Canada loses CAD 2 billion to contraband tobacco every year

Canada’s contraband tobacco market represents 45% of the legitimate market. To help understand the issue from a regulatory, fiscal and legal framework, it might be easier to consider Canada as 14 separate jurisdictions, consisting of 10 provinces, three territories and one federal Excise Act framework. Each have their own tobacco taxation regulations, some with dedicated enforcement units, some without; some allowing online sales of nicotine products, others not; little to no political interest to tackle the issue and no official national coordination to organize broader enforcement efforts.

In other words, a perfect environment for organized crime.

This chapter uses the tobacco market as an example, but to organized crime groups the commodity is somewhat, if not entirely, irrelevant. If there is a high demand for that commodity, and it evolves in a faulty regulatory ecosystem, with poor or little enforcement efforts and political indifference, organized crime will take over and flourish in that environment, regardless of the nature of the commodity. All organized crime groups want is to create revenue. Additionally, when organized crime gets involved in the trafficking of any commodity they bring violence to our communities — this has always been, and likely always will be, the case. 

More profitable than cocaine 

A recent Ernst & Young study (September 2023), sponsored by the Convenience Industry Council of Canada (CICC) and its partners, revealed contraband tobacco incidence in certain provinces to be more than 45% of the legitimate market (see www.ccentral.ca/canadians-losing-billions-organized-criminals-selling-contraband-tobacco-report).

The risk of getting caught trafficking contraband tobacco is low, the fines are not an effective deterrent, and the risk versus reward equation is a no-brainer for organized crime groups, as highlighted in a MacDonald-Laurier institute publication of May 2018 which found trafficking in contraband tobacco to be eight times more profitable than trafficking in cocaine (see www.macdonaldlaurier.ca/mli-files/pdf/MLICommentary_May2018_Leuprecht_Fweb.pdf).

While most, if not all, Canadian provinces fail at forecasting accurate tobacco tax revenue, they also struggle to mitigate losses to contraband tobacco and are incapable of finding the right balance between reasonable taxation, efficient enforcement and sustained public awareness to reduce demand and achieve public health objectives. There is one exception: the province of Quebec.

The Quebec “ACCES” program: Fighting the underground economy

In 2001 the Public Safety Ministry in the province of Quebec created the ACCES program to fight underground economy in various industry sectors (see www.revenuquebec.ca/en/one-mission-concrete-actions/ensuring-tax-compliance/tax-evasion/tobacco-industry). One of those sectors was contraband tobacco. 

At its peak between 2008 and 2009, the legitimate market in the province was afflicted by a 30% contraband incidence. Under the “ACCES tabac” program there was a steady year-on-year decrease in contraband incidence. This consisted of a multipronged approach: combining a reduction in tobacco tax at retail with continuous investment in enforcement efforts linked with sustained public awareness initiatives and broader cooperation and coordination between provincial and municipal police services. 

In only a few years the contraband incidence was reduced by more than 50%, from a 30% market share in 2009 to an estimated 13% in 2016.

Quebec is the only province in Canada that has been able to find that equilibrium between enforcement, taxation, and reduction in demand. For fiscal years 2008–2009 to 2013–2014 the province saw its specific tobacco tax revenue increase by CAD 370 million from CAD 654 million in 2008–2009 to CAD 1.03 billion in 2013–2014 (see www.lapresse.ca/actualites/justice-et-affaires-criminelles/affaires-criminelles/201505/01/01-4866003-tabac-la-guerre-a-la-contrebande-rapporte.php).

This achievement was not only done whilst maintaining the lowest specific tobacco taxation in the country but also by showing impressive return on investment (ROI) ratios. In 2020 the province invested CAD 14.4 million in the ACCES tobacco enforcement program and saw a return of CAD 206 million. A remarkable 14–1 ROI ratio (see www.finances.gouv.qc.ca/ministere/outils_services /consultations_publiques/consultations_prebudgetaires/2021-2022/memoires/MEmoire_NCACTobacco.pdf).

An unpleasant surprise from the same government that gave birth to the ACCES program is the provincial ban on flavored vaping products implemented in October 2023 (see www.montreal.ctvnews.ca/quebec-s-new-vaping-regulations-start-next-week-but-some-say-they-ll-just-buy-online-1.6620488). The intention was noble — to prevent youth access to vaping products. However, if any of the Canadian provinces should have known that bans without education and enforcement do not work, it should have been Quebec. 

It was expected that there would be some transition from legal sales at retail stores over to illicit online channels, however, vaping flavors remained widely available in retail stores despite the ban. It appeared as though the Quebec government had handed this entire segment of the market over to illicit channels, not only failing at their objective to protect youth but also missing out on an opportunity to secure an important revenue stream. An honorable intention but epic failure in execution. 

Contraband tobacco online

Tackling the “conventional” ways of trafficking contraband cigarettes was difficult enough but has become a very different situation, requiring new prevention and enforcement strategies, since trafficking has moved online in recent years. 

As an example, in 2019 Rothmans, Benson and Hedges (RBH) decided to launch a new “vaping” product using a hybrid business model. The new model would combine one single “brick-and-mortar” storefront but use a virtual sales platform as the main retail portal for consumers. In parallel, conventional RBH cigarette products would still be sold at retail in a traditional face-to-face fashion. Well in advance of the deployment of that new business model, and from an illicit trade prevention perspective, many questions developed:

• How does online contraband work? 
• Does it even exist? 
• What are the major online sales platform operators in Canada? 
• Can we find contraband tobacco on websites? 
• Does law enforcement have a presence online to tackle criminality? 

A general misconception from the public, and to some extent within the law enforcement community, is that there is some form of permanent “online policing” or sustained police presence online. One would think there is police monitoring of serious crimes committed on the open internet. This is true for some larger law enforcement agencies in Canada who have a sustained presence online to investigate infractions related to the distribution of child pornography material. However, in general, Canadian law enforcement agencies do not have a sustained investigative presence online. If an ongoing investigation is found to have an online component law enforcement will investigate but there is no permanent online monitoring by law enforcement to detect drug or weapons trafficking on the open internet or online sales platforms. 

Relatively less serious infractions committed online involving regulated consumer goods, such as tobacco and nicotine products, sometimes also constitute criminal code violations like trafficking in contraband tobacco. They may also comprise provincial and federal regulatory violations, Excise Act violations, tax evasion and trademark infringements. For those infractions, the traditional law enforcement “business model” (if you will) is simply not designed to address that emerging form of online criminality. 

To be clear, the above-mentioned crimes are not scam attempts targeting innocent victims to try to defraud them of their money. Illegal or regulated products are offered and sold on the open internet using regular online sales platforms or websites; no need to use sophisticated platforms like the deep web or dark web. Most, if not all, accept payment using major credit cards and use well-known online payment processors. 

The challenge for law enforcement

When conducting conventional contraband tobacco investigations, law enforcement relies on the usual investigative techniques, mostly physical surveillance. For example, a truck or a car loads up with illegal cigarettes, police officers observe it and then they have a case to proceed with. They have not written one judicial authorization, communication order, subpoena nor any other search warrant — they have both a suspect and the product physically in front of them and can act. 

Based on legal and Canadian law enforcement standards, when the same criminal infraction of trafficking in contraband tobacco is committed online almost every step of the investigation requires a judicial authorization (a type of search warrant, commonly called a communication order), to obtain the seller’s information as registered with the online sales platform operator; the registered owner of a phone number; the location of an IP address; the registered user with the internet hosting services; banking and payment information, etc. 

When prioritizing the allocation of limited law enforcement and human resources it makes little sense to deploy such efforts to investigate a relatively less serious crime online without being certain of the outcome. In rare cases where law enforcement did conduct online investigations for similar smaller infractions they first had to ensure that the suspect, at the moment of arrest, would be in a Canadian jurisdiction; that the product would also be in Canada in order to conduct a seizure; that the cellular phone, IP address, banking information and payment processor were also all in a Canadian jurisdiction. A great deal of work to seize sometimes relatively small quantities. 

Now imagine that same suspect residing in a foreign jurisdiction, a product shipped from Asia, the online sales platform operator in Eastern Europe, the cell phone number, IP address and internet hosting services all outside of Canada. No agency would spend resources to investigate a relatively less serious crime especially when there is no reasonable chance of a successful prosecution.

The cyber criminality component

Due to frequent exposure, the general public have become desensitized to many of the phishing attempts we receive — for example automated telephone fraud scams, fake marketing emails or fraudulent posts on social media — we simply brush them off and do not report them. Equally, the volume is simply too great for law enforcement to investigate every one of these crimes. In 2019 the Canadian Anti Fraud Center (CAFC) reported 19,285 cyber or online crimes (see www150.statcan.gc.ca/n1/pub/85-002-x/2020001/article/00010-eng.htm). In only four years that number more than tripled, reaching 63,519 in 2023 representing losses of CAD 569 million (see www.antifraudcentre-centreantifraude.ca/index-eng.htm).

Those numbers are staggering and knowing that only a small percentage of the Canadian population reports this type of fraud means this is likely only the tip of the iceberg. This data, in combination with law enforcement’s inability to police the internet, became determining factors in establishing a new strategy to prevent the unauthorized sale of RBH products online, outlined below. This approach to tackling illicit trade may work for any product being marketed in the contraband or counterfeit market.

Occupy the space first

The RBH Illicit Trade Prevention Department started monitoring the online commerce landscape a year in advance of a new RBH product coming to market. Work was carried out to identify the major Canadian online sales platform operators, where they were based, whether they had existing policies prohibiting the sale of certain consumer goods, the status of their corporate security channels, etc. In a nutshell, RBH started occupying the online space first and did not leave that space open to criminal operators. Nor did the department wait for issues to arise before implementing a prevention and interdiction strategy. 

Considering the complex Canadian regulatory landscape, it could be reasonably anticipated that some form of unauthorized or illicit sale of RBH’s product would happen sooner or later, and that given the lack of online policing criminal operators would try to seize that opportunity to generate revenue from those products.

“Occupying the space” before any issue arose is a luxury law enforcement cannot often afford. RBH believed in this new approach and invested in it. In this case the space was virtual, but I believe the same principle can be applied to physical spaces when dealing with criminality.

Stop the infraction, not the individual

Based on the Canadian Anti Fraud Center’s available data, it was not logical for RBH to add even a small number of anticipated new “cybercrimes” to the existing thousands of cybercrimes already reported, for which only a minority are being actively investigated. 

Our new approach was based on stopping the infraction, not the individual. 

We developed partnerships and agreements with major Canadian online sales platform operators that are simple: we report posts and offers to sell that are either infringing on regulatory frameworks or on criminal laws, or are non-compliant with the platform policy, and in turn the platform operator removes the ad or the post offering to sell the product.

Anticipating that a seller would re-post an ad or offer once it had been removed meant we would have to keep reporting continuously and repeatedly until the person posting would be blocked permanently by the platform operator or simply give up and stop posting. This approach is a virtual application of the broken windows theory (see www.psychologytoday.com/ca/basics/broken-windows-theory).

This also meant an infraction to either a regulatory framework or even a criminal infraction would not be investigated by law enforcement, but rather dealt with directly via the platform operator. These infractions might be viewed as minor in nature when compared to drug or weapons trafficking, but they are nevertheless infractions that could technically be investigated and prosecuted. On the other hand, and for intelligence purposes, we do report our monitoring activities to law enforcement on a monthly basis.

We were ready to concede some minor infractions would be committed but unlike the present law enforcement “business model” we do not ignore them; we take swift action to stop that infraction. An important caveat is that we do not concede the same infraction when committed in a larger illegal or commercial operation or when the presence of organized criminality is detected. Those infractions are investigated in-house, a case is built, and the file is sent to law enforcement for investigation. These significant cases represent less than 1% of all the cases we monitor online.

This is not a criticism of law enforcement; quite the contrary. The traditional law enforcement model in Canada was simply not designed to tackle online criminality. Law and enforcement have evolved over the years to mitigate online criminality, but we need to rethink the traditional law enforcement and prosecution approach as it is presently based on the following: an infraction is reported, investigated, and leads to an arrest which leads to a prosecution. This is not viable in the virtual environment. 

When it comes to the volume of consumer goods offered online, the relatively minor character of most infractions and the challenges posed by the multi-jurisdictional element, the objective to investigate and prosecute is just not realistic — even if, technically, an infraction has been committed.

The volume in our case was not necessarily a huge factor, as by occupying the space first we simply did not allow any growth on unauthorized online channels. We were able to take quick and significant action as soon as we saw our product emerge on virtual platforms or be offered by unauthorized individuals or in markets it was not authorized to be sold in.

As mentioned before, the commodity is somewhat irrelevant: it can apply to contraband or counterfeited luxury brand handbags, sportswear or copies of premium brand apparel. The same logic applies as the one we use for our online monitoring program of RBH products: stop the online infraction, occupy the virtual space where you can and reserve civil or criminal litigation for the larger illegal commercial operations.

The intellectual property rights angle

From an intellectual property rights violation perspective, civil litigation is still possible if a brand owner has the appetite for it. Given the sheer volume of contraband or counterfeit products offered online it is simply too costly and inefficient when targeting smaller players or individuals. But it is still a viable option for larger cases.

RBH Online monitoring program results

Over the past four to five years RBH were able to secure cooperation from major Canadian online sales platform operators. They all essentially operate under the same model by providing a virtual platform where a seller and buyer can connect to buy or sell products, they offer a wide range of goods and commodities. In 2019 we started monitoring one RBH product and grew to monitor six products in 2024. We now follow over 25 online sales platforms that are active in Canada, four of them being larger and popular platforms. 

The cooperation we received, especially from the four larger platform operators, has been very effective: sometimes ads or posts are removed within minutes of being reported. They are also working actively to improve their systems to detect and remove illegal posts on their own more efficiently. Our reporting not only serves as a complement to their ongoing monitoring efforts but also as a learning tool on tobacco and nicotine product regulations they may be less familiar with.

93% of all posts offering to sell our products in an unauthorized fashion is concentrated on these four larger platforms. Their monthly post removal success rate is 100% — every month ends with zero live illicit posts offering of our products and every post reported to any of the four major platforms is quickly removed. This achievement would not have been possible without the commitment and dedication of our intelligence analyst who has been instrumental since the inception of the program. 

Since 2019, our program which began with the intention to monitor our new vaping products, has evolved. As of November 2022, our sustained presence on these virtual platforms allowed us to observe a significant increase in online offers to sell conventional contraband cigarettes. These cigarettes are either made by manufacturers operating illegally in Canada or are not authorized for sale in the country but are offered on publicly available online sales platforms. For reasons explained earlier law enforcement authorities had little interest in these online investigations, so we adopted the same “stop the infraction” approach.

Between November 2022 and mid-September 2024 our program reported 9,115 illegal posts offering to sell contraband cigarettes online, all of which were removed. 

Given their present resources and the challenges online investigations represent, there is no way law enforcement authorities could have handled that additional volume.

What lies ahead

A disturbing observation in the Ernst & Young report cited earlier reveals that “Without concerted, coordinated efforts by all orders of governments, it is hard to see how the trends identified in this report can be reversed”. With what we know so far about online illicit sales a similar inference can be drawn regarding the trend we are presently observing; it is only likely to grow.

The traditional “interdiction” notion for law enforcement does not include letting known crimes go uninvestigated or unpunished, but considering the fast-evolving pace of the virtual world we now live in solutions cannot and must not solely be the responsibility of governments. Brand owners must protect their interests and the public where they can.

By coordinating efforts with online sales platform operators, social media platforms, websites, internet hosting services and online payment processors we can all play a greater role in preventing criminals to use the internet so openly to generate important illegal revenue streams and defraud governments.

In our case our approach at the beginning may have seemed optimistic to some, but five years later it has proven to be a remarkable success — sufficiently so that we are now looking at expanding our monitoring capacity using artificial intelligence and other enhanced technologies to prevent the growth of online illicit sales.

The “Stop the infraction, not the individual” concept may be a bitter solution for some law enforcement agencies to embrace. Others see it as an innovative approach to an issue they have no solutions for. 

I see it as a complement to ongoing enforcement efforts helping to make our communities safer.