Proceedings of the Standing Senate Committee on
Social Affairs, Science and Technology

Issue 6 - Evidence - March 18, 1998


OTTAWA, Wednesday, March 18, 1998

The Standing Senate Committee on Social Affairs, Science and Technology, to which was referred Bill S-8, to amend the Tobacco Act (content regulation), met this day at 3:30 p.m. to give consideration to the bill.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: Colleagues, I have the pleasant duty of welcoming to the committee a new senator who took his place in the chamber for the first time yesterday, the Honourable Archibald Johnstone from Prince Edward Island. Senator Johnstone is joining the committee and will also join his fellow Islander, Senator Phillips, on our subcommittee on Veterans Affairs.

We are here to continue our consideration of Bill S-8, an Act to amend the Tobacco Act (content regulation). You will recall that on February 25 we heard from the sponsor of the bill, Senator Haidasz, and from a representative of the Department of Health. Today we have witnesses from the Royal Canadian Mounted Police and Revenue Canada.

There has been a change from your notice in the witness from Revenue Canada. Our notice indicated that the witness will be Mr. Girard. Instead, it is Mr. Mark Connolly, Director of Program Development, Contraband and Intelligence Service, Customs and Trade Administration Branch, Revenue Canada.

These gentlemen have a joint presentation to make. I will invite Superintendent Smith to begin. Please, proceed.

Superintendent R. G. (Rod) Smith, Officer in Charge, Customs and Excise Branch, Royal Canadian Mounted Police: On behalf of the Commissioner of the RCMP and the Deputy Minister of Revenue Canada, I thank the Standing Senate Committee on Social Affairs, Science and Technology for inviting our two departments to speak with you today. I hope that the information we provide will assist you in your deliberations regard Bill S-8.

I am currently the officer in charge of the RCMP's Customs and Excise Branch, which is our national headquarters policy centre responsible for the enforcement of a number of federal statutes dealing with the illicit manufacture, importation, distribution, or possession of contraband commodities within Canada. One of these commodities is tobacco.

The RCMP shares responsibility for the investigation and enforcement of a number of these statutes and related regulations with another federal department, Revenue Canada. In respect to the smuggling of tobacco and other commodities, Revenue Canada is responsible for enforcement at ports of entry and for the inland investigation of commercial fraud requiring the examination of documents and records. The RCMP is responsible for the enforcement of smuggling along our uncontrolled border and for all inland smuggling other than commercial fraud requiring the examination of documents and records.

In line with our complementary mandate and ongoing partnership I am joined today by Mr. Mark Connolly of Revenue Canada. We are also joined by Staff Sergeant André Pichette of RCMP Customs and Excise Branch and Lyndon Murdock of Revenue Canada, both of whom are senior policy analysts.

The Contraband and Intelligence Services Directorate is Revenue Canada's equivalent policy centre responsible for providing functional guidance and direction to customs officers on matters pertaining to the enforcement of the Customs Act and other federal statues which prohibit, control or regulate the exportation or importation of goods from or into Canada.

We have prepared a joint statement to present to you today. At the close of our presentation we will be pleased to respond to any questions from committee members.

In our presentation to you today we should like to provide you with an overview of the tobacco smuggling situation from 1985 to present, an outlook on the current contraband tobacco situation and our combined professional opinion on the potential negative impact of any modification to tar and nicotine levels in Canadian cigarettes.

During the late 1980s and early 1990s Canada experienced continual growth in smuggling activity related primarily to tobacco products. This caused many law enforcement and social problems. As smuggling escalated so did violence associated with smuggling and the involvement of organized crime. This smuggling activity was initially located in southeastern Ontario, specifically the Cornwall area, and southwestern Quebec near Valleyfield, areas which border northern New York state. However, the smuggling activity eventually spread to virtually every location across the Canada-United States border. By early 1994 it was estimated that approximately 40 per cent of the Canadian domestic tobacco market was being supplied through smuggling. This situation resulted in the loss of over $2 billion in both federal and provincial taxes.

In response to this trend the government of Canada launched a national action plan to combat smuggling in 1994. The enforcement arm of this plan was termed the anti-smuggling initiative or ASI. Coupled with tax reductions on tobacco products the allocation of additional resources through the ASI has allowed law enforcement and regulatory agencies to make great strides in combating the criminal element involved in smuggling activities. As a result of the substantial reduction of federal and provincial taxes the consumer price for cigarettes in major consumer markets in central Canada fell to a level comparable to those in the United States.

Accordingly, profits previously realized by smugglers were cut dramatically, and, as might be expected, the level of cigarette smuggling decreased. This substantial reduction of tobacco taxes also forced many small- and medium-sized organizations to withdraw from the smuggling and illicit distribution of tobacco products.

The primary short-term enforcement objectives of the ASI were to contain violence associated with smuggling and to restore respect for the law. The long-term objectives include the closing down of smuggling operations, increased border protection, dismantling of organized crime networks and the re-affirmation of the uniform application of civil and criminal laws to all Canadians.

Through this initiative the number of RCMP and Revenue Canada investigators working on smuggling cases has increased significantly. RCMP resources dedicated to smuggling rose by over 50 per cent to in excess of 600 investigators. Revenue Canada resources dedicated to anti-smuggling efforts, including drug interdiction, also rose by 50 per cent. In their case it was to over 700 interdiction and intelligence officers.

Tobacco continues to be the primary commodity targeted through the anti-smuggling initiative. However, smuggling investigations are also conducted on other forms of contraband such as liquor, drugs, firearms, including prohibited and restricted weapons, electronic goods and all forms of conveyances used in the commission of the offences.

The success of the ASI can be demonstrated through the results achieved. Since 1994 Revenue Canada and the RCMP have seized over $193 million in contraband tobacco products, including ascertained forfeitures. The total sum of seizures of all contraband over the first four years of the ASI has been in excess of $316 million. If we include drug seizures related to Revenue Canada's ASI efforts this figure would rise to approximately $2.9 billion.

As a result of the anti-smuggling initiative most small and medium-sized smuggling operations have been removed from the contraband trade. However, despite the intensified interdiction and enforcement efforts by both Revenue Canada and the RCMP, the illegal activities of some smuggling organizations are still flourishing.

While we can expect that some level of personal smuggling will always exist the bulk of smuggling today is controlled by organized crime. Our investigations reveal that many of those criminal groups previously involved in the cross-border smuggling of tobacco products have shifted their activities to the illegal, interprovincial movement of tobacco. As a result of lower tax levels in Ontario and Quebec large quantities of tobacco products are now being moved from these two provinces to the most easterly and westerly parts of the country by well-established criminal groups.

Although there has been a marked decrease of the amount of smuggled "not for sale in Canada" type of tobacco products the illegal distribution of tobacco products originating from central Canada -- that is, Quebec and Ontario -- remains high in other parts of the country, particularly in British Columbia and Newfoundland.

It is important to note that the contraband cigarettes are often imported into Canada from the United States with a foreign country listed as a destination, thereby legally avoiding Canadian duties and taxes. En route to the stated Canadian departure point some of these goods are illegally diverted to the Canadian black market.

Since the implementation of the ASI in 1994 a number of provinces in central and Eastern Canada have increased their tax on tobacco products. These comparatively small tax raises have not, to date, translated into any significant increase in reported smuggling activities. However, we can expect that smuggling will increase should tobacco taxes continue to rise.

The extent to which organizations return to and/or expand their smuggling activities would depend largely on the amount of such tax increases. Revenue Canada and the RCMP are, however, committed to continuing the reduction of smuggling and the dismantling of organized crime networks by targeting upwards -- that is, by targeting larger, more complex and organized criminal networks.

Our investigations have resulted in the conclusion of several major projects over the years and have succeeded in the dismantling of significant organized smuggling and contraband distribution organizations. However, the investigation of organized crime is highly complex and time consuming and involves the use of special equipment, techniques and operatives. It is not uncommon for investigations to span a number of years with many more months spent in the preparation for and successful prosecution of offenders.

Concerning levels of tar and nicotine, contraband of any type, like any marketable commodity, depends on the economic concept of supply and demand. In the case of tobacco the demand depends upon a number of factors, including product price, ease of availability, product taste and consumer habits. If any of these factors change consumers have the option of modifying their desire for the product or seeking an alternate tobacco source. The reality of this simple analysis was demonstrated by the sharp increase in tobacco smuggling after the rise in tobacco taxes during the late 1980s and early 1990s. Faced with rising prices some consumers sought the desired commodity elsewhere -- on the black market.

In line with this reasoning the RCMP and Revenue Canada judged that any significant decrease in the rate of tar and/or nicotine in tobacco products would likely provide an incentive for some consumers to seek alternate, possibly contraband, sources of tobacco.

Although we recognize a probable direct correlation between levels of tar and nicotine and tobacco and the level of contraband market neither the RCMP nor Revenue Canada is in a position to offer a qualified opinion on the magnitude of such a correlation.

In conclusion, the increased funding received by Revenue Canada and the RCMP as a result of anti-smuggling initiative in 1994 has certainly assisted our two departments in reducing smuggling operations, dismantling organized crime networks and reaffirming the uniform application of laws to all Canadians. However, it should be noted that the funding level for this federal government initiative has been decreased to 85 per cent of original funding for fiscal year 1998-98 with a further decrease to 65 per cent of original funding planned for 1999-2000 and onwards.

For 1998-99 this will result in a loss of almost $7.2 million in the RCMP-Customs and Excise program and $4.1 in Revenue Canada's interdiction program. For 1999-2000 and onwards this translates into a further reduction of $9.7 million for the RCMP and $5.5 million for Revenue Canada.

Despite our efforts since 1994 and despite the significant successes we have realized during this period the black market tobacco trade still exists in Canada. Regardless of the underlying cause should future smuggling activity increase significantly these funding reductions could further adversely affect our ability to continue the battle against organized crime engaged in this area of illegal activity.

Honourable senators, this concludes our joint presentation before the committee.

Senator Keon: Superintendent Smith, you clearly state that if the tar and nicotine content of Canadian cigarettes is diminished it probably will increase smuggling.

I understand your major problem with smuggling in the past was that Canadian cigarettes were shipped across the border and then brought back because Canadians like to smoke Canadian cigarettes.

I should like you to comment on two items. First, given that phenomenon how significant can it be to this circuit of smuggling Canadian cigarettes back into Canada if indeed the buyers of cigarettes will get the same product whether it is smuggled or not? That is provided the tar and nicotine are reduced.

Second, have you any evidence that a different kind of smuggling will occur and that Canadians will start to smoke American cigarettes?

Mr. Smith: On the second issue I have no information concerning the tastes of Canadian consumers vis-à-vis American cigarettes. I can confirm your statement; our information is that Canadians do prefer Canadian-style tobacco and cigarettes products.

There is some importation of American brands, such as Marlboro and Camels, both within and without the contraband trade within Canada, but the vast majority of Canadians do enjoy Canadian cigarettes, yes.

How big a problem? If the circuit is from Canada of Canadian product into free trade zones or foreign markets and then smuggling back into Canada then it would depend on some of the variables on the demand side of a supply-and-demand equation.

Our feeling is that the supply side is through organized crime smuggling for the black market. The demand side depends on a variety of factors, one of which is taste and one of which is cost. We have seen the results in the past of what happened when we played with the cost side of things. The consumers did move to a contraband product. If the taste or potential addictive qualities of tar and nicotine are reduced the taste changes and the results change for the consumer; then we suspect that there would be a move by consumers to seek an alternate product. They would either change their tastes or seek an alternate product.

If they decide to seek an alternate product that product would not be available in Canada. It would have to come from a foreign market or an illicit market.

Mr. Mark Connolly, Director, Program Development, Contraband and Intelligence Services Directorate, Customs and Trade Administration Branch, Revenue Canada: During the anti-smuggling initiative and certainly at the first stages we were encountering a significant amount of product that was being produced outside of Canada that was being manufactured to Canadian brand standards, so to speak. It was Canadian blends that were being manufactured in foreign locations. That phenomenon could occur again if such a move was made.

The Chairman: Did that involve illicit manufacture or was it legally manufactured but illicitly brought into the country?

Mr. Connolly: In some cases it was legally manufactured and illicitly brought into the country; in other cases it was illicitly manufactured.

The Chairman: How widespread is the illicit manufacture of tobacco products compared to the illicit manufacture of alcohol, for example?

Mr. Connolly: I could not answer that. I do not have that information.

Mr. Smith: I do not have it, either.

The Chairman: But it does exist? That is to say, there is an illicit manufacture of tobacco products as well as an illicit trade in them?

Mr. Connolly: An illicit manufacture certainly existed in the early stages after the anti-smuggling initiative was introduced. To the extent that it exists today, I do not have that information now.

The Chairman: As far as you are aware it existed in other countries but not here?

Mr. Connolly: Yes.

Senator LeBreton: But Canadian tobacco products were used in the illicit manufacturing, were they not?

Mr. Connolly: No; it involves the Canadian blend of the tobacco.

Senator Forest: What makes it illicit? Is it the fact that they are using a copyright on blend or what? Why is it illicit to use a Canadian blend?

Mr. Smith: It is illicit in the sense that it is brought into Canada without the payment of duties and taxes.

Senator Forest: That is illicit smuggling but what about illicit manufacturing?

Mr. Smith: It would be licensing.

Senator Forest: My other question concerned the illegal distribution of tobacco products within Canada. Could you elaborate on that and what you do to prevent that?

Mr. Smith: Are you referring to my statement involving interprovincial trade?

Senator Forest: Yes.

Mr. Smith: There is a price differential due to the taxes between the far eastern and western provinces and the central provinces. That creates a profit margin for it which makes it attractive to smugglers to buy tobacco legally in Ontario and Quebec and transport that tobacco in large quantities to, for example, B.C., where they sell it at a considerable mark-up. It is sold at a price that is lower than the legal price of tobacco in B.C. but higher than the cost to the smuggler. There is a significant profit to the contraband trade from moving that tobacco inter-provincially and avoiding the provincial taxes and in some case excise duties.

Senator Johnstone: Superintendent Smith, it is my understanding from what you say that one of the chief factors involved here is price. Am I correct in thinking that the Americans are already raising the price of tobacco through taxes to the point where the importation of tobacco to the United States is not as profitable as it was previously?

Mr. Smith: I understand that there is a bill before the American jurisdictions to raise tobacco taxes by as much as $10 a carton. However, I am not sure that it has been approved. I do not have the latest information on that. However, if they raise their tobacco prices it will be most likely on the American style product. It may not change that circular route of Canadian tobacco being legally exported from Canada and then coming back illegally into Canada through the contraband trade.

Senator Chalifoux: What effect will this have on the traffic between the Mohawk country and Canada and the United States as far as smuggling is concerned?

Mr. Smith: A reduction in tar and nicotine?

Senator Chalifoux: Yes.

Mr. Smith: Again, it depends on the supply and demand. If there is a change in the taste or one of the demand variables -- that is, cost, taste, habit or whatever -- then the supply side will probably come from an illicit market. If that market happens to come through a First Nation reserve due to the situation at that location, although presently a large part of the contraband trade continues to come through the Cornwall area, it would probably continue.

Senator LeBreton: You suspect, then, that if the level of tar or nicotine is reduced people would then move to an alternate source and turn, perhaps, to American tobacco in order to satisfy their taste in cigarettes? That is to say, they would not continue to buy a Canadian product that has been smuggled into Canada if there was a reduced level of tar and nicotine. For taste and the nicotine content they would go to a another source. Is that what you are saying?

Mr. Smith: Yes.

Senator LeBreton: If the nicotine and tar level is reduced you suspect that it will increase the smuggling of tobacco products produced somewhere else in order to meet the Canadian demand for that same level of tar and nicotine and the taste in those cigarettes?

Mr. Smith: If one of the demand variables changes -- whether it is cost, or taste or whatever -- the consumers will seek that commodity at a cost and a taste that suits their desires. If the only way they can get that is through an illicit market then our suspicion is that they will get it through the contraband market. I cannot comment on whether or not they would switch to an American brand.

Senator LeBreton: To put it in simple terms, you are advocating that it is a tough situation to control but it is more controllable now if it is not changed <#0107> that is, if the levels of tar and nicotine in cigarettes are not reduced. Basically, you are using the argument that, for your purposes, the levels of tar and nicotine in the make-up of cigarettes as stated in this bill should not be changed.

Mr. Smith: For the purpose of protecting the Canadian economy and society from contraband markets, the black market and any variable changing, if it will increase that market -- especially any dramatic change that would provide an impetus for people to seek that product elsewhere -- then, yes.

Mr. Connolly: We are not experts on health or addiction matters. It depends on what the level of reduction would be, how it was introduced and over what period of time. It is something that we would have to monitor over a period of time to get an idea of the change in market habits. Depending on the level, it could happen dramatically or it may not happen at all.

The approach that the government takes in terms of dealing with it would indicate to us, by monitoring that program, whether or not smuggling would increase. We cannot speak about this with any authority. We can only talk about it in terms of our experience with the supply and demand that we have had in the past in relation to the cost of the product.

The Chairman: The problem we faced in the past when taxes increased involved legally manufactured cigarettes in Canada being exported to the United States and then being brought back illegally into Canada for sale. That was the problem.

If this bill becomes law that will not be your problem. You think that your problem will be with the illegal import of foreign cigarettes -- American cigarettes, probably -- or the import of cigarettes manufactured illicitly. Is that correct?

Mr. Connolly: Yes. However, industry itself could legally manufacture blends of Canadian tobacco in the foreign market that they could subsequently illegally import into Canada.

The Chairman: But they could not do it in Canada. The bill would outlaw that manufacture of tobacco products.

Mr. Connolly: They could not do it legally but they could manufacture with the intent of sale in the foreign market.

The Chairman: They could not manufacture it here, though.

Mr. Connolly: I understand that but they could manufacture it in a foreign country for sale in a foreign country.

Senator Chalifoux: Although I do not smoke I come from a family of smokers. I have a daughter who smokes cigarettes containing .01 per cent nicotine. The others smoke stronger cigarettes. When they are out of cigarettes and they borrow from her they do not know the difference. You said that you do not know what will happen but this is what has been happening in our family.

Senator Forest: In your statement you said that there have been slight increases in the price of tobacco products and that has not changed the rate of smuggling. Have you any idea about what the increase could be before you would encounter the same difficult situation again?

Mr. Smith: Not really. If you have to walk a mile to a convenience store for milk and then the store moves two or three miles away from your home at some point you will take either a cab or a car. It is a similar situation. We do not have figures on this that would allow us to state that $2 or $3 or $5 would make a difference and make the consumer switch.

Senator Forest: I was thinking of taxes as opposed to changing the level of nicotine.

The Chairman: There must be some hard information on that subject. At one point the government brought the tax level down to the point where it believed that the smuggling problem would be considerably diminished and that happened.

There must be a threshold beyond which you have a smuggling problem again of the dimensions you have encountered in the past. Is that not the case?

Mr. Connolly: I do not know if it is a threshold so much. We know what happened the last time. From experience we know that when we reached a certain price smuggling increased dramatically.

The Chairman: Do you remember what the price was?

Mr. Connolly: At that point the price was up to about $6.00 and change for a package of cigarettes. I am not sure of the exact price.

Senator LeBreton: It was $5.75.

Mr. Connolly: Every time there is a tax increase we monitor the situation immediately in terms of any increased activity. When the taxes were reduced and the anti-smuggling initiative went into place, for example, the small and medium-sized smugglers went out of business. The open buying of illegal cigarettes from dépanneurs, and so on, along the border of Ontario and Quebec and along the St. Lawrence disappeared. Basically, what stayed intact were the major criminal organizations that were involved in smuggling. Those are the same organizations today that smuggle liquor and other commodities and are still involved in the illicit tobacco trade in the interprovincial smuggling.

Basically, an increase in taxes would increase the activity of the major criminal organizations and would also allow for the small and medium-sized smuggling groups -- that is, the mom-and pop-type of confectionery stores and so on -- that were selling 20, 30, 40 or even 100 cartons a week to get back into that particular business.

Every time there is an increase we watch for it very closely. Oftentimes you do not know that you have reached that point until you have crossed over that line. That is a difficulty sometimes. It is something that we are monitoring closely, given the fact that we had a tobacco increase recently.

Senator LeBreton: I live here in Ontario and there was a tremendous problem involving small and medium-sized smuggling groups.

I do not know how much a package of cigarettes costs in British Columbia but I understand it is quite a lot higher than in Ontario and Quebec. Are there still small and medium-sized business people smuggling across the border in British Columbia as a result of their higher price for cigarettes or did you combat the problem more in Ontario and Quebec and along the St. Lawrence? Are their tobacco prices high enough to encourage that kind of cross-border smuggling?

Mr. Smith: There is still significant cross-border smuggling but not with the mom-and-pop type operations. Cross-border smuggling still represents approximately 60 per cent of the contraband tobacco market in B.C.

Senator LeBreton: It is higher in B.C., then. That would prove the theory that at some point a threshold is involved. I wondered if they were selling their cigarettes at a price close to the threshold.

The Chairman: You mean the interprovincial trade?

Mr. Smith: No, the cross-border trade.

The Chairman: Cross-border from the other country?

Mr. Smith: Yes, cross-border importation and sale. It may be coming across the border in Cornwall and be shipped out to B.C. However, Cornwall is still our major importation area.

The Chairman: You do not have hard information and you are not able to quantify the impact that this bill, if it became law, might have in terms of the smuggling problem. That is your testimony today, is it?

Mr. Smith: Yes.

Mr. Connolly: That is correct.

The Chairman: Is there a difference in the nicotine content between cigarettes manufactured in Canada presently and those in the United States? Does it vary by brand? What is the situation?

Senator Keon: It varies a great deal. On a global basis the nicotine content of cigarettes in some foreign countries is very high.

I see a problem arising as far as a health hazard is concerned if we educate the Canadian smoker to smoke foreign products. While they are smoking Canadian products at least we have some control on it at home.

Frankly, I am quite supportive of this bill. It would be worth enacting this legislation to see how serious the impact is on smuggling.

I should like to know how efficient your network is at picking up illegal manufacturing -- that is, look-alike Canadian cigarettes that have more bang in them for the young people -- and the switch in the use of the Canadian smoker from the Canadian product to a foreign product. How much would you have to address those two problems if this bill becomes legislation?

Mr. Smith: I am not sure we can answer that. As far as switching to a American product, by reducing tar and nicotine levels you are changing one of the demand variables. It goes without saying that if you increase the tar and nicotine levels substantially you are also changing that particular taste demand variable. It might provide an impetus for Canadian consumers to go elsewhere if that level was increased. They would be looking for something that they are used to. That is my opinion. If they could not do so legally they would go to a contraband market for that.

I am not sure that I have answered your question.

Senator Keon: Perhaps I did not express myself clearly. If this bill becomes legislation and we manufacture Canadian products with less tar and nicotine how efficient is your network at identifying the illegal manufacture of look-alike products in foreign countries and how efficient is your network at monitoring the increased flow of American products, for example, across the border in response to this legislation?

Mr. Connolly: On the illegal manufacture with more tar and nicotine as opposed to what is here we probably would pick up on it fairly quickly. We would see it as we seized new types of product. We send any new products that we seize to our customs and excise laboratory here in Ottawa for analysis. We do that with alcohol, tobacco and a number of products to verify what is contained in the product itself.

Through our seizure activity we would be able to tell fairly quickly if, all of a sudden, we begin to get an increase in ABC cigarettes that were being manufactured in accordance with the old Canadian standard. By "quickly" I am talking about months as opposed to years.

In terms of the monitoring of the increased flow itself, it takes a little longer to do your analysis and to look at prices. You must look at a lot of things when you are doing an intelligence analysis on something like that. As opposed to months you would be into one or two years to get into that type of accurate information that would give you a handle on the market itself. Obviously, you would see less product being sold in stores and your own domestic market would give you information as well. If there were reduced sales the tobacco manufacturers themselves would let people know that there were reduced sales. There are a number of variables and factors that you could look at over a period of time. However, that is not something that you could do right away.

Concerning the illegal product itself, based on our experience that would surface within months as opposed to years.

The Chairman: If there are no other questions I wish to thank Superintendent Smith and Mr. Connolly for their testimony today.

We will continue one week from today to consider Bill S-8. We will then hear from representatives from the Non-Smokers Rights Association and Dr. Haidasz, the sponsor of the bill, who has been invited to be our final witness.

I will adjourn the meeting until next Tuesday at ten o'clock, when we will resume our consideration of the child support guidelines but we will reconvene in camera for two minutes.

The committee continued in camera.