Illicit Tobacco: Canada's Tobacco Roads (part 2)

Dec 15, 2012

The first of this three-part series provided a global perspective, and this second article examines ­environmental factors of the illicit tobacco market, looking at illicit trade along Canada’s tobacco roads. Our focus is almost exclusively on illicit cigarettes manufactured in Ontario and Quebec and the factors driving this specific and lucrative trade. Watch for the final installment of FrontLine’s tobacco series, (to appear in the next edition), which will examine possible courses of action to reduce the scope and impact of the illicit trade.

Today, the illegal trade of tobacco in Canada is mainly linked to unlawfully manufacturing cigarettes. This is quite a transition from the 1980s and 1990s when the primary problem was the diversion of legally manufactured products. The RCMP reported in 2008 that the major illicit manufacturing operations were located at Six Nations, Tyendinaga, Akwesasne (U.S. side) and Kahnawake. One year later, the International Consortium of Investigative Journalists determined that manufacturing operations had shifted from the U.S. side of the Akwesasne reserve to Canadian reserves in Quebec and Ontario. Different law enforcement agencies also report an expansion of the contraband tobacco distribution networks from central Canada to the east and west coasts. This change over the last few years is indicative of how much more organized and progressively structured illicit tobacco activity has become in Canada. And yet, the government and other sources continue to highlight “great progress” on its tobacco control strategies, claiming that illicit trade has declined due to law enforcement success in tackling the problem along the borders. The smoke and mirrors ­surrounding the state of illicit tobacco provided the impetus for Frontline Security to examine the issue more closely.

  • Cigarettes/tobacco products manufactured in the U.S. and smuggled into Canada.
  • Illicitly produced cigarettes/tobacco products manufactured in Canada.
  • Counterfeit tobacco products involving domestic and foreign brands making their way into the country via sea container (mostly from China).
  • Diverted products that are destined for sale on reserves and end up being sold ­elsewhere in Canada. These products are legally manufactured but provincial taxes have not been collected. This scheme also allows the seller to discount the product, which makes it appealing to consumers.
  • Illicit sales via the internet (including illegally manufactured/counterfeited tobacco ­products and products on which duties or taxes are not paid).

Source: RCMP Contraband Tobacco Enforcement Strategy Progress Report for the period May 2009 (April 2010).

During interviews with farmers and others involved in the trade, it became clear that a major source of the problem resides with the regulatory oversight of the tobacco supply chain. Since October 1, 2012, oversight of flue-cured tobacco moved from barely tolerable conditions to a total state of abandon. This criminal market is said to cost the provincial and federal governments tens of millions of dollars each year in lost excise revenue, and yet the ­requisite data and resources to tackle the problem do not appear proportionate to such loss.

This report looks at the prevalence and volume of contraband, the illicit gain potential, the state of regulatory safeguards on the tobacco supply chain, and other areas. We present only the tip of the proverbial iceberg, but feel it is important to contextualize, for FrontLine readers, this very complex and multi-layered criminal activity.

What do we really know about the prevalence and volume of illicit tobacco in 2011, 2012 or what to expect in 2013? Not much. In absence of Canada’s criminals disclosing the extent of their unlawful transactions, other means and equations have to be relied on. The result is a wanton use of flawed statistics and posturing that dominate the headlines and possibly decision making processes.

With no apparent government studies on this topic, the question is examined by research teams that are often employed by different interest groups. Distinctive methodologies are used and tweaked, and data is inconsistent or unavailable from year to year, making it difficult to formulate a sound assessment. The only certainty is that excise tax revenue is being lost.

The Canadian Community Health Survey (CCHS) and Canadian Tobacco Use Monitoring Survey (CTUMS) are frequently cited by government agencies, however, their approach appears overly abstract. A 2010 report by Physicians for a Smoke-Free Canada cautions against using either CCHS or CTUMS regional data, which resulted in some provinces having a “negative” illicit trade. The question then becomes how and why regional realities are of a lesser consideration than a theoretically flawed national average. The same report by Physicians for a Smoke-Free Canada, states “the drop in reported tobacco sales has been relatively three times greater than the drop in the number of smokers.” But where are these smokers getting their cigarettes? The approach used by CCHS and CTUMS fails to address these inconsistencies. More alarming is not knowing to what extent their data is used by government to guide tobacco control strategies.

In its 2008 Contraband Tobacco Enforcement Strategy report, the RCMP cites findings by a third-party research company contracted by the Canadian tobacco industry. GfK research examined the issue in a less-abstract manner by conducting a series of annual studies over a three year period that analysed the cigarette pack and product of over 2,000 survey respondents. The results provide a snapshot that shows 17% of smokers consumed illegal tobacco products in 2006, 22% in 2007, and 33% in 2008.


Police seized millions of dollars worth of contraband cigarette packaging in August, and say smuggling in Canada is getting worse. These materials could have been used to make around two million cartons of contraband cigarettes, which would equal tens of millions of dollars in evaded duties and taxes. “This investigation has shown that the contraband producers are becoming increasingly sophisticated in their efforts to confuse tobacco consumers as well as law enforcement,” said Insp. Steve Martin of the Hamilton/Niagara regional RCMP detachment.
Source: CBC News, “Millions in contraband cigarette packaging seized by Hamilton RCMP” (Sept.01 2012),

In an effort to gain some insight on the prevalence of contraband tobacco among youth, the Arcus Group Inc. was hired by the Canadian Convenience Stores Association (CCSA) to conduct a series of annual studies. Researchers collected cigarette butts from the grounds of high schools in Ontario and Quebec to determine the extent to which teens are smoking contraband cigarettes. The 2009 findings show that an estimated 45% of the cigarette butts from 75 sites in Quebec were found to be illegal. In Ontario, an estimated 30% of the butts collected from 110 sites were illegal. The Arcus studies also found that prevalence of illegal tobacco products is not restricted to large urban areas and that the presence of contraband is relatively high in lower income areas.

It is unfortunate that both the Gfk and Arcus studies were abandoned as a number of changes were then taking place in the tobacco industry. For instance, the federal government launched its Tobacco Transition Program in 2009. Intended to assist growers transition to other crops, these one-time buyouts “lacked key safeguards to prevent abuse of the system.” Also, criminal market dynamics were shifting towards the illicit manufacturing of cigarettes, particularly in Ontario where flue-cure tobacco is grown.

High profits, low risk and a willing market attract all sorts of criminals at various levels of innovation, sophistication and capacity. Opportunists at every stage of the tobacco market will scrutinize processes and potentials for loopholes to illicit gain.

(Also see:

A consumer looking to purchase 200 cigarettes will most likely be aware of the significant price gap between the cost of tobacco products on and off reserve. A baggie can cost as little as $12 and a carton can range from $20 to $40 compared to an average retail price of $80 off reserve.

Under Canadian law it is technically illegal for non-Aboriginals to purchase these low cost cigarettes that are sold on reserve, however the system is not strictly monitored and is vulnerable to abuse. Given a choice between paying $12 dollars or even $40 for 200 cigarettes, some Canadian smokers will turn a blind eye to the law and subsequently sustain the market for low-cost Aboriginal cigarettes. Similarly, while tobacco commerce on reserve is entirely legal, some will be inclined to manufacture and sell outside established Aboriginal quotas. The scope and extent of this unlawful activity can vary from casual purchases at smoke shops on reserves or it can manifest itself in large scale and organized illicit enterprises that generate ­significant profit.

Each scheme and method used in the illicit tobacco trade can potentially yield a different profit margin. For example, Aboriginal tobacco manufacturers pay the federal excise duty for their tobacco products, however, as the RCMP states, some of these products are illegally diverted for sale off reserve. In this way, some illicit product can contain the appropriate federal excise stamp and yet still be destined for the black market. Other product, sold in baggies for instance, may not have any type of tax paid on it. There are so many different schemes used by criminals it becomes quite a task to get a good ­estimate on profit margins.

In an effort to provide a very general idea of the potential profit from cigarettes illegally manufactured in Canada, certain assumptions were made. It has been determined that the cost to produce 200 illicit cigarettes averages approximately $5 and that total government taxes average about $65 per carton (including the federal excise duty). Assuming that an illegal carton of cigarettes is sold at $40 per carton, it is possible to arrive at a national average of total tax loss and potential profit. The base figure of $5 may be higher depending on a number of factors, including packaging (the higher the base cost, the lower the profit margin). While these numbers are over-simplified and should invite a more rigorous methodology, it is intended to provide the necessary context to understand the extent of the problem.


A major police operation targeting cigarette smugglers took place in Joliette and ­surrounding municipalities. “We're talking about an organization that brings in between 150 and 300 cases of cigarettes into the region every month, up to 3 million cigarettes,” said a spokesman for the Sûreté du Québec. “This is a complex investigation that began in September 2009, which addresses the phenomenon in its three areas: supply, distribution and resale neighborhoods,” said Paré. Revenu du Québec participated in the operation. The cigarettes originate from outside the country.
Source: La Presse, “Importante opération policière contre des trafiquants de cigarettes” (Nov.30, 2012),

Considering the potential profit generated from the illicit trade in tobacco, the penalties are not proportionately severe. Anyone found in possession of between 1,001 and 10,000 illegal cigarettes in Ontario could be fined $500 plus three times the tax that would be imposed if these cigarettes were obtained legally. In some cases there is a prison sentence but this largely depends on the nature of the criminal activity.

An RCMP report states that, from May 2009 to April 2010, a total of 18 organized crime groups of various levels of sophistication involved in contraband tobacco were disrupted across the country. Investigations by the International Consortium of Investigative Journalists found that outlaw bikers are involved in the manufacturing, distribution, and retailing of the illicit tobacco products. According to the Consortium, the capital to buy equipment and set up operations was, in some cases, fronted by organized crime.

Douglas George-Kanentiio, a journalist from Akwesasne, is quoted in a 2010 National Post article saying that it would be “simply impossible for Indian people to have the means to market tobacco off the reservation” and that organized crime assists in making those types of connections.

The political and geographical situation of illicit trade on reserves presents enforcement challenges for Canadian, American and First Nations authorities. The reluctance that Canadian law enforcement has in entering on reserve might encourage organized criminals to use the reserves as a safe haven and trans-border conduit for committing offences.

In 2009, the Center for Public Integrity, an investigative U.S.-based news organization, published an exposé on Canada’s “boom in smuggled cigarettes”. It asserts that the 12-mile stretch of the Canada/U.S. border that runs through Akwesasne is a major security soft spot. “In one February case, U.S. authorities arrested 10 people, alleging they were part of a ring that smuggled 50,000 pounds of marijuana through Akwesasne and into the United States from 2003 to January [2009]. One of the ringleaders has a tobacco manufacturing license from the ­Canadian government.”

This year, farmers sold about 53 million pounds legally, the highest yield since 2006 and over double what was produced three years ago. This year also represents what is predicted to be the most vulnerable year to contraband production and sale due in large part to the transition of authority and lack of regulatory oversight.

In June 2011, the Ontario government made much ado about legislation it introduced to meet its obligations to the Supporting Smoke-Free Ontario by Reducing Contraband Tobacco Act. Among other things, the new legislation transferred the responsibility for licensing raw leaf tobacco from the Ontario Flue-Cured Tobacco Growers' Marketing Board to the Ontario Ministry of Revenue.

According to officials with Manitoba’s criminal property forfeiture unit, the black-market business appears to be booming. “A single [case] of [50 bags] can provide a profit of $1300 to $2350,” documents filed in court by the unit state. Officials believe the illegal smokes are manufactured on reserves in southern Ontario and in areas along the U.S. border, then smuggled up to Manitoba for resale on the black market.
Source: Winnipeg Sun, “Illegal cigarette biz booming in Manitoba” (Oct.17, 2012),

As of October 1, 2012, the Ministry of Revenue is responsible for licensing tobacco growers, controlling the production, distribution, sale and purchase of raw leaf tobacco to help ensure the supply of raw leaf tobacco stays in the legal market.

Just days after this transfer took effect, the Ministry of Finance issued a news release announcing a temporary grace period that would allow participants the time to learn of their obligations and apply for the appropriate registration certificates for the 2013 growing season. This means that anyone who grows, processes, sells, buys, imports, exports or inter-jurisdictionally transports any varieties of raw leaf tobacco prior to March 31, 2013 will not be required to hold a registration certificate with the Ministry of Finance. It remains unclear if the grace period was meant to benefit the participants or to give the Ontario Ministry of Finance more time in fully grasping its mandate and the resources it would need to fulfil its obligation to farmers and to Canadians.

The result is the same. The regulatory vacuum provides a savoury opportunity for unlawful conduct and in many ways weakens law enforcement efforts to contain the illicit trade of tobacco.

The sand belt in southwestern Ontario is the primary region in Canada where flue-cured tobacco is produced. Today, about 241 tobacco farmers located near towns like Delhi, Aylmer and Tillsonburg are licensed to grow and sell their harvest to registered and permitted wholesalers.  

Just prior to the growing season, wholesalers acting on behalf of manufacturers establish contracts with tobacco farmers and tally up projected totals of pounds per acre. This estimate is submitted to the Ministry of Finance who is mandated to ensure that growers are not producing more tobacco than their contracts allow. In the spring, growers are also required to provide detailed maps of their proposed acreage and its precise location. Ideally, investigators at the Ministry of Finance should inspect these plans and projected pounds per acre to ensure and enforce compliance.

Frontline Security learned, for example, that one wholesaler had submitted an estimate of about 2,400 pounds per acre to the Ministry of Finance while another reported about 2,700 pounds per acre. Neither of the two wholesalers can predict if the harvest will be a good or bad one and so there is nothing too irregular in providing higher or lower estimates. As it turned out, 2012 was an amazing year. The wholesaler that had reported 2,700 actually produced 2,950 pounds per acre. In contrast, the wholesaler that had projected 2,400 pounds per acre did not report experiencing a higher yield. While there may be a logical explanation, it is paradoxical for some farmers’ crops to yield more per acre while other farmers in the same region (but who are signed on with a different wholesaler) experience incongruous results.

One industry source cites as much as 4 million pounds have not been reported to the Ministry of Finance. A loosely structured reporting mechanism is just one of many existing loopholes that are ­scrutinized by criminals, and represents one more method to divert raw leaf to illicit manufacturing facilities.

Referring to an internal RCMP briefing note outlining the state of the illicit-tobacco problem, the National Post examined this issue in a recent article. The RCMP memo stated that farmers are allowed to seed as much as 10% above reported crop yield in the event of some crop being damaged due to poor weather conditions or other unforeseen ­circumstances. This reporting loophole means a farmer can easily sell 10% of their yield to illicit manufacturers. Farmers might be tempted or coerced to sell their overage at $8 dollars a pound instead of the $2 dollars that contractual agreements with legitimate industry normally yield.


Cross-border trade of tobacco and cigarettes largely distributed through Indian reservations costs the provincial and federal government tens of millions of dollars each year in lost excise revenue. About 2.2 million cigarettes and 750 pounds of loose tobacco were confiscated by Mounties and other agencies. The Akwesasne Indian reservation near Cornwall straddles both Ontario and New York state.
Source: United Press International, “Mounties make major tobacco interventions “ (Oct.02 2012),

Other “schemes” involve farmers claiming their bales are stolen when they have in fact been diverted to the illicit manufacturing trade. Poor quality tobacco is another scheme in the illicit trade. In one instance this year, a wholesaler refused over 80,000 pounds of raw leaf from one of its farmers. Reasons for rejecting a grower’s produce may be due to poor quality or other entirely legitimate reasons, although some industry experts say that they have never witnessed such a large amount being refused before. If the bales are rejected due to poor quality, it is reasonable to assume that the grower destroys the produce, however, it is not clear if this is being done or who oversees the process.

The RCMP memo stated that more focus was needed on the manufacturing process – “from the suppliers of raw materials to the illicit manufacturers to the large volume distribution networks.” Instead, during one of the highest crop yields since 2006, regulatory bodies are granting “participants” a reprieve until March 2013.  

Without a physical presence of investigators on the ground in Ontario, where flue-cure tobacco is predominantly cultivated, it is unlikely to claim any successes in provincial or federal tobacco control programs. The absence of government inspectors has resulted in production overages that are simply not being captured.

During the course of our interviews with farmers this year, some expressed concern for their safety and for the growing regularity of farmers being approached by unlicensed buyers for their raw leaf tobacco. One of them referenced a fire that took place in July that destroyed a cigarette manufacturing building filled with product. In a separate incident, it was reported that a Cornwall-area man fired multiple gunshots at a security guard station at a Six Nations cigarette factory in February 2012. These random and unrelated acts build a climate of fear and growing reticence to openly discuss the problem much less volunteer unlawful activity to the Ministry of Finance or to law enforcement.

Police pressure is a necessary component in tackling the illicit trade, however, such efforts are unlikely to significantly reduce these crimes by themselves. In many respects, the conditions that created and sustain the current illicit tobacco problem in Canada have nothing to do with law enforcement efforts and everything to do with politics.

Entering on native reserves is highly charged and political in nature. Past confrontations like the 1990 Oka crisis near Kahnawake and the Six Nations land-claims dispute near Caledonia are reminders to both government and law enforcement not to approach Aboriginal issues with force. Until sustained dialogue and consultation take place, police will continue investigations off reserve and seize tobacco smuggled from the U.S.

Another interesting development relates to the potential re-location of the cross-border checkpoint from Canadian law enforcement control to the U.S.-led Border Enforcement Security Task Force at Massena, New York. It is not clear if the move off the island over to the American side will assist Canada’s smuggling problem or allow for undetected movement of contraband tobacco.

Canadian consumers of cigarettes might be interested to learn more about the content and quality of cheaper cigarettes. Unfortunately, no rigorous data is available. In 2006, Health Canada embarked on a smoke analysis study and published the results on its website. While the information has been recently removed, the report stated that the same chemical substances are present in the smoke of both contraband and legal cigarettes with “no notable difference in the quantity of most of these chemicals found in the smoke of either contraband or legal cigarettes.”

Ontario's First Nations Cigarette Quota: Each year, the Ministry of Finance calculates the total quantity of allocation cigarettes for each reserve. Working within this quota, ministry-authorized tobacco wholesalers are permitted to deliver cigarettes to ministry-authorized reserve retailers for the allocation year. Under the allocation system, First Nations individuals may buy allocation cigarettes on a reserve, for their exclusive use, that are exempt from Ontario tobacco tax.

Section 87 of the Indian Act stipulates that the personal property of a status Indian or a status Indian Band situated on a reserve is not subject to tax. This does not apply to the excise duty. Aboriginal manufacturers, whether licensed or unlicensed, are required to pay the excise tax prior to moving merchandise to other reserves or duty free areas. It is the subsequent sales taxes, whether a federal tax, such as the Goods and Services Tax/Harmonized Sales Tax, or a provincial tobacco/ sales tax, that is subject to the Section 87 exemption.

The analysis was apparently conducted on contraband provided by CBSA, however, it is unclear if this represents an accurate sampling of all types of illicitly traded tobacco, including those unlawfully manufactured in Canada. Also, one has to question the need to finance and impose regulatory quality control on legitimate industry especially if illegally traded tobacco yields the same type of product, as Health Canada claims it does.

The spokesperson for the Ontario Convenience Stores Association (OCSA) has stated that “people buying illegal smokes might be inhaling more than the usual toxic brew of chemicals found in cigarettes because officials say insects and feces are more likely to be found in unregulated, illegal cigarettes. Health Canada or another governmental agency with less conflict of interest may need to examine this issue with more due rigour in order to provide lawful consumers with information that might impact their health.

The First Nation reserves in Ontario and Quebec have successful and thriving industries that generate greatly needed revenue for Aboriginal communities. The tobacco manufacturing centres have worked diligently to become the predominant facilities for manufacturing and distributing tobacco products to other reserves across Canada. As long as the federal excise duty is paid, Aboriginal manufacturers, whether licensed or unlicensed, have the legal right to produce cigarettes within Aboriginal population quantity quotas.

Some, however, do not recognize cigarette quotas because they are established by a provincial body. Aboriginals claim their reserves are on federal land and that the provincial government does not have jurisdiction to enforce any controls.

A Manitoba First Nations leader began selling discounted cigarettes at his smoke shop without paying provincial sales taxes. Since that time, law enforcement has raided the shop five times. The confiscated cigarettes originate from Mohawk distributors from Quebec and are federally stamped under the Excise Act 2001 but are not marked or stamped for sale in Manitoba.

It is clear that the issue of tobacco is a pretext for larger issues that need to be resolved by the federal government. The Belleville Intelligencer published an article on Shawn Brant, who is depicted as an activist fighting two causes: one, dealing with contraband tobacco and the other regarding land treaty rights. However, for Brant, and possibly for many Aboriginals, the two are synonymous.

To bridge the disparity of prices of cigarettes in Canada, it is important to include First Nations communities in the decision making process and allow them to benefit from business opportunities. These might include revenue sharing agreements or for ­Aboriginal communities to develop and enforce their own taxation system on tobacco that is on par with the Canadian provincial and federal tax rate.

An unusual $500-million class-action lawsuit by tobacco farmers that accuses the federal and Ontario governments of turning a blind eye to contraband tobacco was dismissed. The farmers allege tax authorities chose to let the trade in unlicensed, untaxed tobacco flourish to avoid angering First Nations’ communities where the cigarettes are made and sold. But Justice Duncan Grace has ruled even if the government did act to appease First Nations, it was a decision made for economic, social and political reasons, and cannot be challenged legally. One of the tobacco farmers' lawyers stressed the lack of enforcement action by federal and provincial officials has had dramatic effects, pointing to a 32-kilometre stretch of highway near the Six Nations’ community in southern Ontario that is lined with makeshift stores selling unlicensed tobacco.  
Source: National Post, “Judge dismisses tobacco farmers’ $500M lawsuit against governments over illegal cigarettes” (Aug.15, 2012),

Illegal cigarettes target youth and lower income smokers, with disproportionally higher incidence in Aboriginal communities. While we did not cover all the byways, two issues dominated our expedition. The lack of provincial regulatory oversight has allowed and continues to allow central Canada to deepen its roots in promoting the illicit tobacco trade to other provinces and territories across Canada. Also, it is clear that the illicit trade in tobacco is a consequence of a much larger and unresolved political issue at the federal level. Without addressing these fundamental concerns, it is disingenuous to report optimistically about Canada’s tobacco control program.

Targeting youth promotes yet another generation of smokers. An increase in the price of cigarettes to either curb smoking or generate higher tax revenues is quickly neutered with low cost cigarettes infiltrating the market. Other innovative strategies need to be devised but will largely depend on a more serious effort by both the provincial and federal governments to regulate and enforce.

The conclusion of this three-part series will focus on courses of action to mitigate the negative impact of illicit trade.

© FrontLine Security 2012