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THE CANADIAN EXAMPLE: TOBACCO COMPANIES CONVICTED OF CONTRABAND

In Canada, in 2008 and 2010, the three major tobacco companies were convicted of contraband and entered civil settlements with federal and provincial governments. The convictions followed guilty pleas and resulted in fines of C$525 million, the largest in Canadian history. Civil payments totalled C$1.175 billion, with fines and civil payments together totalling C$1.7 billion (US$1.3 billion).

These outcomes arose from actions in the 1990s when the three major tobacco companies in Canada exported vast quantities of Canadian made and branded cigarettes tax-exempt to the U.S., knowing that these cigarettes would return to Canada illegally as contraband. The result was that an estimated 25-30 per cent of the Canadian market in 1993 was contraband. At the time, the companies claimed that they were not doing anything illegal.

The contraband situation prompted the federal government and 5 of 10 provincial governments in 1994 to reduce tobacco tax rates (the rates were not fully restored until 2002) . This had a serious adverse impact on smoking prevalence trends, especially among youth. Moreover, government tobacco tax revenue decreased substantially following the reduction in tax rates.

Eventually there were criminal investigations, including Royal Canadian Mounted Police (RCMP) searches and document seizures at tobacco company offices. The three companies that were convicted and entered civil settlements were Imperial Tobacco Canada (British American Tobacco subsidiary); Rothmans, Benson & Hedges (Philip Morris International subsidiary); and JTI-Macdonald (now a Japan Tobacco International subsidiary, but previously, in the 1990s as RJR-Macdonald, an R.J. Reynolds subsidiary). Also, Northern Brands International, a U.S. subsidiary of R.J. Reynolds, was convicted in both Canadian and US courts.

Governments recovered only a small percentage of the total revenue lost. In subsequent court filings, federal and provincial governments estimated that more than C$10 billion was forgone. Adding in the lower revenue following the tax rollback, the forgone revenue would be much, much higher.

The Canadian experience shows not only the importance of high tobacco taxes and contraband prevention, but also demonstrates that the tobacco industry has engaged in illicit trade on a massive scale and cannot be trusted.

Rob Cunningham, Canadian Cancer Society

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