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Cigarette black market feared Canadian tax increase led to smuggling and organized crime rivalry; Industry complicity alleged

THE BALTIMORE SUN

WASHINGTON -- Ron Martelle would have thought he was watching a scene from "The Untouchables" had the mayor of Cornwall, Ontario, not been looking out his own front door: Rival gangs with automatic weapons were battling in the streets to corner the market on $1 million worth of contraband streaming through town every night, by car, by truck, even by snowmobile.

For a year, he recalls, his town cowered under a "reign of terror" that drove residents off the streets, inviting organized crime groups, prostitutes and drug lords to fill the void. This was not the mythical age of Prohibition. It was 1993, and the battle was over cigarettes.

Tax increases, slapped on Canadian cigarettes in the name of tobacco control, had spawned huge black markets of duty-free cigarettes smuggled in from the United States.

As Congress contemplates sharp increases in cigarette taxes, tobacco companies, police groups and people like Martelle are pointing to the Canadian experience, raising dire warnings about the likelihood of black markets.

"If prices rise to the level they're contemplating, organized crime is going to have a field day," said Martelle, now president of a Canadian forensic investigation company. "I do not want to see any town in the United States go through the devastation Cornwall, Ontario, went through."

Tobacco control advocates in the United States say it is pointless to draw lessons from the experiences of a much-less-populous nation. Besides, they say, the tobacco companies themselves had helped spawn the Canadian black markets by shipping popular Canadian brands to U.S. boot-leggers, who then smuggled the cigarettes back and avoided the tax. Cigarette companies thus have no right, critics say, to raise alarms.

"It's hogwash," said Maurice Gingues, acting executive director of the Canadian Council for Tobacco Control in Ottawa. "Mr. Martelle is coming at it from the wrong end. He's coming at it from the symptomatic end of the problem, not the source."

But the ferocity of the tobacco industry's warnings suggests that the black-market issue could pose a serious threat to Congress' efforts to enact sweeping tobacco legislation this year. Where industry leaders formerly pleaded with Congress that a sweeping tobacco bill pending in the Senate would bankrupt them, they have now shifted to warning about its implications for the nation.

To be sure, the central issue of debate in Congress so far has been the sheer magnitude of the tobacco control measure pending in the Senate, a bill derided by House Speaker Newt Gingrich as a "big government, big tax" approach to the problem of youth smoking.

But the prospects of a black market have recently become another source of contention.

"It has the potential to be very hurtful," said Bill Novelli, president of the Campaign for Tobacco-Free Kids. "People didn't understand the bankruptcy issue. If the tobacco companies go under, good riddance. They do understand black markets."

Industry launches campaign

Tobacco companies have launched a major campaign on the issue, with television and radio ads. Industry officials are releasing a sheaf of letters from law enforcement groups such as the Fraternal Order of Police warning that the pending Senate tobacco legislation would "give organized crime a new line of business."

No one can deny that Canada's tobacco control efforts of the 1980s and 1990s ended in disaster. What precipitated the failure and its lessons for the United States and Congress, however, are matters of sharp disagreement.

Supporters of higher cigarette taxes note that such increases often correlate -- as they did in Canada -- with lower smoking rates. Between 1984 and 1993, Canada's tax on a pack of cigarettes rose from 42 cents to $1.93. Provincial governments added other taxes.

In 1993, the average pack of cigarettes in Canada cost $5.65 in Canadian currency, up from $2.64 in 1984. During that period, teen smoking rates fell by 60 percent, with total smoking rates declining 38 percent.

But by then, Canadians had been overwhelmed by black-marketers smuggling cigarettes in from the United States. one year alone, Canada and its provinces lost more than 2 billion Canadian dollars in tax revenue, according to the General Accounting Office. Up to 40 percent of the cigarette market belonged to the smugglers.

'Mafia was here'

"The Mafia was here, the Asians, outlaw motorcycle gangs, the Mohawk warrior society, all fighting for each other's shipments coming across the [St. Lawrence] river," Martelle recalled. The crackle of gunfire was accompanied each night by the roar of car chases and the wail of sirens.

After Martelle demanded help from the government in Ottawa, cigarette pirates shot up the town's civic center with AK-47s, blasting the federal building for good measure.

In October 1993, police persuaded Martelle to take his family into hiding. His son, a local police officer, discovered that there was a price on his head.

Prime minister backs down

Under siege, Prime Minister Jean Chretien reluctantly backed down in 1994 and slashed taxes.

"We do not want the tobacco manufacturers to receive any benefit from the difficult decision we have made today," Chretien said angrily. "The fact is, Canadian manufacturers have benefited directly from this illegal trade. They have known perfectly well that their tobacco exports to the United States have been re-entering Canada illegally. I believe they have not acted responsibly."

Though nobody has made the link conclusively, tobacco foes are convinced that it was the industry that helped overwhelm Canada's tobacco control officers. A federal grand jury in upstate New York is investigating alleged links between R. J. Reynolds, the second-largest tobacco manufacturer, and a smuggling ring that pocketed $687 million over four years in the early 1990s. The Justice Department indicted two Brown & Williamson employees accused of smuggling cigarettes from Kentucky to Canada.

Suspicions are understandable. Canadian smokers proved unwilling to buy American cigarettes, so organized criminals in the United States began buying up Canadian brands.

From 1990 to 1993, the number of packs of Canadian cigarettes imported to the United States, before their return trip to Canada, rose from 50 million to more than 500 million. When tobacco control advocates sought to stem the tide with export fees, the tobacco industry killed the measures in Ottawa.

Tobacco companies and their allies say the exports were perfectly legal and hint it would happen again in the United States, this time by Mexican smugglers.

"Where there are smokers willing to purchase on the black market for half what they're paying at convenience stores, they'll do that," said Steve Duchesne, a spokesman for the tobacco industry. "And let's remember, bootleggers aren't going to be checking kids' IDs at the back of the truck."

'Gun to Congress' head'

Such talk infuriates and alarms the industry's opponents.

"The tobacco industry is, in effect, threatening it and promising it," Novelli said of black markets. "With bankruptcy, it was like Congress holding a gun to the tobacco industry's head. With black markets, they're holding the gun to Congress' head."

So far, the industry has not swayed the Senate tobacco bill's chief proponents, in part thanks to Deputy Treasury Secretary Lawrence H. Summers. In testimony to the Senate Judiciary Committee on April 30, Summers carefully laid out why he believes a higher cigarette tax would not trigger a U.S. black market.

Most of the bootlegged tobacco flowing into Canada was actually sold by legitimate retailers, not back-alley peddlers. The Senate bill, sponsored by Sen. John McCain, an Arizona Republican, would block the sale of contraband cigarettes by legitimate retailers. Tobacco products sold abroad would be labeled "exports, not for sale in the United States," thus "closing the distribution system," Summers said.

Also, 80 percent of the Canadian population lives within a two-hour drive of the U.S. border, making it easy for U.S. smugglers to evade Canada's outgunned law enforcement agents.

Perhaps most important, Summers said, the McCain bill sets sharp monetary and legal penalties for tobacco companies that fail to reduce youth smoking rates.

"U.S. cigarette manufacturers would have great incentive not to become complicit in any smuggling operation, as they would encounter enormous legal risks and public opprobrium," Summers told the Senate. "Indeed, it is hard to imagine that large-scale smuggling could occur without the manufacturers' knowledge."

Not all senators were convinced. An irritated Sen. Dianne Feinstein, a California Democrat, snapped: "This senator, I must say, has no confidence we can have a closed distribution system. We can't do it for drugs. How can we do it for cigarettes?"

But others are calling the issue a red herring thrown up by the tobacco companies. McCain said he trusts the analysis of the Treasury Department and hinted that the tobacco industry's faltering credibility on Capitol Hill has made members skeptical of its black-market warnings.

Said Sen. Kent Conrad, a North Dakota Democrat: "I think it is an attempt to change the subject when they're losing the argument. They badly need the distraction."

Pub Date: 5/10/98

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