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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 17 - Evidence - May 2, 2012


OTTAWA, Wednesday, May 2, 2012

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. for the review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (S.C. 2000, c. 17), pursuant to section 72 of the said Act.

Senator Irving Gerstein (Chair) in the chair.

[English]

The Chair: Welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order. This afternoon we continue the five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This is our sixteenth meeting on the subject. In conducting this review, the committee has heard from a number of the so-called regime parties involved in the implementation and administration of this legislation. In recent weeks, we have been hearing from those familiar with and impacted by the regime, including industry groups and associations, independent experts in the field and our international partners.

This afternoon we are pleased to welcome Ms. Pénéla Guy, Director, Regulatory and Government Affairs for Imperial Tobacco Canada. Colleagues, we have one hour for this session.

Ms. Guy, the floor is yours.

[Translation]

Pénéla Guy, Director, Regulatory and Government Affairs, Imperial Tobacco Canada: Thank you, Mr. Chair, for the opportunity to appear before the committee as it conducts its five-year review of Canada's Proceeds of Crime and Terrorist Financing Act.

We have been following your study with interest and are pleased that the illegal tobacco trade is now part of the discussion.

There are, literally, hundreds of millions of dollars at stake, with publicly reported links to organized crime, money laundering and even terrorist financing.

I appreciate that most of you do not smoke and may not support smoking. I am not here today to debate the rights and wrongs of smoking, but instead to discuss an issue that is undermining everything that is being done to achieve Canada's tobacco control goals and is robbing governments of hundreds of millions of dollars each year. And while many of you may not be concerned about the impact that illegal trade has on a tobacco company, I am sure all of you are concerned about the effects that it has on our families, our communities, and our country.

Our purpose in appearing today is to bring to the committee's attention Canada's illegal tobacco crisis, which is an extremely lucrative — and relatively low risk — criminal activity in this country, and globally one that international terrorist organizations are turning to as a source of revenue. Likewise, in March, the RCMP in New Brunswick called illegal tobacco a huge money maker for organized crime.

It is our hope that you will include a strong recommendation to act on contraband in your report to the government. At the end of my presentation, I will make a series of concrete recommendations for you to consider.

[English]

Established in 1908, Imperial Tobacco Canada is Canada's leading tobacco company, offering brands like du Maurier, Player's and Peter Jackson to approximately 5 million adult Canadians who choose to smoke. Our company is headquartered in Montreal and employs 650 people across Canada. Imperial Tobacco Canada is committed to conducting its business responsibly, in a manner that meets society's expectations of major corporations. We recognize the health risks associated with tobacco consumption and strongly believe that kids should not smoke. In fact, our company has supported efforts to meet that goal, including the government's ban on flavoured little cigars and cigarillos. Imperial Tobacco Canada is a law abiding corporate citizen that strictly follows all laws and regulations that governs the legal tobacco industry and that pays all required taxes. Unfortunately, the Canadian tobacco market is being taken over by illicit operators who avoid most regulation and taxation, rob governments of hundreds of millions — even billions — of dollars in tax revenue and, thereby, undermine all efforts at tobacco control. That is why we are here today. I will now review some of the facts about the size and scope of Canada's illegal tobacco crisis. Since 2006, illegal tobacco has made up between 16 and 33 per cent of the total market, depending on the year. Although typically more of a problem in Quebec and Ontario, the illegal tobacco trade is a national problem, as demonstrated by the seizures happening from coast to coast. Just two weeks ago, the RCMP in Prince Edward Island stated that illegal tobacco is taking a big toll on the province.

According to the RCMP, illegal cigarettes are supplied by approximately 50 illegal factories operating in Canada and another eight to ten in the States, all located on First Nations reserves.

However, this criminal activity is not confined to reserves. Just last week, the RCMP raided a major illegal tobacco manufacturing facility in Mississauga.

These illegal cigarettes are sold either on-reserve, through 300 smokeshacks identified by the RCMP, or off-reserves, through an organized network of resellers. A variety of tobacco products are offered, ranging from loose cigarettes in transparent baggies to branded packs.

[Translation]

According to the RCMP, there are more than 175 groups linked to organized crime involved in this illegal trade. For example, a 2010 National Post series identified the Hells Angels and the Russian mafia as key players in the illegal tobacco trade.

These groups also traffic drugs and arms. Using the PEI example again, the RCMP stated that some drug dealers in the province have switched to and/or added contraband cigarettes to their stock-in-trade. In addition, there have been reports that profits from the sale of illegal cigarettes may fund international terrorist organizations. I will return to that point later.

In 2010, it is estimated that federal and provincial governments lost over $1.5 billion in tax revenue to the illegal tobacco trade. The federal portion is approximately $600 million — a huge figure in a period of deficit fighting and program cuts. This past year, the Government of Quebec estimated it is losing between $220-420 million annually to illegal tobacco.

[English]

Where does that money go? It does not go to law abiding retailers, tobacco companies or governments. That is why we have encouraged FINTRAC to look into this matter.

Over the past few years, it has been suggested by various sources that the money is going to international terrorist groups. First, the terrorist financing threat was identified in the RCMP's Contraband Tobacco Enforcement Strategy, which was released in May 2008. Second, the U.S. Committee on Homeland Security chaired New York state representative Peter King found, in a report published in 2008, ``a terrifying nexus between cigarette smuggling and terrorism.'' Mr. King also cites, in a published article, linkages between cigarette smuggling and groups like Hezbollah and al Qaeda. Third, in October 2009, Canwest reported on internal RCMP intelligence documents warning of an illegal tobacco trade generating hundreds of millions of dollars that could be used to fund other criminal activities. The RCMP documents listed those activities as ``the smuggling of drugs and firearms, the financing of terrorism, and money laundering, among others.''

Fourth, also in 2009, the U.S. Department of Justice's Bureau of Alcohol, Firearms and Tobacco claims that organized criminal groups, including those tied to terrorist organizations, are engaged in illegal trafficking in alcohol and tobacco products, including counterfeit tobacco products.

Fifth, a study from George Mason University found that cigarette smuggling is the second largest revenue source for the Taliban.

Finally, the U.S. government's Accountability Office ranks cigarette smuggling among the top fundraising activities used by terrorists.

These examples are the reasons why we believe no discussion about the proceeds of crime, money laundering and terrorist financing is complete without looking at contraband tobacco.

[Translation]

The federal government and some provincial governments, particularly Quebec and Ontario, deserve some credit for introducing new enforcement measures to combat contraband. We were also very pleased to see the 2011 Conservative election platform include new commitments to fight contraband, including mandatory jail time for repeat offenders and a new RCMP anti-contraband force of 50 officers. We look forward to those commitments being implemented.

However, none of the actions to date or the election commitments address the heart of the problem — the illegal factories producing billions of cigarettes annually, plus the smoke shacks selling this product outside any regulatory or tax framework.

While your committee will consider new rules for financial institutions, real estate, insurance, and so on, we ask you to consider what is being done about the large and obvious problem of illegal tobacco.

Passing new laws or amending existing ones is only effective in addressing proceeds of crime, money laundering and terrorist financing if they are enforced. Every day of inaction means millions more dollars flowing to organized crime.

[English]

We are, therefore, urging the committee to include the following in its report to government: One, ensure border integrity. Do not relocate the port of entry in Cornwall, Ontario, to the U.S. Second, follow up on the election commitment to impose mandatory jail time for repeat offenders and create a new RCMP anti-contraband force of 50 officers. Three, enforce the law equally for all tobacco manufacturers and retailers. Four, do not raise tobacco taxes. Five, deploy the long-awaited contraband public awareness campaign. Six, create a joint Quebec-Ontario-federal working group to share knowledge and best practices and to coordinate efforts in the fight against illicit tobacco sales.

These are concrete measures that would address the threat of money laundering and terrorist financing stemming from the illegal tobacco trade. Finally we encourage senators to launch an in-depth study of contraband. Senator Segal tried to launch this study twice.

[Translation]

Thank you all for your attention and I look forward to your questions.

Senator Hervieux-Payette: Welcome, Ms. Guy. It is a pleasure to see you. Let me turn to your recommendations right away. You said that we should impose mandatory jail time. That is perhaps one of the very few points I agree with.

In terms of the RCMP anti-contraband force of 50 officers, since we are in the process of reviewing a budget with many cuts, do you know whether those officers are going to be affected?

Do you have any news? Have you checked? I have not seen anything in the budget saying that this force might have to disappear. But do you have the assurance that it will continue to exist?

Ms. Guy: I have no guarantee that it will continue to exist. However, I would like to mention how effective an organized police force was in the region of Cornwall. The Cornwall task force was set up. That initiative was very successful in reducing the quantity of products entering through that border post.

As to the money available, I understand that we are going through a period of economic restraint. But if we recovered the $600 million lost every year to illegal trade, we would be able to fund that group, at least in part.

Senator Hervieux-Payette: Let us talk about the information you have on terrorism. Have you obtained more information from American authorities than from Canadian authorities? Based on how you are presenting the information, it seems that our American colleagues take care of surveillance and have the information whereas the information we have is not as specific.

Ms. Guy: Indeed, the information made public comes from the United States. It is largely based on the work done by the Department of Homeland Security. A number of think tanks have tackled the issue in the US.

In Canada, it is mainly the RCMP that has reported that the link between the illegal tobacco trade, organized crime groups and terrorism. The links between the financing of terrorism and the illegal tobacco trade have been made public by CanWest based on the documents they obtained from the RCMP through an access-to-information request. Those documents were not necessarily made public by the RCMP at the outset.

I am not sure where you are at with your hearings, but, although RCMP officials have appeared before your committee in the past, if you have the opportunity to call them back to specifically talk about contraband tobacco, you would surely obtain more Canadian information.

Senator Hervieux-Payette: You are encouraging us to launch a specific study on contraband. Are you suggesting that it be only on contraband tobacco, or also on contraband in general, including firearms and other products that enter Canada illegally? When you say contraband, it is not just tobacco but also other products, correct?

Ms. Guy: Absolutely. When we look at the seizures done by police forces, we can see that tobacco products are rarely the only products involved. There are always drugs, money and firearms.

Senator Hervieux-Payette: Do you know whether there are regular police raids in the small shops that sell cigarettes in Kahnawake?

Ms. Guy: To my knowledge, there are no police raids in what are known as smoke shacks or points of sale. Police operations have been carried out previously on some reserves in Quebec, but they always had to do with drugs, not tobacco.

[English]

Senator Tkachuk: Thank you for your testimony today. I have a few questions. What is the cost of a package of cigarettes without tax? How much of the $11 to $12 per pack that the consumer pays is tax?

Ms. Guy: Between 50 per cent and 80 per cent of the price of a pack of cigarettes is tax. For example, a legal pack costing $12, which would be a premium category, would cost $4 without tax.

Senator Tkachuk: What do illegal packs sell for?

Ms. Guy: Illegal cigarettes often come in packs of 200. A carton of 200 legal cigarettes sells for between $70 and $100. The same number of illegal cigarettes sells for between $15 and $20.

Senator Tkachuk: It is a matter of economics, really. When governments increase the cost, it creates a huge underground industry for a legal product, not an illegal product like cocaine or heroin. What would the price have to be to stop the smuggling? Let us put aside the fact that the prices are prohibitive, and I am not sure if it reduces smoking because they are buying cigarettes for $4 on the illegal market. They are still getting cigarettes, just not from the retail store. They are still buying cigarettes and there are no taxes being paid.

I remember when former Prime Minister Chrétien lowered the price of cigarettes for awhile. It had a significant effect on stopping the illegal sale of cigarettes because it took away their market.

Ms. Guy: Right, overnight.

Senator Tkachuk: How long did that last?

Ms. Guy: We started to see a comeback of illegal products into the market in about 2005; so it took eight to nine years. At the time of the tax rollback, I am sure many of you will remember when that happened, the illegal market disappeared overnight.

Senator Tkachuk: Would you advise that being done? I do not know how difficult it would be politically. Does the industry have an estimate of how many cigarettes are sold illegally? What is their market share of the total sale of cigarettes?

Ms. Guy: For the past few years that we and other groups — even tobacco control groups — have been measuring the size of the illegal market, it has ranged nationally between 16 per cent and 33 per cent. It has reached as high as 48 per cent in Ontario and 40 per cent in Quebec.

Senator Tkachuk: Those are illegal cigarettes.

Ms. Guy: Yes, illegal cigarettes purchased. That has come down over the past few years, but lately we are seeing a slight increase again. It is a little volatile. It is much lower, we can say, than what it was in 2008, but it is very widespread.

Senator Tkachuk: I am always surprised by the number of young people that I see smoking cigarettes — especially females, who seem to be a big market. Probably not being able to afford the legal cigarettes, my guess is that most of them buy black market cigarettes that are sold in the high schools.

Ms. Guy: A few years ago, the Canadian Convenience Stores Association conducted a study that we referred to as the ``Butt Study'' where they collected cigarette butts around high schools in Quebec and Ontario. In Quebec, it was almost 50 per cent of the cigarette butts collected around most high schools, going to as high as over 80 per cent in one municipality in Quebec; and it was about 40 per cent in Ontario. That was a few years ago.

Senator Tkachuk: I presume the tobacco industry has no self-interest in keeping that except maybe from a public relations perspective.

Some jurisdictions have reduced smoking significantly without the high taxes. I know California was one of the first. It was a state that reduced its smoking substantially. No one smokes in California. Cigarettes were cheap. They were three and four dollars. People did not smoke because governments found other ways to cut down smoking by exposing people to the health hazard. What has happened is that governments have said, ``We will solve that problem by increasing tax,'' and they are not looking at other ways to solve the problem because they see this as a way to solve the problem. However, all it has done is create an industry that is running parallel to the tobacco industry but, I do not think, reducing smoking. I think smoking is still going on. People are buying cheap cigarettes because there are no other programs out there that are big time. We hear people say, ``Put these ugly pictures on.'' That will not stop people from smoking. I think people have to find another way to quit. I do not know. I am just trying to seek out new ways to find out. I would like to have other jurisdictions studied. I would like to find out, chair, how other jurisdictions have reduced smoking. Some jurisdictions have taken the lazy route like we have, which is to increase the price, and some jurisdictions have worked hard at it and are reducing smoking without increasing the price. California is now doing both because they are broke and see that as a way to get cash. Other jurisdictions have not.

Senator Massicotte: Addicted to the cash.

Senator Tkachuk: Who does not get addicted to cash? We all get addicted to it.

The Chair: Senator Ringuette?

Senator Tkachuk: She smokes for most of us. We are working hard on her to quit.

Senator Ringuette: I pay the taxes on it.

I was a member of Parliament in the mid-1990s when the issue was certainly a major one. Then, one of the tactics was to reduce both federal and provincial taxes on cigarettes, and it worked at that time.

If memory serves, Imperial Tobacco was involved in another scheme that did not involve the payment of taxes to the federal or provincial government on their product. However, maybe sometimes we have too many memories.

You have indicated that you estimate that the federal government is losing $600 million a year.

Ms. Guy: I am sorry. Could you repeat the question?

[Translation]

Senator Ringuette: In your presentation, you said that federal and provincial governments are losing $1.5 billion in tax revenue every year.

Ms. Guy: Yes.

Senator Ringuette: Only in tax revenue. But what is the industry losing?

Ms. Guy: Our exact losses in revenue? We are definitely losing a lot of money.

Senator Ringuette: Since you are able to estimate how much the government loses because of the black market, you must be able to tell me what the losses are for the industry. What are the losses in revenue for Imperial Tobacco because of contraband?

Ms. Guy: The only thing I can say is that governments make seven or eight times more money from the sale of tobacco products than we do.

Senator Ringuette: So you are saying that — Is it 7 or 8 per cent?

Ms. Guy: Seven or eight times more.

Senator Ringuette: Does that mean that you lose $100 million every year?

Ms. Guy: They make a lot of money. I cannot tell you the exact number.

Senator Ringuette: I find it odd that you were able to tell us that governments lose X amount of money in tax revenue, but that you are not able to tell us what the industry is losing.

From your presentation, I am also able to see that you seem to know all about what you call ``smoke shacks'' and points of sale. Have you shared that information with the RCMP?

Ms. Guy: Yes, the RCMP is definitely aware of that. Actually, the points of sale have been made public in a brochure from the Canadian Convenience Stores Association. The RCMP is perfectly aware of where manufacturers and points of sale are.

Senator Ringuette: Has Imperial Tobacco met with the RCMP to find out what activities are being planned to thwart contraband?

Ms. Guy: We are cooperating as much as we can with police forces. Now, are they sharing their strategy with us? I would not be able to tell you.

Senator Ringuette: Have you worked together by sharing information on contraband?

Ms. Guy: Yes, we share all the information we have with anyone who can take effective action against illegal trade.

Senator Maltais: Welcome, Ms. Guy. In a former life, I was in another parliament in 1980 and 1995. Every year, we met with your company and we raised taxes until we had to lower them. That calmed everything down a little, but it did not solve the problem. Where do you get your tobacco supplies?

Ms. Guy: Leaf tobacco?

Senator Maltais: Yes.

Ms. Guy: We get it on the international market and from Ontario as well.

Senator Maltais: Do Ontarians still produce tobacco?

Ms. Guy: Yes, a lot.

Senator Maltais: Do Aboriginals produce tobacco?

Ms. Guy: I cannot give you an answer.

Senator Maltais: Where do they get their supplies from?

Ms. Guy: I cannot give you an answer.

Senator Maltais: As the saying goes, you cannot make an omelette without eggs. You cannot make cigarettes without tobacco. That is clear as day, so to speak. Why is it that smugglers can get tobacco? If I were to own a still, it would not be for very long. The Sûreté du Québec or the municipal police would arrest me because you are not allowed to make and sell alcohol.

How can those people get away with making cigarettes, without a licence and without anyone arresting them? Why?

Ms. Guy: Once again, I would invite you to ask the RCMP, the Canada Revenue Agency and Health Canada to appear before your committee in order to discuss those issues and to address your questions specifically.

Senator Maltais: What ties do you have with Rothmans, the other Canadian company in Quebec?

Ms. Guy: Rothmans/Benson & Hedges inc., GTI Macdonald and our company are usually referred to as the big three tobacco manufacturers. But there are also smaller tobacco manufacturers. In Canada, 49 tobacco manufacturing licences have been issued, but I cannot give you any additional information on that.

Senator Maltais: To your knowledge, do they have the same problem as you?

Ms. Guy: In terms of losses in revenue as a result of illegal trade?

Senator Maltais: Yes.

Ms. Guy: Of course.

Senator Maltais: Where is illegal trade, or manufacturing rather, concentrated?

Ms. Guy: According to the RCMP, there are basically 50 tobacco manufacturing factories on First Nations reserves in Canada. Part of the production is also done in the U.S. on the Akwesasne reserve.

Senator Maltais: Can the government do something about tobacco producers? Do you need a licence? I smoke. If I go to buy a case of tobacco from a producer in Ontario, do I need a licence?

Ms. Guy: If you go to a ``smoke shack'' on a reserve?

Senator Maltais: If I go to a producer in Ontario, do I need a licence to buy a case of tobacco?

Ms. Guy: Yes, you do need a licence to be able to buy tobacco leaves.

Senator Maltais: Do smugglers have a licence to buy tobacco leaves?

Ms. Guy: I cannot answer that question, at least not on behalf of the company. I could just give you my personal opinion.

Senator Maltais: You mentioned something important; you link cigarette smuggling directly to Al Qaeda and other terrorist groups. How did you come to that conclusion?

Ms. Guy: Actually, I did not establish that link myself, neither did my company. We use publicly available information. We use a number of sources of information in order to arrive at that conclusion. Some are in the United States: studies have been conducted by a committee of the Department of Homeland Security. The Department of Justice's Bureau of Alcohol, Tobacco, Firearms and Explosives has also established that link. Here in Canada, the RCMP seems to have internal documents that were made public by CanWest, which obtained them through an access to information request. They made the link in those documents between the illegal tobacco trade and the financing of terrorist organizations.

Senator Maltais: I am going to ask you a question that you are not going to like. Everyone says that tobacco is harmful, every major expert says so and I am sure they are right. If you shut down tomorrow, if Imperial Tobacco locked its doors, would that solve the tobacco problem in Canada?

Ms. Guy: Absolutely not. The very next morning, there would be just as many cigarettes on the market because the smugglers have the capacity to produce the equivalent of the entire legal demand for tobacco.

Senator Maltais: Could we kind of compare the situation with the Prohibition era in the United States, where alcohol was banned and Canadian manufacturers prospered because of it? Does alcohol smuggling go hand in hand with cigarette smuggling? Or the smuggling of firearms, as you mentioned just now?

Ms. Guy: What I can tell you is that, generally, when contraband tobacco is seized, other products are also seized, such as drugs and firearms.

[English]

Senator Harb: In your recommendations you mentioned that you want the government to enforce the law equally for all tobacco manufacturers and retailers. We know retailers. Could you elaborate on those tobacco manufacturers where the law, in your view, is not being applied equally?

Ms. Guy: I have to say respectfully that that question would be better directed to Health Canada, the Canada Revenue Agency and the RCMP. They are responsible for enforcing the laws that they administer. Certainly, they are not shy to enforce them on us. However, I can speak to the laws that regulate us, for example.

We have a rough estimate of 200 laws and regulations that we have to abide by. In one way or another, they regulate the legal tobacco industry. That ranges from having to put health messages or graphic health warnings on our packages. We have to report to government on a weekly, monthly, bimonthly, quarterly, biannual and annual basis. Everything we do is turned inside out by governments. Regularly, there are inspections of our facilities and offices. Every time there is a new law or regulation, someone comes in to see if we are compliant.

Senator Harb: We would be on the same page. It is not Health Canada who is making this recommendation and not the RCMP. It is your company making this recommendation.

Ms. Guy: Yes.

Senator Harb: I repeat. You want the law to be enforced equally for all tobacco manufacturers and retailers. I ask you specifically: Can you give us the name of one of those manufacturers that you believe the law is not being applied to equally?

Ms. Guy: No, I cannot.

Senator Harb: Okay. You want to have border integrity. You talked a bit in your presentation about a number of on-reserve organizations that are manufacturing tobacco products. Do you know the source of the raw material used on these reserves?

Ms. Guy: No, I cannot answer that. I do not have knowledge of their supply chain.

Senator Harb: I understand.

You mentioned about 50 different factories. Do you know whether some of those factories have licences to operate?

Ms. Guy: I know that 49 manufacturers have manufacturing licences, but I do not have information with regard to their names or addresses because the government does not give that out. We have tried to get it through access to information requests.

Senator Harb: You are saying that 49 on-reserve organizations manufacture cigarettes. Do they sell them to you? What sort of chain do they have?

Ms. Guy: No. We manufacture cigarettes. We do not buy products. We buy the raw leaf and all the materials necessary to make a cigarette: filter, paper, water, glue and tobacco. We do not buy finished goods. The RCMP is saying that the illegal cigarettes sold illegally in the smoke shacks I referred to are generally bought from illegal factories.

Senator Harb: In fairness, you have a lot of credibility, frankly, because you come from a rough neighbourhood. In December 1999, the Government of Canada took your firm and a number of other firms to court. On July 31, 2008, you settled with the Government of Canada to the tune of $1.2 billion. You know a lot about this stuff, and I believe that what you are saying is extremely important for this committee. You have been there; you have been on the other side; and you have paid your dues. I take your recommendation seriously and I hope, chair, that we will incorporate some of those recommendations in our report. Thank you very much.

Senator Oliver: Unlike Senator Harb, I found your recommendations are not really as helpful to a Senate committee as they could be. For instance, you are telling this committee that you hope we are not going to increase the taxes anymore; and I did not think that was too helpful. Many of the things that you have told us about tobacco and illegal tobacco have been widely known to Canadians for years and years. In your remarks today, you said that you have written a letter to FINTRAC trying to get them to do something about it. Can you tell us why FINTRAC has not done something about this contraband trade in cigarettes?

Ms. Guy: I cannot answer that because they have not told us why they have not done anything. Part of the reason we wrote to them was to bring it to their attention.

Senator Oliver: Did they acknowledge your letter?

Ms. Guy: No, not yet.

Senator Oliver: One thing that might be helpful for a Senate committee is the inclusion of tobacco manufacturing and retailer sector under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to assist in the reduction of this contraband tobacco. Have you and your company thought about that? It would be within the power of a parliamentary committee to do. We are studying a piece of legislation. Are there any changes to the legislation that we could make that might fit the problem you have outlined today? Have you considered that? Of the six recommendations you made, none of them came close to talking about something like making an amendment to the legislation before us.

Ms. Guy: Our view is that amendments to any legislation, in order to be effective, to fight contraband, to fight money laundering or to fight any other kind of problem, must be enforced. That is one of the problems happening now with contraband. Laws are in place, but they are not being enforced.

Senator Oliver: Would you like to have this committee consider perhaps making an amendment to the legislation before us to include contraband, as you have set it forth today?

Ms. Guy: As long as it is in force for all manufacturers equally, sure.

Senator Oliver: You are here today, as I understand it, on behalf of Imperial Tobacco, which is an individual company. Is there a tobacco association of all of the producers in Canada, and, if so, is your company a member?

Ms. Guy: It is not an association of all tobacco companies, but there is an association of the three major tobacco corporations. It is called the CTMC, the Canadian Tobacco Manufacturers' Council.

Senator Oliver: How is it that they are not here today? Why are you here as an individual company and the association is not here?

Ms. Guy: Imperial Tobacco Canada views it as being a responsible corporate citizen to participate in a democratic process and that is the reason why we are participating. I cannot speak on behalf of the other companies.

Senator Oliver: You mention these illegal cigarettes produced in the 50 factories and so on, 49 per cent of which have licences and so on. Is there any difference between the quality of the tobacco or the cigarettes and the cigarette materials that they are producing and the materials that your company is producing? Are they inferior? Are there any greater health hazards from those, or are they the same?

Ms. Guy: First, as a point of clarification, there are 49 licences that have been issued, and the RCMP says that there are 50 illegal manufacturers. They would be additional, not the same.

Senator Oliver: Oh, 50 illegal ones. I apologize.

Ms. Guy: In terms of the quality of the products, it is difficult for me to say. We do not test the illegal products. There have been reports in the media of certain things being found in illegal products, but we do not have the proof of that. I think that that would be a question to direct to Health Canada.

[Translation]

Senator Massicotte: Thank you for coming. We very much appreciate your testimony. I am not going to get into the facts, but, coming from Montreal, I think we are dealing with a major problem in our society that has been going on for a long time. Could you perhaps clarify, for my benefit and the public's benefit, what the problem is?

It all depends on who you ask, but there seems to be no agreement on the laws as such. The First Nations claim that they are sovereign, that they have their own countries and they can do what they like on their own territory, whatever the consequences are.

The federal and provincial governments accept that the First Nations have the right to sell cigarettes on their own territory to their own residents. However, the legal opinion is that selling cigarettes to non-residents is illegal. Does that sum the situation up adequately?

Ms. Guy: In fact, First Nations have the right to sell cigarettes to non-Aboriginals without applying provincial tax. However, in theory, $17 in federal tax must be applied. When the sale takes place on a reserve and the purchaser is non-Aboriginal, all taxes must apply.

Senator Massicotte: They have the right to sell to a non-Aboriginal person if that person pays the taxes?

Ms. Guy: The federal taxes.

Senator Massicotte: But does it have to be someone who lives on the reserve?

Ms. Guy: No.

Senator Massicotte: At what point do they have to collect both taxes?

Ms. Guy: When they sell to non-Aboriginals.

Senator Massicotte: When they sell to a non-Aboriginal who does not live on their territory, they are required to collect federal tax?

Ms. Guy: Yes.

Senator Massicotte: But not provincial tax?

Ms. Guy: Right.

Senator Massicotte: And 95 per cent of the sales are to non-residents and non-Aboriginals?

Ms. Guy: Correct.

Senator Massicotte: Do First Nations accept that interpretation of the law?

Ms. Guy: I have to say that it all depends. Some First Nations are more open than others. Last fall, hearings were held before Quebec's Commission des finances publiques. The First Nations from Akwesasne and Kahnawake came to testify and there was some disagreement. The people from Kahnawake said that they are sovereign, they neither pay nor collect taxes and that tobacco is an ancestral right. The people from Akwesasne were more open to holding discussions with the government with a view to coming to an agreement.

In some provinces, like New Brunswick, Aboriginal communities have reached an agreement with the provincial government under which they will collect the provincial tax for sales to non-Aboriginals and the government returns 95 per cent of the amount collected to the communities. The rule has been seen as an incentive to stop leaving the tax uncollected.

Senator Massicotte: Did they agree to collect the federal tax as well? You only mentioned the provincial tax.

Ms. Guy: I do not know what they do about the federal tax, so I am reluctant to say. I am more aware of what happens with the provincial tax. I could get you that information to you, if you wish.

Senator Massicotte: Is what you have done generally accepted legally?

Ms. Guy: In New Brunswick, yes; there was an agreement.

Senator Massicotte: Do Quebec and Ontario have that interpretation as well?

Ms. Guy: You see a difference from province to province as to whether provincial law has to apply on reserves. In addition, First Nations also believe that they have the right to trade between reserves. So even when they leave their territory, their view is that provincial legislation does not apply to them. That complicates the issue a little as well.

Senator Massicotte: As you indicated, provincial governments are of the opinion that First Nations do not have the right to sell to non-Aboriginal non-residents.

Ms. Guy: Correct; not without collecting the tax.

Senator Massicotte: Is that opinion well-founded legally?

Ms. Guy: Yes.

Senator Massicotte: So to sum up, the problem is political and social. In order to keep the peace, provincial and federal governments, not wishing to cause conflicts and problems such as we have seen in the past, turn a blind eye and accept that First Nations are breaking the law. The problem is just being swept under the carpet in order to keep the peace. That is basically the only reason for not doing anything.

Ms. Guy: You are certainly in a better position than I am to understand the political sensibilities in the matter. Of course those sensibilities exist, because the government has taken no decisive action. There is clearly a reluctance to intervene.

As I mentioned earlier, there have been police raids on a number of occasions on First Nations reserves in Quebec. However, those raids were related to drugs and not to contraband tobacco.

Senator Massicotte: As a private company, you would say that, if the New Brunswick solution were to apply to Quebec and Ontario, it would be more acceptable because your competitors' costs would go up and the market would become more competitive, given the fact that the same rules would apply to all.

Ms. Guy: That is correct.

Senator Massicotte: Even if 95 per cent of the money went back to the reserves?

Ms. Guy: Absolutely.

[English]

Senator Greene: In your report, you mentioned al Qaeda and the Taliban, et cetera. Is there any way of knowing specifically whether al Qaeda and the Taliban benefit from the illegal trade in Canada?

Ms. Guy: I think you would have to ask the RCMP if they have evidence for Canada. I have not seen it necessarily directly linked in Canada. The only link that I have seen is through the George Mason University report, where they specifically make reference to the smuggling of cigarettes being a source of revenue. The George Mason University report found that cigarette smuggling is the second largest revenue source for the Taliban.

Senator Greene: Is that in North America or worldwide?

Ms. Guy: I do not know. I cannot answer that question.

Senator Greene: Is there any way to quantify it?

Ms. Guy: I do not have the means to do that. There may be some U.S.-based organizations that could do it.

Senator Greene: It is something that would be interesting to know, if that could ever be achieved. I tend to be in Senator Harb's camp about the value of your report. It is valuable, and I would be happy to support that all of your recommendations be included in our report.

Could I ask you to talk a little about what you identified as the large and obvious problem of illegal tobacco: the illegal factories and smoke shack are in plain sight. Can you describe how your recommendations will deal specifically with that problem?

Ms. Guy: My recommendations are an alternative to the government's unwillingness to tackle the problem head on, which would be to shut down the factories.

Senator Greene: Your most important recommendation would be number 3, to enforce the law equally.

Ms. Guy: They are pretty much all important. It is the combination of all the recommendations that will be effective. If you go with the public awareness campaign alone and you do not go with the enforcement measures, there is no point. It is really the combination of all. If you were to do all of the recommendations, but yet again move the border location in the Cornwall area to the U.S. side, you would be losing all the gains. What makes the recommendations effective, we think, is combining all of them.

The Chair: Ms. Guy, you have six recommendations. Aside from the one election commitment made in the campaign one year ago, how would these recommendations differ if you had appeared before us two or three years ago? Is there a change in the framework we are operating in? How do you see it differently?

Ms. Guy: Certainly, on the enforcement side, in the provinces specifically, they have stepped up. In particular, Quebec and Ontario have proposed and implemented measures. They have increased fines and penalties and they have put in place a task force to combat illicit trade. From that perspective, it would have been different a couple of years back because that had not been done.

The Chair: Is that the difference you would like to bring to our attention?

Ms. Guy: That would be the major difference.

[Translation]

Senator Hervieux-Payette: What percentage of the legal market do the big three tobacco companies occupy?

Ms. Guy: Of the legal market? We do not necessarily share the figures by company publicly, but let me talk about the overall picture. It is probably about 70 or 75 per cent of the market.

Senator Hervieux-Payette: To me, smuggling means crossing a border. The word ``contraband'' generally implies moving illegally from one country to another. Is there an increase in the illegal market for products made and sold in Canada? ``Contraband'' is perhaps not the term that I would use, but the phenomenon does exist. The things you basically need are some leaf tobacco and some growers.

So, in terms of Canadian manufacturers, is the supply of leaf tobacco used in cigarettes grown in Canada, by Canadian farmers, or is some of it imported? Does some of the basic material come from outside the country?

Ms. Guy: Both. Speaking for our company, I can tell you that some comes from Ontario producers, some from the United States and the rest is bought on international markets.

Senator Hervieux-Payette: Can you give us percentages?

Ms. Guy: It varies from year to year depending on the grade of tobacco we need based on the previous year's inventory. We still buy a large quantity in Canada, contrary to what people think because of a government program a few years ago to help growers get out of tobacco production.

Senator Hervieux-Payette: Is a lot of tobacco grown on the reserves?

Ms. Guy: I do not know.

Senator Hervieux-Payette: Are manufacturers, other than the big ones, on the reserves or outside the reserves, or mostly on the reserves or mostly outside the reserves?

Ms. Guy: I cannot answer that question accurately because the information we have managed to get on the 49 licensed manufacturers give us the number only. So we have no names or addresses, and I have no way of knowing where they are located. All I can do is rely on what the RCMP tells us, that, on the Canadian side, there are 50 located on First Nations reserves, essentially in Quebec and Ontario.

Senator Hervieux-Payette: So these are people who are making cigarettes but not necessarily crossing any borders. They can be manufactured here with tobacco from three sources. My colleagues and I may well be coming to the conclusion that we have to look at the supply chain. We have to see where the basic ingredient comes from and how it travels through the system. Then we can make sure that there is an agreement. I have no problem with cigarettes being manufactured on reserves and sold to Aboriginals on those reserves without taxes being paid. Where I have a problem is when the customers are from outside the reserves, when the cigarettes are sold outside the reserves, around schools and school boards, and when dealers are walking around with contraband cigarettes.

Our mandate is to study the question of money laundering.

[English]

This question is much larger than that. Perhaps natives on their reserve are doing an illegal operation. It is illegal when they are being sold outside and taxes are not collected. Of course, the whole system is falling apart. I would say that when our clerk helps us to draft a good report, we have to underline the fact that we are not attacking the native community; we are not going after them on the reserve; but we want the laws of the land to be applied equally the same way in every province of this country. However, we have to be conscious that we are talking about a large amount of money. I rarely agree with my colleague from the West but, Senator Tkachuk, for once in my life I agree with you.

The level of taxes could be one of the triggers that we could recommend to reduce considerably this kind of activity. The size of it is certainly worth looking at. We will have to talk to your Minister of Finance. Maybe it is not in the budget but we could add a few clauses. It disturbs me that it is mostly young people who are the first target and young women. It is a big concern for me that women are the main consumers at an age when they should not smoke. They are buying those cigarettes because of the cost. At the real price, certainly they would smoke less and probably it would be less damaging. I do not say that we should ban tobacco. It would make just a few people too rich to do so. I just think we have to consider that in a more global environment and ensure that it is not just native or white communities. It is a whole community problem.

If you have other information to share with us, I think our report will be out in a few weeks, and we would welcome that. At least we know where to ask the question. That is my deduction.

Ms. Guy: There is certainly a body of evidence I could share with the committee. I did not table it today because they are documents mainly in English, and I was told that, to table them before the committee, they had to be in both French and English. I did not have time to translate them all, and I am not sure that we would have the right to.

Senator Hervieux-Payette: If they are tabled, they will be translated by the government.

The Chair: You could table those to the clerk.

Senator Hervieux-Payette: That would be appreciated.

I wanted to summarize to ensure that we understand each other, and now we will have some evidence. I think it will be useful.

The Chair: We note your excellent questions, and we also note, on the record, your agreement, for the first time, with Senator Tkachuk.

[Translation]

Senator Maltais: Your problem is a bit like squaring the circle, just like the seal hunt. Everyone thinks that a little baby seal on an ice floe is cute. You see photos of them everywhere. But you never see photos of the baby seal's father with a 40-pound halibut in its mouth. I am standing up for the halibut and the cod, because no one else is. Everyone talks about the seals. There is more in the Gulf than seals. No one in Canada stands up for the cod, though it is an excellent resource.

Senator Hervieux-Payette: It is not as cute.

Senator Maltais: True, it is not as cute, and not as furry.

Do you think that the government advertising on cigarette packages encourages a lot of people to stop smoking?

Ms. Guy: You would have to ask Health Canada.

Senator Maltais: Are you selling fewer cigarettes now, or are you selling more?

Ms. Guy: Tobacco consumption and use has been in decline since 1965. That is the only answer I can give you.

Senator Maltais: Your fifth recommendation is to launch the long-awaited public awareness campaign about smuggling.

Ms. Guy: Yes.

Senator Maltais: You mean cigarette smuggling, I presume?

Ms. Guy: Yes.

Senator Maltais: How can the government mount an advertising campaign against cigarette smuggling when it cannot advertise cigarettes in public?

Ms. Guy: That is a good question. It has to be done in a way that does not promote tobacco. I have some sample brochures, which I can leave with you. They were published by the RCMP, or jointly by the RCMP and the Canada Revenue Agency. That campaign is aimed either at the general public or at retailers, for example. It focuses on the consequences that illegal business dealings can have. You just have to follow the rules properly. If it is done in conjunction with Health Canada, they should be able to come up with something good.

Senator Maltais: Does your company sell on reserves?

Ms. Guy: Do you mean to the communities, or to the points of sale on the reserves?

Senator Maltais: To the points of sale on the reserves.

Ms. Guy: Yes, we sell to some. Some sales are done directly and others through wholesalers. I can assure you that we are very strict and we share a lot of information with the government about our sales on reserves. We are very careful.

Senator Maltais: I come from the North Shore. More than half the First Nations in Quebec are in the north. I go there regularly. They sell cigarettes at the same prices, and they show that the taxes have been paid. You do not see any smugglers in those places. Smugglers never go to remote places in the north like Caniapiscau. Is that because it is too cold?

Ms. Guy: We have to be careful, and I hope that I was clear in my remarks. Our comments are not directed against Aboriginal communities. This is a geopolitical situation. Organized crime groups are taking advantage of the geopolitical situation they see. Maybe because the pool of consumers is small on the North Shore, they cannot make as much profit. So it is certainly not an ideal place for them.

Senator Maltais: The big cities are where the smugglers get their customers, I suppose.

Ms. Guy: Pardon?

Senator Maltais: Are big cities like Quebec and Montreal fertile ground for the smugglers?

Ms. Guy: Not necessarily.

Senator Maltais: There are 180 people on the Essipit First Nation in Les Escoumins. No one is going to go all the way there with a trailer full of cigarettes. So they are buying them from legal sellers.

Ms. Guy: I do not have that information with me. But if you want to know the proportion of consumption in large regional centres versus the rest of the province, I can certainly provide you with that information. We have it, but for previous years.

Senator Maltais: In terms of cross-border smuggling, are just Aboriginals doing that or are white people into it too?

Ms. Guy: Are you talking about products coming from the American side?

Senator Maltais: Yes.

Ms. Guy: I do not have the statistics on the people who drive the trucks full of cases of illegal products. I cannot answer your question.

[English]

The Chair: Senator Maltais, in your usual fashion you have stimulated two quick questions. I am little concerned. The first is coming from Senator Ringuette, and I see she is holding a cigarette package in her hand. There is no advertising allowed in the committee. You are covering the name.

Senator Ringuette: Yes. Three years ago, if my memory is correct, Revenue Canada asked us to approve the funds to produce a new sticker in order to reduce cigarette contraband. This new sticker would better identify the cigarettes' origin and that the duty and proper taxes had been paid. What has the result of that been?

Ms. Guy: It has always been our company's position that we would abide by that new regulation, but, in our opinion, it would not have an impact on the illicit trade problem as we know it today. This type of stamp may have some effectiveness when it comes to counterfeit products, but counterfeit products are about less than 2 per cent of the contraband tobacco problem in Canada. I do not have statistics on it. I am sure, if you directed the question to CRA, that they are monitoring it and hopefully could have a precise answer for you.

I can tell you, though, that the stamps have been showing up on products that are illegal.

Senator Ringuette: You are saying that this stamp that supposedly proves that I paid quite a lot of money when I bought this product is being reproduced on contraband products? We were told that this new sticker would be foolproof and not reproducible; but that is not the case.

Ms. Guy: I have not seen counterfeit stamps; but we have seen legitimate stamps being put on illegal products.

Senator Massicotte: She may be holding contraband right now and she does not know it.

Ms. Guy: I assume you have a branded product bought in a legal store for a price that does not lead you to think that it is illegal.

The Chair: We can wrap up with a quick question by Senator Massicotte.

[Translation]

Senator Massicotte: When you look at a pack of cigarettes, can you tell the difference between one that is contraband and one that is not?

Ms. Guy: Typically, illegal product is sold in clear plastic bags. That is not to say that you cannot have cigarettes sold in plastic bags legally, but generally, you can see that the laws and regulations governing the legal industry have not been applied.

I have an example to show you. There are two ways. If you end up with 200 cigarettes in a plastic bag, with nothing written on them, and they cost you ten dollars, you can be sure that it is an illegal product and it does not take a lot of smarts to see that it is. But what we are seeing more and more, especially in Ontario, are what we call ``branded'' products. They almost look legal. I brought one to show you because it may be a long time since some of you have seen a pack of cigarettes.

Senator Massicotte: That one is contraband?

Ms. Guy: No, this one is legal. An illegal product would not have the manufacturer's name and address or the stamp. Nor would it have a public health picture or message that conforms to the requirements.

Senator Massicotte: If necessary, is it not easy to arrange for that to be put on, so that they sell better?

Ms. Guy: Our definition of contraband is that the duties have not been paid. That is a very general statement, but it is more or less the situation. If your pack looks legal, but you are not Aboriginal and you buy it on a reserve for two dollars, you know that it is an illegal product.

[English]

The Chair: Ms. Guy, there is some additional information that you indicated you would forward to the clerk, which will be circulated to all members of the committee. On behalf of all members of the committee, I thank you very much for appearing before the committee today.

Ms. Guy: Thank you.

The Chair: This meeting is adjourned.

(The committee adjourned.)