macdonald-Laurier Institute.
The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government.
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* This report has been amended in the executive summary and on P. 7 of the report. An earlier version conflated excise tax losses in Ontario with the size of the market and Ontario and national figures for estimated tax losses.