CANADA

RISKY BUSINESS

Tax-weary Canadians help support a boom in smuggled alcohol

TOM FENNELL July 11 1994
CANADA

RISKY BUSINESS

Tax-weary Canadians help support a boom in smuggled alcohol

TOM FENNELL July 11 1994

RISKY BUSINESS

CANADA

Tax-weary Canadians help support a boom in smuggled alcohol

Kanata Keniate has a new job. And just like his old job, it’s dangerous. Keniate, a burly Mohawk, is a veteran of smugglers’ alley, a strip of St. Lawrence River shoreline in eastern Ontario opposite the Akwesasne Mohawk reserve. The Liberal government’s decision to slash tobacco taxes in February almost wiped out the market for cheap illegal cigarettes that once poured through Akwesasne. But undaunted, smugglers like Keniate have quietly switched to running alcohol out of the reserve, which straddles the Ontario, Quebec and U.S. borders. And as illegal cigarettes did, their new product has found a ready market with tax-weary Canadians. Last week at Akwesasne, the trade in illegal alcohol appeared to be booming. Boats carrying boxes of booze crossed the river, and trucks delivering contraband alcohol rolled through the reserve. Keniate was in a boastful mood as he waited to make another run through smugglers’ alley. ‘When cigarettes died down, booze took off,” said Keniate. We just moved into another industry.”

Not since Prohibition in the United States six decades ago has so much illegal alcohol flowed across the border. But unlike the 1930s, when Canadians made fortunes smuggling booze into the United States, this time the contraband is washing into Canada. In fact, officials at the Liquor Control Board of Ontario (LCBO), the largest purchaser of beverage alcohol in North America, estimate that nearly $806 million in illegal wine and spirits were consumed in Ontario in 1993, up $50 million from the previous year. And Quebec Liquor Corp. officials calculate that $500 million worth of illegal booze was purchased in that province last year. The growth in the illegal trade, which now costs governments across Canada almost $1 billion a year in lost tax revenues, has been explosive. In 1993, police seized nearly 455,000 litres of smuggled alcohol, up from just 7,000 litres in 1990. And while police on both sides of the border have stepped up their fight against the modern-day rumrunners, they have barely slowed the illegal trade. Said Ontario Provincial Police (OPP) Insp. Chris Lewis: “While we’re making one seizure, three more are getting by.”

To kill the illegal trade, Canada’s distillers want the federal and provincial governments to cut alcohol taxes. According to the U.S. Bureau of Alcohol, Tobacco and Firearms (ATF), most of the alcohol being smuggled into Canada is manufactured by numerous small U.S. distilleries. As a result, Ronald Veilleux, president of the Ottawa-based Association of Canadian Distillers, said the industry is rapidly losing both market share and jobs. In fact, he estimated that four million cases containing 12 750-mL bottles of illegal liquor—or 25 per cent of the legal market—are consumed in Canada each year. But he said that while some Quebec liquor board officials have proposed cutting alcohol taxes, the Ontario government strongly opposes any tax concession. Still, said Veilleux, “If the politicians don’t do something, we will lose the industry completely.” The growing threat to the alcohol industry is clearly evident at Akwesasne. Last October, a special OPP and RCMP task force was established to fight cigarette smuggling in the Cornwall area. And Lewis, the senior OPP official with the task force, said that since the collapse of the illegal tobacco market, police have been seizing increasing amounts of alcohol. In May, officers with the task force seized about 10,500 1.7-litre bottles of alcohol, with a street value of $350,000. Up until May, police had been averaging about 2,000 bottles per month. But Lewis said that represents little more than 10 per cent of illegal alcohol flooding through smugglers’ alley. Keniate, who lives in the Mohawk reserve at Kahnawake, on Montreal’s South Shore, told Maclean’s that he can earn as much as $700 per trip carrying alcohol between Cornwall and Montre al. And like many Mohawks, Keniate says they have the right to move smuggled alcohol across the border, because they are a sovereign nation. Still, to make sure he is not caught in the random police checks, Keniate has beefed up the suspension of his car to hide the fact that he is carrying a heavy load. “They would like to pull us all over,” said Keniate. “It’s still risky, but we can get through.” The risk of being caught is also outweighed by the potentially huge profits to be made on alcohol. One veteran smuggler living on the Six Nations Reserve near Hamilton told Maclean’s that smuggling booze can be even more lucrative than smuggling tobacco. As his staff packaged illegal cigarettes to be mailed to clients in British Columbia, where

tobacco taxes have not been cut, he took out a calculator and quickly added up how much money he could make selling bootleg booze.

As he did, he laughingly stated the simple economics underpinning the illegal trade. “In the United States,” he said, “booze is cheaper than water.”

That is almost true, American alcohol distillers sell a case of six 1.7-litre bottles of vodka, rye whiskey or rum for as little as $30 a case. By the time it arrives on the Ontario shoreline at Cornwall, outside the reserve, it fetches nearly $100 a case, or about $15 per bottle. It is later sold to individuals and bars for $30 a bottle—a 600-per-cent markup over the original $5-a-bottle price. By comparison, a 1.7-litre bottle of Smirnoff vodka sold for $45 in Ontario liquor stores last week. According to the former cigarette smuggler, as they gain more experience moving alcohol across the border, they will be able to bring even more booze into Canada. “Give them another year to learn,” said the smuggler. “They will have more resources to work with.”

Turning cheap American booze into big profits in Canada has also lured far more sophisticated smugglers into the trade. Unlike Keniate, these smugglers openly cross the Canadian border with transport trucks loaded with illegal alcohol. Mark Rusin, alcohol and tobacco program manager with ATF’s intelligence division in Washington, said the agency has documented a staggering increase in the number of exports from small American distilleries to Canada. In many instances, Rusin said, distillers fill orders from smugglers who produce false customs documents that say the alcohol is being moved to a third country through Canadian ports. While shipping alcohol through Canada is legal, Rusin said the shipments rarely reach their stated destination. Instead, it is diverted to warehouses in Canada where the loads are broken up and sold to bars and individuals across the country.

The ATF has cracked down on the small dis-

tillers, but Rusin said that has only made the smugglers more creative. In some cases, smugglers are now asking the distillers to deliver the alcohol to bonded warehouses in the United States. By doing so, the distillers are moved further down the smuggling chain and further away from ATF investigators. Then, to complicate the paper trail, the booze is removed from the warehouses and shunted around the United States before it is finally diverted to Canada. In one case, ATF agents followed two trucks for 5,000 km from Hood River, Ore., to a Quebec border crossing in northern New York state.

At the same time, hundreds of smaller nonnative smugglers across Canada, who also cut their teeth in the cigarette smuggling trade, are now switching to alcohol. In most cases, they purchase cheap booze at liquor stores in the United States and then move it into Canada at remote unmanned border points. Cpl. William Appleby, who is with the RCMP’s customs division in Lethbridge, Alta., said that until recently no one in the detachment could remember arresting anyone for smuggling alcohol. But last month, when officers pulled a van over after it crossed an unmanned border point, they discovered it was carrying 175 cases of alcohol. A few days later, they uncovered 300 cases of smuggled booze in Medicine Hat. The smugglers likely loaded up on cheap U.S. vodka, rum and rye in Nevada and, according to Appleby, the alcohol was probably going to be sold at special events, such as weddings. Added Appleby: ‘We’re looking at alcohol a lot harder now.”

Once in the country, the illegal booze— whether brought in by individuals or major smuggling rings—is being widely dispersed through an informal network of bootleggers. At the Six Nations reserve, a smuggler told Maclean’s that he has customers who routinely drive hundreds of miles to load up their cars with cases of illegal alcohol. They in turn sell the booze to neighbors and colleagues at work. Police also say illegal alco-

hoi is being sold out of the trunks of cars in factory parking lots or at large sporting events. But because the networks are so informal, Sgt. Wyman Sangster, a spokesman for the RCMP’s customs and excise branch in Winnipeg, said they are difficult to crack. “It’s viewed as a victimless crime,” said Sangster. “That makes it difficult to gather intelligence.” The same informal network also distributes smuggled booze to bars and restaurants across Canada. Police say middlemen representing the smugglers often become regular customers, and then casually mention that they know someone who sells cheap liquor. The problem appears to be growing. In 1992, inspectors with the Ontario Liquor Licensing Board charged 179 bars with selling illegal alcohol. The number charged jumped to 368 in 1993, and continues to rise. Legitimate bar owners resent the unfair competition posed by cheap booze. “It’s like an invisible army out there,” said David Manore, owner of Toronto’s trendy Madison Avenue Pub. “We can’t see them, but we know they are hurting us.” Bootleggers have even become so sophisticated that they offer restaurant and bar owners, many of which are constantly on the edge of bankruptcy, services—including credit—that the LCBO does not. “You don’t have to pay right away, and they deliver,” observed Ontario Restaurant Association president Paul Oliver drolly. “The LCBO doesn’t do either of those things.”

Despite the surge in booze smuggling, Veilleux said the alcohol industry has been unable to convince federal and provincial politicians to cut taxes—which typically account for about 83 per cent of the retail price of a bottle of liquor across Canada. In the cigarette manufacturers’ case, officials could easily measure the extent of the problem because the Canadian manufacturers sold their product legally in the United States where smugglers promptly brought it back into Canada. But because the bulk of the smuggled alcohol is being produced in the United States, the industry is having difficulty proving the extent of the problem. “The taxes are killing the industry,” maintains Veilleux. “The politicians have a choice to make.”

That is not the view of the Ontario government, which insists that the problem should be dealt with by clamping down on alcohol smugglers—not giving tax breaks. But the Quebec government, which fought hard for a cut in cigarette taxes, may yet reduce taxes on alcohol. In March, the Quebec liquor board asked provincial Finance Minister André Bourbeau to consider cutting taxes by up to $5 a bottle. Veilleux said that he met with Bourbeau two weeks ago to discuss the tax cut. He added that Bourbeau intended to raise the issue at a meeting of federal and provincial finance ministers in Vancouver last week. In the meantime, Keniate and hundreds of other smugglers like him will continue to dodge police across Canada.

TOM FENNELL