Public Safety Committee on May 12th, 2008

[The Chair, Conservative, Garry Breitkreuz]

I'd like to bring this meeting to order. This is meeting 29 of the Standing Committee on Public Safety and National Security. We are continuing our study of contraband tobacco.

I would like to welcome the witnesses we have before us today. We have, from Imperial Tobacco Canada Limited, Mr. Donald McCarty and Mr. Benjamin Kemball. We welcome you, gentlemen, and we will let you begin your testimony.

The usual practice is to have a ten-minute opening statement. We'll then give Mr. Jerry Montour, who is the chief executive officer from Grand River Enterprises, an opportunity to make a presentation. Steve Williams is not here, but Chantell Montour is here taking his place, I presume.

Sir, I will let you or Chantell do approximately a ten-minute presentation after we hear from Imperial Tobacco, if that's all right with all of you.

After that, we will open it up for questions and comments.

Without any further ado, which one of you gentlemen would like to begin?

Mr. Kemball, go ahead, sir.

[Benjamin Kemball, President and Chief Executive Officer, Imperial Tobacco Canada Limited]

Good afternoon, ladies and gentlemen.

First of all, thank you for this opportunity to address you on behalf of the Canadian Tobacco Manufacturers' Council.

Over the past three years we've drawn attention to the alarming growth of the illegal tobacco trade and its disastrous economic and social consequences. I'm heartened by the fact that this committee has called for hearings on such a serious matter. Given that we're discussing illegal activities, I've asked Don McCarty, vice president of the law division and general counsel of Imperial Tobacco Canada, to join me.

Before we get to the potential solutions, I'd like to give you an overview of this illegal market and its consequences. We've circulated a document to pre-read, as well as a CD, which provides detailed information from various different studies commissioned by Imperial Tobacco Canada, the Canadian Tobacco Manufacturers' Council, as well as others, such as the Canadian Convenience Store Association. I'd be happy to answer any questions you have on these studies, or indeed on any other matter concerning this important subject.

In the interests of time, I'll limit my points to the key conclusions. First of all, illegal products represented 22% of the Canadian market in 2007—and over 30% in Ontario and Quebec. Those data were from the last major study conducted, and the findings and the methodology of this study have been widely reviewed and accepted. Even health groups, such as Physicians for a Smoke-Free Canada, recognize it as the most extensive survey available.

In volume terms, illegal products reached 10 billion cigarettes in 2007, and all the indications since then are that it has continued to grow rapidly. The illegal trade has now overtaken Rothmans, Benson & Hedges, and JTI-MacDonald to become the second largest supplier of tobacco products in Ontario and Quebec. It's well on course to becoming the leading supplier nationally—ahead even of Imperial Tobacco, which manufactures 14 billion cigarettes a year.

Now, of that 22% that the illegal products represent, 93% originate from first nations reserves. I have with me here some examples of such products. These products violate a wide range of laws and regulations, including the Excise Act, the Tobacco Act, and the Consumer Products Labelling Act, amongst others. The remainder of that 22% is attributable to cigarettes smuggled in from other countries, and only 1% is attributable to counterfeit—basically the illegal copies of recognized brands, typically smuggled in from countries such as China.

While this is still a sizeable proportion of cigarettes purchased from smoke shacks, the largest and fastest growing means of purchase of illegal cigarettes is through contacts, namely, the criminal networks who distribute illegal products outside the reserves. In many cases, these sales are taking place directly to consumers, and indeed directly to children.

Whereas legal tax-paid cigarettes cost between $65 and $85 a carton—according to the price category in the province—illegal cigarettes are sold at prices as low as $6 for a bag of 200. In other words, they are sold at 3¢ a cigarette. An analysis of cigarette butts outside schoolyards in Ontario and Quebec suggests that the penetration of illegal cigarettes amongst children is running at 30%. In some municipalities it reaches as much as 50% in Ontario and even 70% in Quebec.

The illegal trade in tobacco products is widely seen as a low-risk and victimless crime that hurts only big tobacco and big government. It is true that the legal manufacturers lose several hundred millions of dollars per year in revenues. It's also true that other industry partners are suffering, whether they be wholesalers, retailers who lose an average of $120,000 a year, or the tobacco growers in Ontario whose livelihoods are threatened. And governments in Canada—or more accurately the Canadian taxpayer—are being defrauded to the tune of $1.6 billion every year. But as if that were not enough, it's the disastrous social consequences that demand urgent and effective action.

Canada justifiably prides itself on having the most highly regulated and one of the most highly taxed tobacco markets in the world. These regulations encompass the manufacturer, labelling, testing, marketing, and sale of tobacco products.

Given the inherently risky nature of our products, the major tobacco companies support reasonable regulation and indeed the use of taxation to discourage kids from smoking. We ask only that these laws and regulations be enforced uniformly and that they achieve their purpose. Sadly, neither is true today.

As you can see from the studies, children now have access to cigarettes at pocket-money prices, and criminals do not ask for proof of age. What is more, according to the RCMP and provincial police, many of the networks involved in illegal tobacco distribution also deal in alcohol, drugs, and firearms, with consequent risks to Canadian youth.

More broadly, all Canadians must be concerned that a culture be allowed to develop of casual law breaking.

So there you have it. From a highly regulated legal tobacco market to an illegal, unregulated, and untaxed market.... And we have yet to see the impact of the tobacco display bans, which come into effect in Ontario and Quebec at the end of this month and which will create fertile conditions for the illegal tobacco trade.

Before coming to the potential solutions, let me make clear that I am not calling for a tax rollback. While tax rollbacks have worked in the past, I understand the political pressures that one would bring. But the laws of Canada must be enforced uniformly and effectively or else governments will leave themselves no alternative other than chaos or a tax rollback.

I should also stress that there is no single solution, no silver bullet, to this problem. Any lasting solution will require a combination of measures that must involve and be supported by the first nations leadership. While I can't speak on behalf of the first nations, all the contacts and information we have had confirm that the first nations themselves are very concerned at the damaging effect of illegal tobacco trade on their own communities. Far from being beneficiaries, they have become the victims of crime from outside.

I'm pleased to see that certain first nations leaders have chosen to attend this hearing, and I hope their voices will be heard.

Effective measures to deal with illegal tobacco should include more effective enforcement of all relevant laws, not just taxation but also those covered by the Tobacco Act, amongst others. Proper enforcement would not only drive up the costs and reduce the demand for illegal products, but it would also help tobacco control policies from unravelling.

The announcement last week of the RCMP's 2008 contraband tobacco enforcement strategy is a very positive development, but as Assistant Commissioner Raf Souccar stated last week, enforcement alone will not suffice.

The creation of a national task force is a much needed initiative to coordinate government strategies and actions for the diverse government bodies that can play a role in fighting illegal tobacco. This range includes the Canada Revenue Agency, the RCMP, the ministries of Public Safety, Finance, Indian and Northern Affairs, Agriculture, and Heath. Such a task force should consult the different stakeholders, including the tobacco companies, for such information and recommendations as may be required.

There are areas beyond enforcement that can help to deal with the problem. For example, the supply of specific machinery and materials associated with tobacco manufacture should be properly monitored and controlled. To our knowledge, more than 20 tobacco manufacturing licences have been issued by the federal government over the past few years with very few, if any, inspections. The tobacco companies could also play their part by working with suppliers to the industry to ensure that they apply “know your customer” policies.

Finally, and perhaps most importantly, the introduction of a first nations tobacco tax comparable to the provincial tobacco tax should play a pivotal role. The proceeds could be used to fund the much-needed development programs for the first nations. This concept has proved effective with Seneca territories in the U.S. It's encouraging to hear that here in Canada several first nations leaders are advocating this as part of the solution. There are similar examples of very effective self-regulation in tobacco in first nations reserves such as the Cowichan Reserve in Duncan, British Columbia, where the provincial tobacco tax is enforced, collected, and retained by the first nations.

As you've seen, the situation is dire and has already spiralled out of control. I hope the political leadership--federal, provincial, and first nations--will seize this opportunity to put in place lasting solutions for the benefit of all Canadians. My company, together with the industry I represent, is committed to help wherever we can.

Thank you very much for your time.

[The Chair, Conservative, Garry Breitkreuz]

Thank you very much.

We'll now move over to Mr. Montour. Please go ahead with your presentation, sir.

[Jerry Montour, Chief Executive Officer, Grand River Enterprises]

I too would like to thank the committee for the opportunity. It's kind of overwhelming to me, as a first nations manufacturer, because I know there has never been a time in history when a first nations tobacco manufacturer has actually been allowed to have input into these kinds of hearings.

We've been licensed as a tobacco manufacturer in Canada since 1997. We've contributed around $500 million in tax revenue, from which we've yet to see benefits come to first nations communities. This makes it all the harder for us as a company when we go out and try to lobby first nations governments as a whole to participate in levelling the playing field, which is drastically.... As my colleague pointed out, we're out there trying to sell a bag of tobacco products for somewhere in the vicinity of $28 to $35, and we have other people out there selling them at $6 a carton.

You know, the idea of allowing first nations people the ability to place taxation on the products themselves is not new. I can remember, as early as the late eighties and early nineties, coming to former governments prior to this one and actually suggesting these same ideas. Basically, they didn't even have the time of day to listen to us. I remember sitting with someone as high up as the then-Minister of Finance, I think Mr. Anderson, and telling him that to really get our people to buy into these programs, they were going to have to see some of the benefits of this revenue helping first nations people.

With that in mind, I also have to say that the overall problem with the industry as a whole right now is the word “legal” recognition. Legal recognition is the hardest part of the industry as a whole.

Our company has chosen the avenue of taking on a tobacco manufacturer's licence. Up until eight years ago we were perceived as almost iconic heroes in our community. Under the guidelines of the federal government, paying all the applicable federal taxes, our company flourished. We also founded one of the very first charities among first nations, the Dreamcatcher Fund. We've contributed over $10 million to that. The spinoff effects of our company alone have created over 1,000 jobs on first nations communities, all under the guidelines of paying the applicable federal taxes.

I see the chief of the Akwesasne reserve here. I can totally understand, from her perspective, how it must hurt to sit there and have her people demonized as criminals. It's almost a savage-like environment. As soon as they point out there's a problem with tobacco, they say, “It's got to be Akwesasne”. And that's the core of the problem.

I've never once heard that we should find out who supplies the raw materials to this industry and bring them to task. I can guarantee you that CEOs of publicly traded companies don't like to be indicted, and people of first nations descent who are in desperate situations are easily capitalized on. But I don't know how you're going to be able to manufacture tobacco products if you can't source out the raw materials.

Let's talk about the health ramifications and other things. If you believe for a second that first nations people don't have their own youth to consider, you really have to....

Let me give you the mindset of our young people. Let me give you the mindset of being a young first nations person going to high school: leaving your community on a bus, getting to the end of your territory, seeing probably 40 or 50 OPP officers sitting outside the edge of your reserve because of unresolved land issues, and thinking you're going to change your life, you're going to get a job. So you go back to your community. But the only opportunities that present good employment on our first nations territories right now are tobacco-related.

In terms of the transition period, just like the tobacco farmer.... I'm very proud to say that at Grand River Enterprises, all of the tobacco content in our tobacco products--plus we happen to pay all applicable federal taxes--is 90% domestically grown.

Now, I don't want to sit up here and try to be like an advocate for tobacco and be attacked by all of the public health concerns and stuff. From a global perspective, we are recognized as the pioneers of making people aware of the ramifications of tobacco products. Our products display health warnings to put us on a level playing field with our competitors. But when you have things like this happen--your product is being blatantly counterfeited and sold right in your own communities--it's discouraging.

Whether you're pro tobacco or not, there is nothing to disclaim the things that we've been asked to put on these packs. There's no proof from an industry standard that we can say to you that smoking is not bad for your lungs or that it doesn't hurt you. So we don't have any medical evidence to back up anything different, and we have a responsibility to put those health warnings on those packs. Our company is a first nations manufacturer, and we took it upon ourselves to adhere to all those guidelines, only to be slapped in the face and have our product counterfeited and put right on those same packs.

In this public forum I would also warn all first nations communities that allowing the organized crime element to come into first nations territories is like allowing wolves in sheep's clothing into your communities.

There seems to be some confusion over who has the ability to tax the product, and we're all waiting. I met the former chief of Akwesasne, Chief Mitchell, when I walked into the room. When he and I were trying to pioneer these arguments, we were much younger men. There have never been changes brought about on the whole aspect of jurisdiction and who has the ability to tax these products. We still don't have it 20 years later. If we're going to base all of our actions on the fact that we're going to have to figure out who has jurisdiction over the territories first, I'm really concerned that absolutely nothing will get done.

As the CEO of this enterprise, I'm very concerned that our products are blatantly displayed in first nations territories. The RCMP reported there were something like 140 different organized criminal elements working along with first nations people as a whole in the tobacco industry. I speak only as an individual. I'm not a hereditary chief; I'm not currently elected as chief of a first nations territory. But I don't want, every time a committee talks about our people, to have them perceived as embracing organized crime and wanting those activities to take place on their reservations.

You're going to hear from another man who is chief of a reserve and also pays all the applicable federal taxes. I'm not here to argue the tax jurisdiction. I'm here to make you aware that you cannot make tobacco products without raw materials. It's only just recently, thank goodness, by the actions of the government that you've restricted tobacco machinery from getting into the hands of these operations. I applaud you for that. It was a great first move. Now take all of the other necessary steps to at least make sure that there's total transparency in the industry as a whole.

We can walk through who has jurisdiction over the taxation at a later date, but everybody knows what it's like to try to extract organized crime from a community once it embeds itself there. I'm very concerned.

Because we're first nations businessmen, in the first eight years we had the licence and were paying all the applicable federal taxes, as soon as we were able to recognize some benefits from this we reinvested our money in the first nations communities. You saw lacrosse arenas go up, the Ohsweken Speedway, gas stations, tech companies, and a lot of other spinoff and satellite companies that were owned by the directors or people who were working within the companies that were legally compliant.

I've watched that slowly diminish. I believe it's diminishing because a lot of the time these activities involve people who don't have first nations' agendas at heart. The money is leaving the country and going to other countries that participate in activities. I'm sure you have very good policing agencies; they can help you identify them.

It's very difficult to even speak in front of a committee when in the back of your mind you're thinking, “Don't sell out your own people. Make sure you give your people the opportunity to go after some of that revenue stream too. It's all that your people have as a revenue stream.” By the same token, as a first nations businessman, am I not entitled to a level playing field? Am I not entitled to play under the same rules as everybody else?

You talk about provincial jurisdiction. I can speak only for myself; I don't have the privilege of speaking for every other tobacco manufacturer on the reservation. But I can tell you our company is the largest compliant tobacco manufacturer on a first nations territory, and we don't want to see our native-made products in retail stores off the reservation.

We've never been granted provincial permission to go into Ontario and sell tobacco products, which is an issue that will be before the courts one day. I don't want people taking products that are destined for first nations people and selling them in convenience stores. But do you know what? If you toughen up your laws, that won't happen.

I know in the United States of America, if you sell unstamped cigarettes for a second or third time, the punitive damages are unbelievable. They usually result in long-term incarceration. So you can't have a mellow environment and say, “Well, we're looking out for the rights of first nations people.”

First nations retailers who are truly committed to building their own communities only have their products for sale on first nations territories. They don't choose to have their products sold into the mainstream.

I've already touched a little bit on what it's like for the younger people growing up. Aren't they entitled to be working in a manufacturing facility? As long as tobacco is legal and recognized, I think they're entitled to be there. Do you want them working in a facility where there are firearms at their feet because they have to fear the raids and they have to fear the aggression? Because they're desperate for those jobs, they allow themselves to work in those environments. Is that what you want for the youth?

One thing first nations people do is believe in family. If you watch, we're the fastest growing population in Canada today. You have to provide opportunities for our people as well. If you can help me with restricting the raw materials that go into these tobacco products and move toward legal recognition, you will truly make Canada a safer place.

Thank you very much for your time.

[The Chair, Conservative, Garry Breitkreuz]

Thank you very much. We appreciated the presentations from both of you.

Now the usual practice at this committee is to allow for some questions and comments. The first person on my list is Mr. Cullen.

[Roy Cullen, Liberal, Etobicoke North, ON]

Thank you, Mr. Chair.

Thank you, Mr. McCarty and Mr. Kemball, Mr. Montour and Ms. Montour.

I don't know if you've seen that the RCMP has just come out with its contraband tobacco enforcement strategy. I don't know if you've had a chance to see it. One of the things it says is that the largest proportion of all contraband tobacco seized by the RCMP originates from illicit manufacturers on the U.S. side of Akwesasne territory.

Mr. Montour, you talked about how the United States takes some pretty serious action against companies or organizations that don't mark their tobacco. It doesn't seem to be that willing, as I understand it, to take action against contraband cigarettes being smuggled across into Canada.

How do we deal with that? Do we have better interdiction methods? The geography for some of it is that they can move right through first nations territory from the U.S. side to the Canadian side. How do we deal with a good number of these products coming from the U.S. side?

[Jerry Montour]

First of all, I don't necessarily agree with the statistics that all of it comes from that particular origin. Beyond that, I think the number one way to get the attention of the U.S. government is through the total lack of transparency. In other words, if there's an opportunity, especially after 9/11, for billions of dollars to be allowed through the monetary system unaccounted for, that's something they're interested in.

The manufacturers that may choose to send product through that avenue are saying the product is for export and therefore it does not concern the U.S. government. Maybe there's some merit to their argument.

But the fact that the financial traceability of those activities is not transparent is a very good way to approach that avenue, as far as I'm concerned.

[Roy Cullen, Liberal, Etobicoke North, ON]

We had the problem in Canada not too long ago of a huge volume of tobacco products going into the United States and of course coming back to the Canadian side. I think that's been technically dealt with, because the taxes are now put at the plant door.

Let me come back to this question you raised about the raw materials and equipment. The manufacturers now in Canada that are licensed and operating legally, and the ones that aren't, probably have the equipment to make those products.

At the meeting with the officials the other day I asked them about the paper and the filters. The officials seemed reluctant to pursue that. They said the filters come in big slabs and they can be used for a variety of different things. But it seems to me that you can control any new equipment coming in and you can control the papers and the filters, because I gather there's a very limited number of suppliers, and I think this is the point you alluded to. Is it feasible to do that?

[Jerry Montour]

Absolutely. I'm embarrassed to say that I did not hand this report to all of the honourable people at this meeting, because I didn't do it both in French and English. It was a lack of consideration on my part, coming to this meeting. I will have one in your hands before the week's out, in both languages.

The only reason I did not hand this out, giving you total insight to exactly what my points are on this, is that I had it in English only. I think it would have been a lack of respect for the people of Quebec and the people who choose to speak French in this meeting. That's why I didn't hand it out.

I do have that outlined, and I promise to have it to you before the end of the week.

[Roy Cullen, Liberal, Etobicoke North, ON]

Thank you. And that deals with that very question of how the federal government could control those raw material input items coming in?

[Jerry Montour]

I think Benjamin would be as committed as I am to really helping you identify...and the actual main source of the raw materials themselves, if there is an interest in that.

[Roy Cullen, Liberal, Etobicoke North, ON]

Before we do that, I have a question for Mr. Kemball. Maybe you can expand on that.

When we had the Finance Canada officials here, they seemed reluctant to indicate the magnitude of the contraband tobacco. I think you put a number on it in terms of taxes--$1.6 billion per year. I'm sure the Department of Finance has that number as well.

Now, you talked about putting on a first nations tobacco tax as a possibility. They've done that in the United States. But if you have on these first nations reserves organized crime involved, as Mr. Montour has indicated, as well as the RCMP, surely it's not just a question of the jurisdiction of whether there's a tax or where it goes to. When you have organized crime, they're looking at the spread between not paying taxes and the margin they can use to make a lot of money.

First of all, there's some jurisdiction on the legal questions, the constitutional questions around allowing first nations to take control of that tax, but is that going to really deal with the problem? If organized crime is involved, they just want the spread, don't they?

[Benjamin Kemball]

Yes, that's true. The manufacturer of cigarettes on the Canadian side of the reserves, or any reserves within Canada, should carry a federal excise. Federal excise should be applied to that.

Clearly that is not happening when you talk about $6. The federal tax alone, to say nothing of the provincial tobacco tax and so on, which would apply outside the reserve, is way in excess of $6. So there is an issue of enforcement of the laws with the Excise Act. But our understanding is that any manufacturing operation, provided it complies with the federal regulations and laws within the reserves on the Canadian side, should do so; however, the criminal activity is when those cigarettes are sold to non-status Indians or taken off the reserves for resale to others. That's where criminality gets involved.

I think the RCMP can speak better about the nature of the criminal networks that are operating off the reserves, but that is where the key illegality happens. There are other laws that should be respected concerning the manufacture: for example, health warnings, the use of low-ignition propensity cigarette paper, which is also covered under Canadian laws and regulations. All of those should be respected. But I totally agree with you, there is a need. If there is to be any additional tax over and above the federal excise, there does need to be agreement on the enforcement of both the federal excise as well as the first nations tax.

I can't see who would lose out from the introduction of a measure such as this. You'd be reducing the amount of illegal trade, you'd be reducing the revenue losses for federal and provincial governments, and on top of that, you'd be generating useful funds for the much-needed development programs on the first nations reserves.

[Roy Cullen, Liberal, Etobicoke North, ON]

I will just pursue that a bit. You're saying that the organized crime occurs mostly when the cigarettes leave the reserves, but if you have people running drugs, firearms, illegal immigrants, contraband tobacco, from the U.S. side or within the Canadian side, organized criminals are involved in that, are they not? They're not going to just say, “Well, we have a new tax. The whole tax regime has been sorted out. First nations will get a bit more. The governments have worked all this out. We can finish all this and go home.” They're not going to do that, are they?

[Benjamin Kemball]

No, they're not, not given that they're violating so many laws today. But this is the point I was trying to make in terms of the political commitment that is needed. If we are going to have a first nations tobacco tax applied, which will solve many problems, then it requires political leadership, both within the first nations, the federal government, and also the provincial governments, to make sure there is a commitment to making this happen.

[The Chair, Conservative, Garry Breitkreuz]

Your time is actually up. We'll come back to you.

Now we'll go over to the Bloc Québécois.

Monsieur Ménard, do you have a question or comment?

[Serge Ménard, Bloc, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chairman.

Mr. Montour...

[Jerry Montour]

I'm embarrassed to say, sir, that I don't speak French.

[The Chair, Conservative, Garry Breitkreuz]

No, that's fine.

Do you all have your little ear pieces in for translation?

[Serge Ménard, Bloc, Marc-Aurèle-Fortin, QC]

I know how difficult it is to learn another language.

As I understand it, you disagree with the RCMP and the tobacco companies about the volume of illegal cigarettes sold in Canada that originate from first nations reserves.

[Jerry Montour]

I'm sorry. Maybe I misstated that. I would just say that I can't agree with it. I don't have as much access to the studies as they do, but it certainly is a problem.

[Serge Ménard, Bloc, Marc-Aurèle-Fortin, QC]

Yes, but I understood that in the report that you will be presenting to us, you conduct your own study of the volume of illegal cigarettes originating from first nations reserves.

[Jerry Montour]

Yes, I do.

[Serge Ménard, Bloc, Marc-Aurèle-Fortin, QC]

You are going to do your own study. Correct?

[Jerry Montour]

Yes.