Canada’s Boom in Smuggled Cigarettes

Gary Godelie has been a tobacco farmer most of his life, struggling to keep alive a family farm that produces what most everyone agrees is a death crop. Whacked by global competition undercutting his prices, not to mention a dwindling number of Canadian smokers, he often thinks of getting out of the business.

Nothing brought this thought home more clearly than a series of events that began one hot July day in 2006 when two men drove up to his southern Ontario farm and offered to buy his entire crop. That surprised Godelie because anybody in the tobacco business would know that Canadian growers are part of a tightly regulated quota system. Buyers have to be federally licensed and can buy only through the marketing board.

“I said, ‘Well no. I can’t sell you tobacco. I have to sell it to the legal system,’” Godelie recalled. “They kind of looked at me and laughed and like said, ‘Why would you want to do that when we’re offering you cash money, a deal here, you know.’ ‘Well, no, I’m not going to do that kind of stuff.’”

The two men drove off and Godelie thought that was the end of it.
Then a few days later he had to fetch some irrigation equipment from a barn where he had stacked 169 bales that were over quota from last year’s tobacco crop. He hoped to sell the surplus bales at auction that winter as part of the current year’s quota. The first clue that something was wrong came when he saw his hydraulic forklift sitting on the hood of his tractor. In his mind he blamed his son-in-law. But then he thought that that wasn’t typical, that his son-in-law wouldn’t have done something like that. Then he switched on the light and saw why he knew in his heart that something wasn’t right.

“I stood there kind of flabbergasted for a minute and then I scanned over the stacks and then it hit me, oh, no, they had cleaned out the barn completely.”

It had rained the previous night so Godelie hadn’t gone out to irrigate. That was the night they nailed him. He said he figured that at 40 pounds a bale it took them maybe 20 minutes to clean him out. “They stole all 169 bales, which… is (about) 8,000 pounds. It takes about 1.9 pounds to make 1,000 cigarettes. That’s more than 4 million cigarettes. That’s pretty significant. Now we’re talking some serious coin. For me it was about a C$20,000 loss” (or roughly US$18,000 at the time).

It wasn’t long before Godelie began hearing about other tobacco farmers getting hit. The thefts became so widespread that farmers began installing security systems, barring barn windows, and parking disabled tractors in front of their barn doors. But to little effect.

“Now they are so brazen they take chain saws and they cut the side walls out of the barn,” said Linda Vandendriessche, chair of the Ontario Flue-Cured Tobacco Growers’ Marketing Board and herself a tobacco farmer. “It’s no joke. You will not believe the intimidation that is going on with our farmers.”
The thefts are the result of a new brand of tobacco smuggling that has flooded the Canadian market with contraband cigarettes and cigarillos made by clandestine manufacturers in Canada and the United States. Over the last six years, as Ottawa and provincial governments began hiking tobacco taxes to curb smoking and raise funds, the smuggling business has grown “exponentially,” according to the country’s national police force, the Royal Canadian Mounted Police (RCMP). At a time when a crumbling economy has forced governments into deficit financing, Canadian smugglers — dominated by members of Indian tribes and in some cases their mob partners — are pocketing hundreds of millions in profits. The cheap cigarettes not only fuel the spread of smoking, which costs Canadians more than C$4 billion annually in health care, but also rob governments of money that otherwise would go into official coffers to pay for healthcare and other services. The federal, Quebec and Ontario governments alone claim the proliferation of untaxed cigarettes is costing them at least C$1.6 billion a year.

The size of this tobacco-fueled black market is huge. Both industry and government studies indicate that, across Canada, two to three cigarettes out of every ten sold are now contraband. According to the most recent study, by Physicians for a Smoke Free Canada, contraband in 2007 made up 27 per cent of the Canadian tobacco market. In Ontario and Quebec the figure climbs as high as four out of ten. This conforms with an earlier study done by the nation’s health ministry, Health Canada. “We’re making more cigarettes than Imperial Tobacco [Canada’s leading tobacco company],” boasted one Indian smuggler.

All those contraband cigarettes are fueling a black market conservatively estimated at C$1.3 billion, with profit margins rivaling those of narcotics. And the market is growing rapidly. Seizures of contraband tobacco in Canada jumped a whopping 16-fold between 2001 and 2006, according to the RCMP. The off-the-books smokes range from independently-produced cigarettes sold in plastic bags to expertly counterfeited packs of leading brands. In some cases cheap Indian brands have become so popular that rival Indian manufacturers are counterfeiting them.

So vast are the profits, and so poorly are the laws enforced, that the contraband tobacco industry has attracted an unholy alliance of Canadian Indians — who say they have the right to sell untaxed cigarettes — and members of various organized crime gangs, according to law enforcement officials and the smugglers themselves. At the center of the trade are about 20 Indian-owned manufacturers that produce millions of untaxed and unregulated cigarettes a day out of small and medium-sized factories at Indian reserves in Ontario, Quebec, and across the border in New York State. An investigation by the International Consortium of Investigative Journalists has found that outlaw bikers, Italian, Irish, Russian, and Asian mobs are also now involved in the manufacturing, distribution, and retailing of the illicit tobacco products. According to Indian smugglers and police, in some cases the capital to buy the equipment and set up operations was fronted by organized crime.
Recent joint U.S.-Canadian police investigations indicate that drug money has been used to finance the tobacco business. Tobacco profits are likewise used to buy cocaine and marijuana, which are smuggled across the border using the same networks as for tobacco. Large cash seizures are common at the border and along Highway 401 in Ontario, which has become a smugglers’ pipeline to Montreal and Toronto.

In March 2008, federal, provincial, and Mohawk police in three reserves — Akwesasne, Kahnawake, and Kanesatake — seized about C$2 million in cash after raiding a cigarette/marijuana smuggling operation. In just two seizures on Nov. 17 and Dec. 7 last year, Canadian Border Services agents seized C$636,467 in U.S. and Canadian funds hidden in vehicles driven by Indians from Akwesasne, the reserve that straddles the border between Ontario, Quebec, and New York. In addition, the RCMP on Feb. 19 seized US$260,000 from an Indian driving from Akwesasne to Quebec. Police believe that the cash is linked to drug sales into the United States

Source: Publicintegrity