Alberta's contraband tobacco trade not easily extinguished, investigators warn

Every day, at the register of Awet Tekie's Edmonton convenience store, customers looking to buy cheap, contraband cigarettes are turned away. 

Tekie, known as Sammy to his regulars, says the illicit tobacco industry has undercut the profits of the family business he has owned for 11 years, the Mini Mart in McCauley.

"They ask me, they ask me day and night," he said. "What they are demanding. I don't have it."

Tekie said his tobacco revenues have plummeted by more than 50 per cent over the past year. He believes an increasing supply of illicit tobacco in Alberta is to blame.

"It hurts the business," said Tekie, 58. "It's out of control." 

The average price for a legitimate pack of 25 cigarettes in Alberta is $15.68, according to the provincial regulator. Contraband cigarettes, often sold under the table in packages meant to mimic the real thing, sell for around $5 a pack. 

As retailers warn that sales of contraband tobacco products have undermined their profits, investigators caution that the  supply chain is vast, highly profitable and resistant to enforcement efforts, despite a recent spike in sizeable seizures across the province.

Peter Bruni-Bossio, a senior manager of investigations with Alberta Gaming, Liquor and Cannabis — the agency charged with enforcing tobacco laws in the province — said the supply network has operated for decades and will not be easily dismantled. 

"We're just touching the tip of the iceberg," Bruni-Bossio said in an interview.

"It's hidden in plain sight."

Investigators believe the vast majority of contraband products being sold in Alberta are manufactured in underground facilities in provinces including Ontario and Quebec and then shipped west. There is no evidence of clandestine factories within Alberta, Bruni-Bossio said. 

The shipments arrive by road and are then distributed to makeshift distribution centres throughout the province, he said.

Investigators have found caches of contraband in homes and corner stores but most often the product is stored in industrial areas, where the shipments coming and going are less likely to draw attention. 

Bruni-Bossio said the enforcement unit has increased its focus on taking down more "high level players" in the criminal trade, which continues to cheat governments out of valuable tax revenue. 

Over the past 10 months, AGLC's tobacco enforcement unit has seized an estimated $33.5 million in contraband cigarettes and 208 kilograms of contraband shisha tobacco, at a total potential lost tax revenue of more than $12.8 million.

The illegal products were recovered from rural and residential homes, storage lockers and convenience stores.

The most recent bust, in June, saw thousands of cartons of cigarettes seized from two warehouses in a northwest Edmonton industrial yard. 

Around 28,000 cartons of cigarettes and 93.2 kg of contraband shisha were found, with an estimated street value of $5.3 million. Charges are pending.

Investigators believe the cigarettes, sealed in cardboard boxes, were manufactured in factories outside Alberta and then smuggled into the province by truck.

Recent investigations resulted in two of the largest contraband tobacco seizures ever made in the province:

• In January, about 43,500 cartons were seized in Edmonton from two homes and a rural property.  Investigators say the cache would have fetched a total of $7 million on the illicit market.

• In April, 60 wrapped pallets were seized from a warehouse. They contained 111,300 cartons of contraband cigarettes with an estimated street value of $18 million.

Bruni-Bossio said many criminals already involved in trafficking drugs and firearms are turning to the tobacco trade, attracted by the money and the relatively lower risk of a hefty criminal sentence if they are caught, he said.

"In terms of seizures, I don't think that we have created that much of an impact," he said. "We're certainly raising some eyebrows. 

"But to say that there's an impact, that we're going to see a decline in the contraband tobacco coming in, I don't think we're there yet."

Low risk, high reward

Various criminal networks bring the products to the Alberta market, relying on the sales proceeds to subsidize their operations and bring in profit, he said. 

Purchased at wholesale prices from illegal distribution networks in the east and sold without taxation, the illegal tobacco provides big profit margins for "high level" distributors, Bruni-Bossio said. 

No single group is dominating the industry, he said.

"It's a low-risk commodity that a lot of the criminal networks are manipulating," he said.

"There's a significant amount of profit that could be made for low risk and high reward." 

David Klein, an AGLC tobacco investigator for northern Alberta, said Ontario and Quebec remain the hot spots for manufacturing.

Packaging has grown more sophisticated, he said. Cigarettes that were once sold in large plastic bags are now distributed in packs designed to mimic legitimate brands. 

Illegitimate products can be recognized by the absence of a red Alberta or light tan Canada stamp bearing the "DUTY PAID CANADA" on packages of cigarettes and cigars or pouches of tobacco.

Klein said more public awareness is needed so that distributors of illicit products get reported to authorities.

"Sometimes when people hear about tobacco tax, there's really no concern that this the Alberta government losing money," he said.

"Well, it's Albertans losing money, for the purposes of keeping our province running." 

Supply and demand

A recent study by Ernst & Young LLP, conducted for the Convenience Industry Council of Canada, estimated that contraband's share of the tobacco market is as high as 69 per cent in Ontario, 45 per cent in British Columbia, and 44 per cent in Newfoundland.

Sara MacIntyre, the council's Western Canada vice-president, said legitimate operators can't compete.

She said increased tobacco prices have led to a growing consumer demand for illicit tobacco, and that has taken a devastating toll on small business. The prevalence of smoking among Albertans has remained steady but legitimate sales have been in decline, she added.  

"It's clearly a result of the availability of contraband," MacIntyre said.

"As tax rates on tobacco increase, contraband prevalence and domination increases. It's a natural connection." 

The council is calling for tougher penalties and a more aggressive, nationally co-ordinated approach to enforcement. 

"It's everywhere. And it's a big challenge for enforcement officers and for governments to actually get a handle on it." 

Standing behind the register of his store, Tekie hands a pack to a grey-haired man who shakes his head and complains about the rising cost of each cigarette.

Tekie doesn't believe the illegal trade will ever disappear completely. He said attempts to crack down on the industry should focus less on punishment and more on understanding why contraband tobacco has gained a foothold in the province. 

He said he has empathy for consumers who buy contraband cigarettes and the retailers that sell them. 

"The consumers, they cannot really afford the regular cigarettes," he said. "And the people who sell it are trying to make a living out of their shops. 

"We have to see the bigger picture."