Insider: The black market cigarette trade

A large body of evidence suggests the contraband cigarette trade in Canada is growing at a worrisome rate.

The size of any black market is difficult to measure accurately, but a growing body of evidence suggests that the contraband cigarette trade in Canada is growing at a worrisome rate. The RCMP seized 472,268 cartons of illicit cigarettes last year — 3.5% more than in 1994, when smuggling became so prevalent the federal government slashed tobacco taxes to curb illegal sales. The economic impact of contraband tobacco is unclear, but federal tax revenue from cigarettes has dropped to $1.5 billion from $2.5 billion in 2004, and a study conducted for Imperial Tobacco Canada by GfK Research Dynamics last year found that 16.5% of all cigarettes smoked in the country are illicit. The RCMP says the trade is operated by organized crime groups in Toronto and Montreal — typically bikers, Asian gangs and the Mafia — that employ natives on reserves. The RCMP says approximately 90% of the illicit cigarettes seized in Canada originate from the Akwesasne Territory in New York state. Here’s how police believe the business works.

Farmers in the southern United States grow the tobacco and sell it at market prices to federally licensed suppliers, who then mark the product up and distribute it to cigarette manufacturers.

A number of suppliers in North and South Carolina have deals with unlicensed — and therefore illegal — manufacturers on the U.S. side of the Akwesasne reserve in New York. The suppliers package either raw leaf or fine-cut tobacco and ship it via transport or pickup truck to the reserve.

There are dozens of factories on the reserve, and they can produce 200 cigarettes for about $2. Cigarettes are packaged in zip-lock bags of 200, and stored in cardboard boxes of 50 bags.

Smugglers buy cigarettes from the factories at about $4 a bag, and transport their cargo to the Quebec and Ontario side of the reserve. They use boats to cross the St. Lawrence River, a trip of only a few minutes. In winter, they simply drive across frozen parts of the river, even though the border is patrolled by law-enforcement agencies.

The cigarettes are stored in warehouses and garages scattered across the Akwesasne reserve. The smugglers employ distributors to drive cases of cigarettes to smoke shacks on other reserves in Ontario and Quebec, as well as to convenience stores in rural areas and cities. Some cigarettes are transported to the Maritimes and the West, although most contraband sales are in Central Canada.

The vendor typically pays the smuggler $7.50 a bag, and then charges the customer between $8 and $10. Outside of the reserves, illicit cigarettes sell for as high as $20 for 200 ? that’s still less than half the price of a carton of cigarettes purchased legally in Ontario.

This route spans both international and provincial borders, complicating enforcement efforts. Sgt. Michael Harvey of the RCMP says the goal isn’t necessarily to bust suppliers or smugglers, but to get at the groups running the operation. “When we’re doing an investigation, we do it holistically,” he says. “That way, we take down the whole organization.” It took eight months of investigation and three law-enforcement agencies to dismantle a ring involving Hells Angels in Quebec last year, resulting in 14 arrests.