Robert Schwartz, Director of Evaluation & Monitoring,

Robert Schwartz, Director of Evaluation & Monitoring, Ontario Tobacco Research Unit, Dalla Lana School of Public Health, University of Toronto

Anti-Contraband Tobacco Measures:Knowledge Synthesis StudyFunded by CTCRI Presentation at Bi-National Conference, A Taxing Issue: Public Health and Contraband Control University of Buffalo, February 4th, 2009 By: Robert Schwartz, Jeff Sweeting & Teela Johnson

What is Contraband? Contraband is “any tobacco product that does not comply with the provisions of all applicable … statutes. This includes importation, stamping, marking, manufacturing, distributing, and payment of duties and taxes.” - RCMP 2008

Background • Approximately 10.7% of global tobacco sales are illicit, representing 600 billion cigarettes. • The loss in revenues from this illicit trade is estimated to be $40-50 billion US annually, affecting numerous priorities including fiscal revenue and public health.

Objectives • To identify and analyze anti-contraband policies around the world. • To specify the different contexts where different policies have been successfully used, and ascertain which approaches to contraband have been most effective in what context.

Methodology • A systematic literature review • 49 key-informant interviews with policymakers, practitioners, scientists and academics. • Four expert focus panels, totaling 31 participants

Limitations • Transparent public data on contraband tobacco is extremely limited. • Many jurisdictions do not provide official estimates of the size of the illicit market or comprehensive data on contraband tobacco seizures, making it difficult to assess the efficacy of different policies. • Very limited evaluative research on the effectiveness of various policy measures

Bottom Lines • No single contraband solution exists. A comprehensive, proactive, and reactive strategy is needed to address current problems and prepare for those of the future. • The political environment in Canada inhibits implementation of effective anti-contraband policy measures • In Canada, need to address underlying economic realities associated with some First Nations communities and contraband

Policy Measures Licensing Markings/Stamping Tracking and tracing Record-keeping / control measures Enhanced enforcement Export taxation Tax harmonization Aboriginal tax agreements / compacts Legally binding agreements with industry Public awareness campaigns

Contexts • Contraband product can be legally or illegally produced • diversion of legally produced products to the black market • illegal production in my basement • Product might be “smuggled” across borders, or might be “evaded” domestically

Legal Is it legally produced, or illegally produced? Production Source Illegal

Are the taxes evaded domestically? Or does the product have to cross-borders? Legal Production Source Illegal

1. Legal products distributed domestically • Tobacco produced by a licensed manufacturer, illegally distributed within one jurisdiction, tax-exempt. • Most jurisdictions have licensing or registration processes which allow government officials to differentiate between legal and illegal products.

1. Legal products distributed domestically • Tracking and tracing and tax stamping needed to monitor shipments to tax-exempt jurisdictions • A the retail level licensing and record-keeping can ensure tax-exempt product is not sold to non-First Nations customers.

2. Legal products distributed cross-border • Tobacco produced by a licensed manufacturer, illegally distributed throughout multiple jurisdictions. • Cross-border smuggling of legal brands is common, likely the easiest way to smuggle.

2. Legal products distributed cross-border • Enhanced border controls needed to identify illegal products being smuggled into the country. • Because the brands are legal, the key issue is to catch those who are illegally diverting and distributing the product.

3. Illegal products distributed cross-border • Tobacco produced either by counterfeit manufacturers or through illegal manufacturing operations, that is distributed throughout multiple jurisdictions. • Smuggling through large-scale shipments of counterfeit products is increasing globally. • Counterfeit cigarettes from producers in China and Eastern Europe have already become a major source of contraband in many countries.

3. Illegal products distributed cross-border • Enhanced border controls is likely also the best way to address this issue. • Tax stamps and similar tools to help identify illegal products are also useful. Political pressure on other jurisdictions to address the source of contraband in their country.

4. Illegal products distributed domestically • Tobacco produced either by counterfeit manufacturers or through illegal manufacturing operations, distributed in one jurisdiction. • Identifying illegal growing or production operations, and enforcing compliance have proven efficacious. • Tobacco grown illegally by unregistered or unlicensed growers, may sell tobacco leaf to manufacturers, or directly to consumers. • In this case, growing tobacco is similar to growing marijuana, where authorities inspect suspected growers, and enforce penalties.

4. Illegal products distributed domestically • Licensing to differentiate between legal and illegal growers and manufacturers appears to be the most effective policy for this quadrant. • Enhanced inspection and enforcement would also be necessary.

Policy Responses Based on Role Each quadrant and each ‘player’ require a different set of policies. The policy table in the next slide highlights measures that are common to several quadrants for manufacturers / distributors. Scoring method: • High potential = X = 2 points • Some potential = x = 1 point

Anti-Contraband Measures: Known Impacts • Different combinations of measures work better in different contexts • Few good cases of eliminating the illicit trade • Many unintended consequences of action • Control of legal manufacturers often leads to imports of counterfeits • Export taxation often drives manufacturing to other jurisdictions • Protecting the retail level drives illegal sales to the street

Some Suggestions • Prepare for counterfeits by adding covert markings to tax stamps • Prevent retail sale of contraband with tax stamps and inspections. • Promote cooperation between domestic and international agencies. • Communicate and collaborate with First Nations. Address underlying economic realities of some aboriginal communities. • Consider the demand side, including why consumers are purchasing contraband, how they are doing it, and what might help them stop.

The Canadian Context • Approximately 20% of cigarettes consumed in Canada are illegal. • Mostly in Ontario and Quebec, where an estimated 30% of cigarettes are illegal • Main problem is that non-First Nations purchase tax-exempt cigarettes, both on and off-reserve. • 2007 OTRU report found that at least 14% of smokers purchase cigarettes on reserves • Both legal and illegal products are coming in over the border (including reserve border).

Tax-exempt vs. Contraband • Each province has a mechanism for the sale of tax-exempt tobacco products on reserves • Some rely on allocations of tax-exempt (Ontario), others use a refund system (Saskatchewan) • Prone to abuse, unless both systems in place simultaneously • If a non-Aboriginal purchases tax-exempt, it is contraband

Contraband Seizures in Canada • Majority of RCMP seizures are in the Cornwall area just outside Akwesasne • Contraband is manufactured on U.S. side of Akwesasne/St. Regis reserve • Six Nations, Tyendinaga, and Kahnawake also manufacture illegally • Comprises about 50% of RCMP seizures: over 236,000 cartons in 2006 • Major aspect is “baggies” of cigarettes • 200 cigarettes sold loose for $8

Benefit of High Price • Tobacco taxation increases the price of tobacco products and is considered the most significant mechanism for smoking cessation. • Youth are particularly sensitive to high cigarette prices, and may never start smoking. • Revenue generation also allows for investment in community programs.

Smoking on Reserves • Smoking rates are dramatically higher among First Nations than the rest of Canada • One study indicates 46% of First Nations adults smoke, compared to 21% of Canadian adults • 2002 smoking rates among First Nations youth aged 15-17: • were 47% for boys and 13% for girls, • compared to Canadian averages of 13% and 15% respectively • The discrepancy is due to accessible, tax-exempt tobacco on reserves Source: First Nations Regional Longitudinal Health Survey (RHS) 2002-03

Canadian Anti-Contraband Policies • Enhanced enforcement of manufacturers/ distributors and consumers likely to be effective: • border control measures similar to RIDE can prevent product from getting off-reserve • Seizure of vehicles used in cross-border smuggling as a deterrent • Enforcing penalties for receiving or participating in smuggling • First Nations’ police force cooperation important. • Intelligence sharing between First Nations officers and CRA officers enhance regional enforcement activity.

Barriers to Contraband Control on Reserves • There is no official border between First Nations’ land and Canadian land. • The recommended policy of border control means a border will have to be established and patrolled • Establishing a patrolled border of reserves may incite anger among the First Nations community, resulting in demonstrations. • Tobacco sales drive reserves’ economies, implementing measures that would reduce sales could lead to violence.

Barriers to Contraband Control on Reserves • A First Nations expert focus panel yielded statements of perceived barriers to contraband control on reserves • Government intervention is not wanted, First Nations communities know how to control tobacco on-reserve and have a stake in reducing criminal activities. • Curtailing the tobacco trade, both legal and illegal, is not currently financially feasible as it helps fund community initiatives such as day cares and libraries.

Barriers to Contraband Control on Reserves • For any policy measure to work, buy-in from First Nation leaders and the community is required. • Education of First Nation residents about the dire health effects of smoking is necessary. • The tobacco control triumphs logged by the non-First Nation community result from incremental changes in social attitudes. • Social conditioning makes Canadians open to the idea of quitting and tobacco control policy. • First Nations need to be given the same access to information and opportunity to choose. • Poor economic conditions on-reserve must be dealt with.

First Nations Expert Panel Themes • Economics • First Nations’ Autonomy • Perceptions of False Accusations • Confusing Government Roles • Unequal Treatment • Need for Education

First Nations Taxation • Would also likely be effective, but need First Nations’ buy-in to work • In Canada, only 29/633 First Nations have implemented the First Nations Tax (FNT) or First Nations Goods and Service Tax (FNGST) • These agreements cover the 5% portion of the Goods and Service Tax in Canada

First Nations Tax Agreements • The FNT and FNGST only cover the 5% equivalent of the GST in Canada • FNT covers “fuel, alcohol and tobacco” • FNGST covers all consumer goods • The Cowichan Tribe imposes an equivalent tax to the provincial tobacco tax on all consumers • Cowichan Tribe then retains the revenue generated

First Nations Tax Agreements FNT FNGST

Potential of Taxation Agreements • Promoting and negotiating taxation agreements with First Nations can help settle disputes over tax collection, “contraband tobacco,” etc. • Must be negotiated with respect to Section 87 of the Indian Act – taxation of tobacco should be an exception, not the rule • Helps generate revenue for the community, as well as reduce smoking rates

Recap • Smoking kills and is a huge financial drain on health care • Tobacco control policies have been effective at reducing smoking, but contraband threatens those gains with cheap, accessible tobacco • The source of tobacco is four reserves bordering Ontario, Quebec and the US • Therefore, First Nations cooperation is imperative to control tobacco coming off reserves • First Nations require autonomy and respect from the Canadian government in all their dealings • First Nations require economic stimuli that can replace the role of tobacco on reserves • The magnitude of the tobacco problem, and the financial losses from contraband and health care make it worth it to work with First Nations to meet their demands

Conclusion • A mixture of policy solutions must be implemented particularly: • Collaboration with First Nations and let them lead on-reserve tobacco control initiatives, • Intergovernmental cooperation of enforcement between provinces and the feds, • Reduce consumer demand through education of the negative health effects of tobacco and the illegality of contraband, • Prevent contraband sales at retail stores to make it harder for the public to access, • Prepare for a surge of counterfeits by improving border control, tax markings, and tracking and tracing • Expect slow but steady change.

Robert Schwartz, Director of Evaluation & Monitoring,