Photo Jonathan Blair

Monday, April 13, 2015

Canada’s “War on Contraband Tobacco”

The security implications of contraband tobacco and the consequences of the changes to Canada’s Criminal Code introduced by Bill S-16.[1]

Contraband products represent about 15% of Canada’s tobacco market and hundreds of millions of dollars in illicit revenue, lost legal earnings and lost taxes. Existing measures have contained the potential security dangers that derive from contraband tobacco, and have kept smoking rates in Ontario and Quebec, where much of the illicit products are consumed, in tune with the declining trend in the rest of the country. In other words, things are not great, but they may well be as good as can be. As the saying goes, “if it ain’t broke, don’t fix it.”

Well, the Harper government appears keen on doing just that.

The measures contemplated by Bill S-16 flow directly from the kind of thinking that led to the disastrous War on Drugs: punish them all, from the smallest violator to the global drug kingpin. As you may know, the results have not been great, especially for impoverished users everywhere and especially for impoverished people in producing and transit countries. Now that a growing movement towards softening drug laws is developing, not just among potheads and academics but also among the American, Canadian and European public, as well as the US’ and Latin America’s political establishment, Canada’s government under Stephen Harper is moving backward with no solid evidence to support its stand. Following a hardening of the regime against drugs with Bill C-10, Bill S-16 now completes the turn of this country’s crime policy towards a hard line on law and order, when what evidence we have points exactly in the opposite direction: crime is declining.

1- Diagnosis

In theory, contraband tobacco could have significant security implications. We have identified six channels through which it may affect Canada’s public and national security.

1) The protection of the production, smuggling and sale of contraband tobacco products and the enforcement of the many contracts involved cannot rely on the law enforcement and judicial institutions that guarantee a degree of security to normal economic activities. Protection and contract enforcement must instead rely on informal mechanisms and ultimately on the use or threat of violence.

2) The smuggling of illegal tobacco into Canada, from the United States, Eastern Europe or China, involves a whole chain of people and organizations, which may be best thought of as a pipeline. That pipeline can be used to transport tobacco, but also other goods, like weapons, drugs and other controlled substances, as well as illegal migrants.

3) Assessing the value of illicit activities is a hazardous entreprise. Nonetheless, on the basis of what information is available, my team has calculated that the gross revenue generated in Canada by illicit tobacco could represent as much as $350-400 million, with perhaps $75-80 million in profit. Part of this money needs to be reinvested and other illegal activities represent an appealing option, as money laundering through important investments into the legal economy could be detected by law enforcement.

4) Some of the profits from illicit tobacco sales could be diverted to the financing of terrorist organizations.

5) A significant proportion of the smuggling, production and sales of contraband tobacco takes place on First Nations Reserves where these activities, though not their criminal ripple effects, enjoy broad legitimacy. Aggressive enforcement of the law risks provoking confrontations and effective loss of control by government authorities over these territories.

6) Much of the traffic in illicit tobacco takes place over and around the Canada-US border, particularly along the so-called 401 corridor, between Brantford, East of Hamilton, and Montreal. US authorities perceptions of the risks involved for their country’s security can lead to an intensification of border controls, with a negative effect on the flow of people and merchandise through the border, on which Canada depends more than the United States.

We found evidence suggesting that all of those channels except the one regarding terrorism apply here. However, we found the scale of the problem not to be very significant.

Violence related to collateral crime directly linked to contraband tobacco (protection, contract enforcement) has been limited.

We also found limited evidence of “mixed smuggling” or of significant involvement of large criminal organizations, at least since September 2001.

As mentioned, we found no evidence of linkages between contraband tobacco and the financing of terrorist organizations.

Finally, while some US local authorities and senior US public officials have argued that drug trafficking on a large scale is taking place along contraband tobacco in Mohawk reserves around Cornwall, we found little credible evidence that this was the case. Moreover, general risk assessments done by the US government do not consider this area a major source of insecurity.

In other words, the current regime appears to have effectively contained most of the potential security dangers related to contraband tobacco.

2- Implications of S-16

The proposed amendment to the Criminal Code involves the introduction of compulsory sentences for repeat violations of the prohibition of the sale, transport, delivery, distribution or possession for the purpose of sale of illicit tobacco products. As described in the proposed amendment, the minimum sentences (3 months, 6 months, 1 year and 2 years minus one day) would apply in succession from the second infraction involving 10,000 cigarettes or more. This amount corresponds to 50 of the 200 cigarette bags that represent much of the trade, or a single typical case of such bags. Several such cases can fit in the trunk or back seat of a typical passenger car.

It is not clear that the imposition of such minimum sentences would lower the overall level of insecurity stemming from illicit tobacco, for four main reasons.

1) Reducing the differential between the sentences imposed on tobacco and on other illegal goods increases the incentives to use the smuggling  “pipeline” for other things. As things stands, the choice is between something that pays handsomely and involves mild sanctions (tobacco), and a number of other things that might pay much more but also involve severe sanctions, especially given the changes introduced recently to the Criminal Code for drug offenses (Bill C10). In our view, this is possibly what explained the low level of violence and “mixed smuggling” and the limited use of the “pipeline” for other “goods.” Under the new provisions, the relative appeal of higher value smuggling is likely to increase.

The other risks of the changes derive from the fact that, if enforced, the law would mostly affect the First Nations communities of the 401 corridor where much of the contraband tobacco industry is concentrated. That enforcement will be seen as a direct affront because, to repeat, producing, transporting and selling any type of tobacco or tobacco products without charging taxes is broadly considered as legitimate in those communities.

2) Most of the people likely to be arrested under the new rules are young men, many of them aboriginal, further contributing to the over-representation of these demographics in Canada’s prisons.

3) Controlling alternative uses of the pipeline for drugs, weapons or people is likely to become much more difficult to the extent that law enforcement will not enjoy the goodwill of the community, something it currently has. The position of the Mohawk police, in particular, will become extremely uncomfortable.

4) Direct confrontation with the communities cannot be excluded, in which case effective control of a strategic border area will be severely complicated and could be compromised.

3 – Conclusion

Dialogue with the Mohawk communities about the fuller legalization of First Nations tobacco production and trade, shared taxation and economic development in and around the reserves, along with the kind of careful enforcement of the law that currently prevails, represent a much better path to controlling the damages of contraband tobacco than hardening sanctions against small-time smugglers.

Jean Daudelin

[1] This commentary expands on my background notes for a testimony on Bill S-16 before the Senate Committee on Legal and Constitutional Affairs, in Ottawa on May 8, 2013, which was based on a study commissioned by the Macdonald-Laurier Institute that I have done with Stephanie Soiffer and Jeff Willows, two graduate students from NPSIA. “Border Integrity, Illicit Tobacco and Canada’s Security,” Ottawa, Macdonald-Laurier Institute, National Security Strategy for Canada Series #4. March 2013, 41p.