Illicit Tobacco

Jul 15, 2013

By getting serious about the problem of contraband tobacco, there are numerous benefits for Governments including to the population's health and national coffers. It's time that collectively we stop taking dated approaches of continually increasing taxes that only prompt further black market activity and approach the subject anew.

Since it was first declared, the war on drugs has occupied tremendous international attention and focus along with the associated manpower, financing and political capital designed to produce results in the field. The United States has spent over one trillion dollars over 40 years in efforts to win the war on drugs.

With nearly $500 spent every second in the United States in 2012, the money has achieved realizable results (with $1.6M of product seized during arrests) and is the principal cause of the U.S. having one of the highest incarceration rates in the world. Despite this, a recent Gallup poll found that 82% of police chiefs and sheriffs in the U.S. believe the war on drugs has failed. Both heavily praised and criticized, the war on drugs has been a polarizing public policy effort since the Second World War but has maintained its status as a priority initiative.

In contrast, the fight against illicit tobacco is often treated by public policy makers and agenda setters as a problem to be addressed, but with no greater urgency than numerous other files.

In the 2012 RCMP report on illicit contraband, it notes that “low public appreciation”“perception of a victimless crime”“apathy of loss tax revenue” and “exploitation of political sensitivities” all combine to feed the contraband market in Canada. In essence, tobacco crime is widely perceived as a low priority. The illicit tobacco market is simply under the radar, and combatting it typically falls behind other pressing demands.

Both heavily taxed and regulated, the tobacco industry shares significant undertones with the temperance movement that successfully lobbied for prohibition nearly a century ago. As with alcohol, tobacco has significant ‘sin taxes’ levied on it – spawning a lucrative black market in the process. With at least 190 of 900 iden- tified criminal groups in Canada highly involved in the manufacture and distribution of tobacco, the industry is helping create modern gangsters, just as prohibition made the infamous Alfonso Capone. While drug trafficking has stiff sentences and enforcement requires significant resources, violations are treated with far more tolerance than most crime.

In 2012, the Canadian tobacco market was $31.1B, with total provincial taxes of $4.51B and $2.92B in federal taxes, representing a combined government take of $7.42 billion. It is widely accepted that at least 30% of Canada’s tobacco market (over 40% in Ontario) is underground. This represents a combined loss of $13B in legitimate trade going instead to the black market, and a $3.15 billion loss in taxes. With a $13B annual market for contraband tobacco, the trade is fueling organized crime. It is central to their operation in terms of profitability, limited risk in penalties and the relative obscurity of the marketplace.

The costs and impacts of modern scandals or criminality pales in comparison to the continual cost and damage being done by illicit tobacco. Given the financial gravity of over $3.15B in annual tax losses and the enormous cash flow generated to organized criminal groups, one would guess governments would quickly wake up to the priority of combatting this behavior. Surprisingly, that is not the case.

Since 9/11, all western law enforcement groups have struggled to maintain traditional priorities while budgets and political will focus on counter-terrorism and internationally focused threats. This has whittled away already meager funding allocations for traditional problems facing advanced democracies. It is unfortunate that governments tend to approach the subject only from a law enforcement or health lens, in which illicit tobacco is but one of many considerations.

It is only when viewed on a taxation basis, that it becomes an urgent national priority – one which could quickly fix funding deficits across the country by recovering the lost tax income.

While New Brunswick, in its 2013 budget, is using increased tobacco taxes to reduce its deficit, no mention is given to the corresponding increase in the illegal market, nor is any attempt made to reduce the existing contraband trade.

The Government of Canada has recently undertaken some positive efforts, including a 50-man task force established by the RCMP, and the creation of new trafficking offenses and inclusions of tobacco-related products in the Excise Act that allow easier prosecution of criminals. While good steps, these efforts showcase the dated legislation that tie hands and meager resources that are allocated to fight this multi-billion dollar problem.

In light of the large potential benefits for governments and their citizens, one wonders if the stigmas, labels and connotations built by health advocates were to be removed, how would contraband tobacco be tackled by governments. Would it be approached with the same intensity as the war on drugs, or with the same conviction as fighting human trafficking? Would trademark infringements of brand names be as aggressively pursed as IT patents and designer goods? Would Governments allocate the level of priority to ensure the elimination of the underground economy as a potential efficiency measure that could net over $3.15B a year?

Governments at both the federal and provincial levels need to increase their focus on stopping the illicit production and trade in tobacco as well as strongly confront the criminal forces that administer the illicit operations. By getting serious about the problem of contraband tobacco, there are numerous bene- fits that Governments can promote, including to the popula- tion’s health and national coffers. It’s time we collectively stop using the dated approaches of continually increasing taxes (which simply prompts further black market activity) and approach the subject anew. The sooner contraband tobacco is given the same regard as the war on drugs, the sooner we can stamp out our tax losses and stop adding the billions to fund dangerouscriminalnetworks.

Simon Smith has worked as a politically-exempt policy advisor for all three levels of Canadian government, with more than a decade in senior strategic roles.
© FrontLine Security 2013