Public Safety Committee on May 7th, 2008

[The Vice-Chair, Liberal, Roy Cullen]

Ladies and gentlemen, mesdames et messieurs, I'd like to bring the meeting to order.

Welcome to meeting 28 of the Standing Committee on Public Safety and National Security. We're doing a study of contraband tobacco. We're looking at contraband tobacco, not in the sense of smoking and the ills of smoking—I don't think many of us here need to be reconvinced of that—but in the context of contraband. I'm sure that's been explained to the witnesses.

I welcome all of you, and the members.

If I could indulge the witnesses for one moment so I can do a bit of planning here, we understand that the minister will not be available to come to our committee next week within the context of our review of tasers. So I have a suggestion to make. The panel meeting that we had originally planned for the other stakeholders on the contraband tobacco question had to be cancelled because of the water problems on the Hill on Monday. So with your agreement, we'll reschedule that panel, if there's sufficient time, for this coming Monday.

Is that okay?

Mr. MacKenzie.

[Dave MacKenzie, Conservative, Oxford, ON]

I don't disagree with that at all, but that panel is way too big to have here on one day. This room was full, and there wouldn't have been room for the panel to be here in the room. I really think it should be divided in half, and that the meeting should have been for two days. I don't think it would be fair to the panellists, otherwise.

[An hon. member]

Agreed.

[The Vice-Chair, Liberal, Roy Cullen]

Is that agreed?

Okay, that might make it easier to schedule as well. If anyone has some scheduling problems, we'll split it up. Does it matter which pairs or—

[Dave MacKenzie, Conservative, Oxford, ON]

I think we should have the tobacco industry people here separately from the other group. It's not that there's anything untoward about the second body, but it was just way too big.

[The Vice-Chair, Liberal, Roy Cullen]

You don't have to call them with the order?

[Dave MacKenzie, Conservative, Oxford, ON]

No, absolutely not.

[The Vice-Chair, Liberal, Roy Cullen]

It's a matter of the practicalities of who we can get—

[Sue Barnes, Liberal, London West, ON]

Why don't you just let the concordance group do our scheduling?

[The Vice-Chair, Liberal, Roy Cullen]

Yes.

Okay, thank you. We'll proceed on that basis.

I believe we will now have statements from the RCMP, the Canada Revenue Agency, and the Canada Border Services Agency, as I understand it. We will start with the usual five- to ten-minute presentations, and then we'll open it up to questions.

Could we start with Mr. Cabana, chief superintendent from the RCMP.

[Chief Superintendent Mike Cabana, Chief Superintendent, Director General, Border Integrity, Federal and International Operations Directorate, Royal Canadian Mounted Police]

Thank you very much.

As director general of the RCMP border integrity program, I'd like thank the committee for this opportunity to meet and discuss the illicit tobacco trade.

Briefly, and by way of background, a large portion of the RCMP's border integrity mandate is to enforce laws within Canada and along the uncontrolled border, and to govern thereby the international movement of dutiable, taxable, controlled, or prohibited goods; and the manufacture, distribution, and possession of contraband products, including tobacco and spirits.

Historically, like other criminal trends, the illicit tobacco trade ebbs and flows. Over the years, we've seen periods of sharp spikes and sharp declines. Today, it is not only flowing, but also hemorrhaging, and it has flourished into a key business enterprise for many criminal groups. Since 2001, our contraband tobacco seizures have rapidly and steadily climbed. Last year, our seizures reached an all-time high. We seized more than 618,000 cartons of illegal cigarettes, a 21-fold increase over 2001, which totalled 29,000 cartons at that time. Equally concerning are the large bags of illegal raw leaf and loose tobacco seized. Again, last year our seizures reached 37 metric tonnes.

Clearly it's big business for criminals. In fact, intelligence assessments, along with seizure rates, indicate three things: the trade is growing, it is no longer centralized in only Ontario and Quebec, and more than 150 organized crime groups are involved. But they are not only involved in trafficking contraband tobacco.

These are criminals who also deal in drugs, firearms smuggling and money laundering. It's not uncommon to have our investigators seize other illegal commodities along with tobacco, today.

Last summer, through a marine security initiative called Shiprider, the RCMP and the U.S. Coast Guard worked in partnership on the same vessels along our shared marine border. The project resulted in the seizure of more than 1.4 million contraband cigarettes, 200 pounds of marijuana, and $38,000 in illicit cash, and contributed to dozens of arrests. All this occurred in a two-month span in a relatively small marine corridor in the St. Lawrence Seaway.

Given its growth, proliferation, and connection to organized crime, contraband tobacco is a major priority of the RCMP customs and excise program. To further focus our efforts on effectively attacking the market, the Minister of Public Safety and our deputy commissioner of federal policing officially released the RCMP's contraband tobacco enforcement strategy this morning. While a big part of the strategy is the disruption of criminal organizations, success will require more than enforcement alone.

In this regard, in developing our strategy we met with over 70 partners and stakeholders that have an interest in the contraband tobacco trade. Through this consultation and dialogue, we believe our strategy responds to the various challenges before us.

Decades of experience dealing with this illegal market, however, indicate that enforcement efforts alone will not resolve the issue. Making an impact will require a multi-layered approach encompassing a number of initiatives, including raising public awareness. The public needs to understand that purchasing contraband tobacco directly supports organized crime. We believe that knowing the consequences will help reduce the demand.

We'll strive for more open dialogue with aboriginal governments on issues associated with contraband tobacco trade. We will monitor and evaluate programs to keep pace with the evolution of the illicit trade and adjust our approach as required.

We are committed to expanding partnerships and improving international cooperation and training. For example, last week close to 150 representatives from several countries met in Toronto for the sixth annual tobacco diversion workshop. This is perfect example of international cooperation. This is more than a Canadian problem; it's a global problem requiring a global solution.

In closing, based on the growth of the illicit market, it's evident that the current deterrents have to be enhanced and expanded. I can assure you that the RCMP will continue to pursue criminal organizations involved in illicit tobacco manufacturing operations and large-scale distribution networks.

The Strategy is our continued commitment to targeting this crime and it will build on the actions we are already taking to ensure the safety and security of our communities.

I would like to thank you for inviting me to appear before this committee. I am prepared to take any questions you may have.

[The Vice-Chair, Liberal, Roy Cullen]

Thank you, Mr. Cabana.

Our next witness is Pierre Bertrand, Director General, Excise and GST/HST Ruling Directorate, Canada Revenue Agency.

Mr. Bertrand.

[Pierre Bertrand, Director General, Excise and GST/HST Ruling Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency]

Good afternoon, and thank you, Mr. Chairman and members of the committee, for the opportunity to appear today and explain Canada Revenue Agency's role in this file under discussion.

With me today is Phil McLester, who is the director of the excise duties and taxes division.

The CRA is responsible for the administration of the Excise Act of 2001, which establishes the framework for licensing tobacco manufacturers, regulating tobacco products in Canada, and applying excise duties to tobacco products manufactured in Canada or imported. Our focus is maintaining compliance in the legal tobacco market. To this end, we interpret the act and its regulations, and we create policies and other administrative procedures.

On the tobacco file, one of our important roles is the issuance and renewal of tobacco manufacturing licences. Without a tobacco licence, the company does not have the right to manufacture tobacco products, will not have legal access to raw leaf tobacco, and cannot import tobacco without the imposition of excise duty. The licensing function can be described as an important first step in gaining compliance with the legislation.

The act and the regulations respecting excise licences and registrations contain strict requirements for obtaining and maintaining a licence, and these are applied diligently to all applicants. Prior to issuing a licence, the CRA undertakes criminal background checks, ensures a history of compliance with federal tax legislation, contacts provincial authorities to verify compliance with their legislation, and verifies the financial and economic viability of the enterprise.

An important criterion for obtaining and maintaining a licence is that an applicant or licensee must comply with any act of Parliament or of the legislature of a province respecting taxation of tobacco or controlled items. The CRA consults with the province in which an applicant is located. The information provided is evaluated, along with all the information available when assessing the issuance of a licence, or when considering possible suspension or revocation of a licence. In addition, the CRA advises licensees of the need to comply with provincial permit requirements by way of outreach packages, licensing notifications, and visits to manufacturing premises.

A licence has a maximum duration of two years. To be renewed, it must pass through the same stringent requirements noted above. Once a licence has been issued, if the licensee fails to meet the conditions of the licence—e.g., maintaining satisfactory security or complying with the act—a licence may be suspended or revoked. We have suspended and revoked licences when licensing conditions are not met. There are currently 46 tobacco licences in Canada. While we do not specifically track or report on the locations or premises associated with these licences, I can say that there are currently 14 tobacco licensees on first nations reserves.

The CRA undertakes numerous activities to ensure that licensees are in compliance with the legislation, including audits to confirm revenue and regulatory activities to ensure compliance with the control of tobacco products. There are many examples of this activity, such as reviewing internal controls, touring premises, inventory verifications, stamping and marking verification, etc.

In respect of the recent history of federal excise revenues collected on tobacco products, it is public information that over the four years from 2003-04 to 2006-07, federal excise revenues have declined from $3.35 billion to slightly under $2.5 billion. This relates specifically to legitimate tobacco manufacturing production.

Budget 2005 announced funding for a number of tobacco compliance activities, and the CRA has used this funding to advance its tobacco compliance strategy. This encompasses enhanced audits of tobacco manufacturers, tobacco grower outreach and compliance monitoring, and the establishment of an enhanced stamping regime.

We have implemented the first two elements of our strategy. As well, we have completed contracting for a new tobacco stamp that will contain state-of-the-art overt and covert markings to combat counterfeiting and discourage the illicit manufacture or under-reporting of tobacco production. The new stamp will be another tool in the arsenal of federal and provincial enforcement agencies to address a portion of the contraband tobacco challenge.

Government has long recognized that the subject of legislative compliance and contraband tobacco is far-reaching and complex, involving the cooperation of several partner government organizations. To ensure that Canada's tobacco tax laws are effectively applied, CRA works with the RCMP, CBSA, Finance Canada, and the provinces and territories. In terms of our overall administrative role, we also work with Health Canada and Agriculture and Agri-Food Canada. In fact, the CRA participates in numerous fora with provincial, national, and international representation, including the tobacco diversion workshop mentioned by my RCMP colleague. There are a number of other ones.

In terms of our future activities, the CRA will continue to advance our new enhanced stamping regime; support our partners in combating contraband tobacco products; advance collaboration with band councils and manufacturers in the tobacco industry; participate in the World Health Organization Framework Convention on Tobacco Control's intergovernmental negotiating body toward the drafting of an international protocol on illicit trade in tobacco products; and defend, in collaboration with Justice Canada, Canada's interests before the courts to ensure that revenue is protected and compliance objectives are met and maintained.

Mr. Chairman, thank you for this opportunity to speak to you today. We would be pleased to answer any questions you may have.

[The Vice-Chair, Liberal, Roy Cullen]

Merci beaucoup, monsieur Bertrand. I'm sure we'll want to know more about this decline in the tobacco federal excise revenues. I was surprised by your comment.

Nonetheless, we'll move on to the Canada Border Services Agency. Mr. Quartermain, please.

[David Quartermain, Director, Borders Intelligence Division, Intelligence Directorate, Enforcement Branch, Canada Border Services Agency]

Thank you, Mr. Chairman and members of the committee.

On behalf of the CBSA, I am pleased to appear before the committee to explain to you how the CBSA addresses the contraband tobacco situation in the context of our border mandate and to respond to any questions you may have.

The mandate of the CBSA is to provide integrated border services that support national security and public safety priorities. The CBSA is responsible for managing, controlling, and securing Canada's borders by ensuring that all people coming into Canada are admissible and comply with Canadian laws and regulations, and for processing all commercial shipments that cross our ports of entry to ensure that Canada's laws are adhered to.

Under the Customs Act, we are also responsible for investigation and prosecution of border security offences, such as the smuggling or unlawful import or export of controlled, regulated, or prohibited goods, including contraband tobacco. The CBSA investigates commercial fraud, smuggling, and other import- and export-related offences and ensures that the business community complies with Canada's trade and border legislation.

The agency administers more than 90 acts and regulations on behalf of other federal departments and agencies, the provinces, and territories. Where there is a contravention under these authorities, such as the unlawful importation of tobacco products, the CBSA will prosecute offenders, or we will call on our law enforcement partners to lay criminal charges under the Criminal Code of Canada.

The agency works in close partnership at the federal level with our partners represented here at this table: the RCMP, the Department of Public Safety, the Department of Justice, and the Canada Revenue Agency, as well as a variety of partners beyond our borders, including U.S. Customs and Border Protection, the U.S. Immigration and Customs Enforcement, and of course, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives.

Regarding tobacco, the CBSA administers its responsibility in accordance with the provisions set out in the Customs Act; the Customs Tariff; Excise Act, 2001; and the Criminal Code of Canada.

With respect to the current situation, it is notable that the price of Canadian cigarettes has increased by approximately 45% over pre-1994 levels. While this may have motivated some smokers to quit, others seek out lower-cost sources of tobacco. In 2007, CBSA officers made over 3,800 seizures of illicit tobacco, totalling 268,754 cartons of cigarettes, 225 kilograms of cigars, close to 17,000 kilograms of fine-cut tobacco, and just under 3,000 kilograms of pipe and other tobacco products.

Compared to 2006, the number of tobacco seizures in 2007 increased by 43%. This is primarily due to a greater number of seizures made in the postal and courier modes. The total seizures in 2007 represented the highest number of annual tobacco seizures made by CBSA officers since the implementation of the federal tobacco control strategy. This increase can be attributed to better targeting due to intelligence development through monitoring and assessing the contraband tobacco market as required by the strategy.

Counterfeit Canadian and American brand cigarettes, primarily from China, as well as Chinese brand cigarettes are being seized from marine containers and comprise the majority of contraband cigarettes intercepted by the CBSA. Extensive smuggling by organized crime groups continues to occur in the Cornwall-Valleyfield area, both at and between the ports of entry, and this remains a challenge for law enforcement personnel.

Between 2003 and 2007, the CBSA seized approximately 18,000 cartons of cigarettes, as well as carton equivalents in zip-lock bags, at the port of Cornwall, consisting mainly of native brand cigarettes produced on the U.S. side of the Mohawk community of Akwesasne. However, the majority of tobacco smuggling in these areas continues to occur between the ports. Here, the CBSA supports its law enforcement partners by providing resources to assist in intelligence-gathering initiatives.

The CBSA is also noticing that smugglers are making increasing use of the courier and postal systems to move illicit tobacco products into Canada. This mode of smuggling has seen a dramatic increase over the years, but most notably this past year. In 2006 there were 641 seizures as compared to 1,610 seizures in 2007. This is an increase of 151% in one year.

To detect tobacco smuggling at the border, the CBSA uses state-of-the art technology and intelligence information to assess and target shipments coming into Canada.

The CBSA continues to successfully intercept illicit tobacco at the Canadian border. A notable success occurred in July 2007, when the agency seized 49,000 cartons of Chinese brand cigarettes from a marine container originating in China. The cigarettes were discovered during a mobile VACIS scan and a physical examination of the container. The seizure occurred following a cooperative joint enforcement effort involving the CBSA and the RCMP in the Greater Toronto Area, and it resulted in the arrest of seven individuals.

Also, in October 2007, more than 15 metric tonnes of fine-cut tobacco, valued at over $1.5 million, originating in North Carolina and South America, were seized in two separate shipments at two ports of entry in Quebec. The seizures were the result of a joint force operation involving the CBSA, the Integrated Border Enforcement Team, and U.S. Customs and Border Protection agents.

Our largest seizure occurred in December 2007, when four persons in Markham, Ontario, were arrested following a joint CBSA-RCMP enforcement operation. A marine container originating in China arrived containing 51,600 cartons of counterfeit Marlboro brand cigarettes valued at over $3.6 million. Also in December, at the port of Vancouver, CBSA intercepted another container, again originating in China, with 48,950 cartons of Chinese brand and Canadian and American counterfeit brand cigarettes valued at $3.4 million. Duties and taxes evaded were approximately $1.2 million.

In 2001, the Government of Canada introduced the federal tobacco control strategy to improve the health of Canadians by discouraging tobacco consumption. Health Canada is the lead agency in this initiative, and the CBSA is a partner along with the RCMP and other partners seated at this table.

In support of furthering cooperation between domestic and international enforcement partners, I am pleased to say that the CBSA recently co-hosted, along with the partners at this table, the sixth annual Canada/U.S. Joint Tobacco Diversion Workshop. Participants met over three days to discuss tobacco diversion issues. This year's attendees included representatives from various U.S. and Canadian federal agencies and provincial ministries, as well as international guests from the World Customs Organization, the Australian Customs Service, French customs, Her Majesty's Revenue and Customs, the U.K. Border Agency, the New Zealand Customs Service, and the OLAF.

Through the collaborative partnership of the Canadian host agencies—CBSA, the RCMP, CRA—and our American counterparts at the Bureau of Alcohol, Tobacco, Firearms and Explosives and the Alcohol and Tobacco Tax and Trade Bureau, this workshop has become an important forum for exchanging intelligence between enforcement partners, for the building of international relationships, and for the development of both strategic and technical intelligence related to the domestic and international contraband tobacco market.

While the above successes are noteworthy, we at the CBSA recognize our contraband tobacco market continues to be of great concern, and I can assure you, Mr. Chairman, that the CBSA continues to address the contraband tobacco market as an agency, in cooperation with our partners.

[The Vice-Chair, Liberal, Roy Cullen]

Thank you very much, Mr. Quartermain.

Now we'll start with a round of questions. The first round, seven minutes per questioner, will start with Mr. Dosanjh.

[Ujjal Dosanjh, Liberal, Vancouver South, BC]

Thank you.

I see this document that we just received. Not to be critical of the presenters from the RCMP, but this suddenly appears on the day of this hearing. Call me an unbeliever, but I just find that not very persuasive, and I don't know how much went into printing this.

Here are my questions. We know there is contraband smuggled into the country and manufactured in this country. I'd like to know what percentage of the total tobacco trade is contraband, what part of that is smuggled into the country, what part of that is manufactured in the country, where it is manufactured, and why you have not done anything about it—about the manufactured part.

[The Vice-Chair, Liberal, Roy Cullen]

Who would like to start with that? Monsieur Cabana.

[Ujjal Dosanjh, Liberal, Vancouver South, BC]

It's the RCMP.

[C/Supt Mike Cabana]

Certainly, sir. I'm afraid that in terms of being able to provide you with percentages of contraband tobacco in Canada that originates from manufacturers here in the country compared to what originates in the U.S., I'm not in a position to provide you with those statistics. Those statistics would be based on seizure levels and would be—this is my personal opinion—somewhat speculative.

[Ujjal Dosanjh, Liberal, Vancouver South, BC]

I am assuming that there are manufacturers within this country that may be engaging in illicit trade as well. I am assuming that. You can correct me if I am wrong.

[C/Supt Mike Cabana]

No. You're absolutely right.

[Ujjal Dosanjh, Liberal, Vancouver South, BC]

I am also assuming that there are unlicensed manufacturers. I'd like to know both what you are doing with respect to the licensed manufacturers that are engaging in this and where the unlicensed manufacturers are located, and what have you done about them?

[C/Supt Mike Cabana]

As for unlicensed manufacturers that we have identified to date in the Akwesasne territory, we believe that between 11 and 13 factories exist. In the Kahnawake territory, there would 11. In the Six Nations, there would be seven.

[Ujjal Dosanjh, Liberal, Vancouver South, BC]

And these are unlicensed?