The inner workings of an illegal industry

Contraband tobacco in 2010 : Smoke Shack Alert

1

About the CCSA The Canadian Convenience Stores Association (CCSA) represents the economic interests of more than 27,000 convenience stores that serve the daily needs of Canadians in every community across the country. The CCSA has developed a basic mission to promote corporate social responsibility and represent “Responsible Community Retailing.” The Association was the first to develop the “We Expect ID” world class age testing program for all employees in the industry. The CCSA works to promote and foster professional business practices, standards and ethics throughout the C-Store industry and provides training, education and guidance to its members. For more information visit: 10-2010contrabandobjective.com

A regional affiliate of the Canadian Convenience Stores Association

A regional affiliate of the Canadian Convenience Stores Association

A regional affiliate of the Canadian Convenience Stores Association

A regional affiliate of the Canadian Convenience Stores Association

Contraband tobacco in 2011: Smoke Shack Alert

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What is contraband? . . . . . . . . . . . . . . . . . . . . 3

2 Are smoke shacks illegal? . . . . . . . . . . . . . . . . 7 3 Where are they? . . . . . . . . . . . . . . . . . . . . . . 10 4 How do they affect the Native reserves? . . . . 16 5 What can we do about it? . . . . . . . . . . . . . . . 19 6 Who has joined the fight? . . . . . . . . . . . . . . . 20

2

Contraband tobacco in 2010 : Smoke Shack Alert

1 What is contraband? Contraband tobacco is a term used to describe the growing market in illicit cigarettes in Canada. For the second time in history, our country must face the challenge of contraband – the last time being in 1994, when the illegal market reached a peak at more than 50 per cent..

Number of cartons/Re-sealable Bags

RCMP Cigarette Seizures: 1994 to 2008*

965,688

900,000 750,000 625,659

600,000 456,333

472,268

437,709

450,000

369,169

356,643

300,000

222,228 158,355

150,000

115,355 36,131

28,996

39,773

59,347

119,968

0 1994

1995 1996 1997 1998 1999

2000 2001 2002

2003 2004 2005

2006 2007 2008

The difference in today’s contraband challenge is the Native factor. According to the RCMP, contraband is mainly fueled by a few, but important, Native reserves located in Ontario, Québec and the United States. These reserves are heavily involved in the manufacturing, distribution and sale of contraband tobacco to consumers both inside and outside the reserve. To understand contraband, one must look the current tax system. What makes contraband illegal, first and foremost, is the tax evasion factor. Cigarettes in Canada have become an excessively taxed product. While the overall tax on goods and services averages 13 per cent, with gas around 30 per cent, taxes on cigarettes have skyrocketed to heights of 75 per cent. To collect these heavy taxes, the government imposes a tax on every main player within the tobacco industry: the manufacturer who fronts the Federal Excise Tax (currently $17) every time a carton of cigarettes leaves its assembly plant or is imported; the distributor who pays the Provincial Tobacco Tax (PTT), which varies widely among provinces, and finally, above all, the consumer who (depending on the province) either pays the Provincial Sales Tax (PST), the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST).

*Source: Contraband tobacco in 2010: Smoke Shack Alert

Contraband tobacco in 2010 : Smoke Shack Alert

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Summary of federal and provincial tobacco taxes Carton of 200 Tailor-Made cigarettes As of September 28, 2010

B.C.



ALB

SASK

MAN ONT

QUE N.B. N.S.

P.E.I. N. & L.

Average price $93.23 $90.55 $97.06 $97.71 $80.16 $70.18 $78.81 $102.67 $95.70 $95.19 Federal Excise Duty $17.00 $17.00 $17.00 $17.00 $17.00 $17.00 $17.00 $17.00 $17.00 $17.00 Provincial $37.00 $40.00 $42.00 $41.00 $24.70 $20.60 $23.50 $43.04 $44.90 $38.00 Tobacco Tax

Sales Tax Rate* G.S.T. see note 1 5% 5% 5% see note 1 5% see note 1 see note 1 5% P.S.T. 5% 7% NA NA H.S.T. 12% 13% 13% 13%

see note 1

13%

MINIMUM

LEGAL PRICE

$60.48

$59.85

$65.05 $65.16 $47.12 $39.48 $45.77 $67.85 $65.00 $62.15

PAY EXCISE TAX

PAY EXCISE TAX

*(NA: Not applicable tobacco) PAY on PROV TAX note 1: HST applies: combined GST with provincial component

PAY PROV TAX

PAY HST/GST/PST Source (average price): Non-Smokers’ Rights Association

When all the taxes are tallied, the minimum prices charged on every legal carton of cigarettes in this country are: $47.12 SMOKE SHACK in Ontario, $39.48 in Québec and up to $67.85 in Nova Scotia. In other words, if DISTRIBUTOR you buy a carton of cigarettes for less MANUFACTURER DISTRIBUTOR RETAILER MANUFACTURER OR SMUGGLER than these prices, you are supporting contraband tobacco. A CARTON A CARTON

$80

$50

AND MORE

But how exactly does the tax evasion work? There are four basic models at play in the market.

CONTRABAND TYPE A

Legal

Sold in C-stores

(ALL TAXES AVOIDED)

Most Native brands and baggies

PAY EXCISE TAX PAY EXCISE TAX

PAY EXCISE TAX

PAY PROV TAX

PAY PROV TAX PAY HST/GST/PST

MANUFACTURER MANUFACTURER

4

DISTRIBUTOR DISTRIBUTOR

SMOKE SHACK RETAILER OR SMUGGLER

$30 $80 A CARTON A CARTON AND MORE

Contraband tobacco in 2010 : Smoke Shack Alert

MANUFACTURER MANUFACTURER

DISTRIBUTOR DISTRIBUTOR

SMOKE SHACK SMOKE SHACK OR OR SMUGGLER SMUGGLER

$11 $50

A CARTON A CARTON AND MORE AND MORE

The majority of the contraband activity we see is Type A -- where none of the key members of the supply chain pays taxes. This huge tax evasion explains why the consumer can pay as low as $11 for a carton of contraband cigarettes in a province where it should cost $80 on average (of which $52, on average, is entirely made up of taxes. See Chapter 4 - What do they sell?). With such a wide price discrepancy, it’s no wonder that we’ve witnessed an explosive growth within the contraband tobacco industry – from players, manufacturers and traffickers to the number of smoke shacks on Native reserves – all in the past decade. And not only do the Native reserves have a price advantage, they also enjoy a border asset. The Akwesasne reserve encompasses Québec, Ontario and the U.S. -- an ideal passage point for tobacco, cigarettes, money, drugs and arms, according to the RCMP. To feed demand, more than 400 smoke shacks have opened their doors (mainly on four reserves), with more than 50 illegal manufacturing plants producing cigarettes by the millions. In 2008, their market share reached 50 per cent in Ontario and 40 per cent in Quebec, almost dominating one of the key mass-market products in the country. One of the main difficulties faced by smugglers is transportation. Cartons and tobacco are bulky and require access to water and road transportation to travel from the U.S. plant to the Canadian smoke shack. A good part of the contraband tobacco found on smoke shack shelves comes from the U.S. PAY EXCISE TAX

PAY EXCISE TAX

PAY PROV TAX

PAY PROV TAX PAY HST/GST/PST

MANUFACTURER

DISTRIBUTOR

RETAILER

$80

MANUFACTURER

DISTRIBUTOR

SMOKE SHACK OR SMUGGLER

A CARTON

$50

A CARTON AND MORE

CONTRABAND TYPE B (PPT + HST/GST/PST EVASION)

Some Native brands & cigarillos PAY EXCISE TAX

MANUFACTURER

DISTRIBUTOR

SMOKE SHACK OR SMUGGLER

$30

A CARTON AND MORE

MANUFACTURER

DISTRIBUTOR

SMOKE SHACK OR SMUGGLER

$11

A CARTON AND MORE

Contraband tobacco in 2010 : Smoke Shack Alert

5

As might be expected, the contraband seizures made by the RCMP in 2008 represent a record high, surpassing the previous record set in 2007. Seizures in 2008 include approximately*: - 965,000 cartons and re-sealable bags of cigarettes (an increase of 54 per cent from 2007); - 69,000 kilograms of fine-cut tobacco (an increase of 146 per cent); - 18,000 kilograms of raw tobacco leaf (an increase of 49 per cent). *Source: RCMP Progress Report -- 2009

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The increase in controls by the Canadian border patrol around Cornwall, Ontario, has forced smugglers to flock east and target Quebec, according to RCMP specialists who recently opened their doors to the Montreal daily newspaper Rue Frontenac. The RCMP warehouse near Valleyfield holds minivans, light trucks, pick-ups, cars, snowmobiles and a variety of boats seized from smugglers over the past few weeks. The huge amount of tobacco seized was the product of just one week’s work. “It’s just the tip of the iceberg,” says RCMP officer Josée Thomas. The numbers are staggering. In January alone, this RCMP division seized more than $1 million in illegal cigarettes, which is only a minor part of all the tobacco traffic in the area. Over the same period, 17 cars were seized and 22 people arrested.

6

Contraband tobacco in 2010 : Smoke Shack Alert

2 Are smoke shacks illegal? As a highly organized contraband industry that operates in a manufacturing capacity with a sophisticated distribution network, hundreds of smoke shacks are selling tobacco to everyone, young and old -- but mainly to non-Natives. As result, convenience stores are losing their legitimate business to criminals, smugglers and organized crime, and stores are closing by the thousands. As for the government, it is losing its grip on this highly regulated market and finds itself incapable of pursuing its public health mission or financing health and education through sheer lack of revenue. While some would argue that Native communities have an ancestral right to grow, sell and consume tobacco, there are laws that regulate these aspects of the trade. Today, these laws are publicly violated by the daily operation of smoke shacks. The current federal and provincial regulations that legitimate retailers of legal tobacco products must follow include: - Labelling (list of ingredients, type of claims, e.g. using the word ‘Light’ is no longer permitted) - Health warning (displayed on half of the cigarette pack) - Display and signage (no cigarette display in store, no advertising) - Taxes (collect and remit all taxes) - No sales to minors (age verification mandatory for every sale) - Product inspection and use of Reduced Ignition Propensity (RIP) cigarettes When the set-up of smoke shacks is compared with convenience stores, the difference is striking.

Contraband tobacco in 2010 : Smoke Shack Alert

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One society, two standards C-stores vs Smoke Shacks

Display ban & behind the counter No sales to minors Taxes on products Health warnings Inspected & approved products No advertising or signage

8

Contraband tobacco in 2010 : Smoke Shack Alert

-

- NO display ban & available on shelves - SOLD to minors - NO taxes on products - NO or few health warnings - UNINSPECTED, UNAPPROVED PRODUCTS - Advertising or signage

Contraband tobacco in 2010 : Smoke Shack Alert

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While the vast majority of smoke shacks are located on a few Native reserves fed by nearby illegal manufacturing plants, many of the smaller reserves house a few smoke shacks as well.

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49

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132 138 132

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207

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Contraband tobacco in 2010 : Smoke Shack Alert

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Contraband tobacco in 2010 : Smoke Shack Alert way High

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Contraband tobacco in 2010 : Smoke Shack Alert

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$10 - $15

THE OVER-100 DIFFERENT PRODUCTS AVAILABLE ON SMOKE SHACK SHELVES CAN BE CLASSIFIED IN THE FOLLOWING CATEGORIES: Low-end, cheap cigarettes: the baggies Baggies are the cheapest, most sought-after products sold in smoke shacks. Prices range from $10 to $15 per carton, depending on the location, time of year and quantity (purchases by the case are usually $10 cheaper). It’s very difficult to tell where a baggie has been produced, but some are packaged in printed bags, sometimes labelled with a brand like Saratoga, Canadian Premium, etc.

$15 - $25

The most common: the native brands Slightly more expensive than the popular baggies, the Native brands are priced between $15 and $25 a carton. The best known are Native & dis COUNT, all made in Akwesasne, NY, by Jacobs Tobacco Company, one of the only manufacturers to identify themselves.

$25 - $30

THE MOST EXPENSIVE: THE IMITATORS Brands like PlayFare’s, Rockmans and du MONT are considered deluxe brands in this market.

14

Contraband tobacco in 2010 : Smoke Shack Alert

$30

THE SPECIALTY BRANDS Some brands aim at attracting a “specialized” clientele. The French-speaking Québécois are targets, with brands that appeal to their nationalistic sense of belonging, such as Les Patriotes, Je me Souviens or Fleur-de-Lys. Other brands target bikers (Choppers), women (Midazzé), etc.

$5/pack - $25/baggie - $50/carton

The cigarillos category Shortly after the adoption of Bill C-32 forbidding the sale of cigarillos in Canadian convenience stores, the availability of the product has exploded onto reserves. With a virtual monopoly on such products, smoke shacks offer a wide range of cigarillos under brands such as PT, Smokin Joes, etc.

Contraband tobacco in 2010 : Smoke Shack Alert

15

4 How do they affect the Native reserves? Native reserves are very small and fragile communities. Those who have embraced contraband have seen their quality of life, traditional way of living and sense of belonging completely transformed in a negative way by the culture and business of manufacturing and selling illegal tobacco. “Everybody knows we do have organized crime here,” Kahnawake Chief Rhonda Kirby said. “In fact, some smoke shop owners want to get out of the business,” she added, “but have been forced by the gangs to stay put.” “The mob is involved with some of the individuals, the Mafia and the Irish mob and the Russian mob and the Chinese mob.”1 According to Doug George-Kanentiio, an Akwesasne Mohawk and former editor of Akwesasne Notes, “Smuggling tobacco, narcotics, and whatever else commands a profit has created a “narco-culture” at Akwesasne in which the traditional values of humility, compassion, simplicity, generosity and communal service have been replaced by violence, intimidation, greed and death.” And with the illegal activities comes the distrust and paranoia of being watched or arrested. In most reserves involved in trafficking contraband, an internal police system has been put in place. Non-uniformed people without official authority or power are patrolling the streets, checking the whereabouts of people and sometimes blantantly intimidating them. Who pays them? For whom are they working? Nobody knows for sure. Of Kahnawake’s population of 10,000, 20 per cent are believed to be involved in the trafficking of contraband tobacco.

This patrol car, with four people inside, closely followed the hidden photographer’s car for a long ride until finally giving up the chase. This scrutiny and the organized crime presence combine to create a reign of terror within the reserve. *Mohawk, Gangs & Tobacco by William Marsden, Montreal Gazette, April 28, 2009.

Smoke shack owners make good money. One proprietor admitted to a Montreal daily newspaper that his operation enjoys profits of $130,000 a year by selling contraband. Still, it’s not an easy life, he said. He can’t hold any assets in his name or else he faces the risk that the government will seize them. He has no bank account and is forced to keep large sums of money handy to pay his workers and suppliers.1 “I can’t put my name up front because the government is going to come kicking my door in. That car I own out there? It belongs to my last girlfriend. I pay for the car payments but I can’t own it in my name. And my business is not in my name. I burn all my stuff. We don’t keep records in the stores. We burn paper. At the end of the day, I log into a special computer and hide it on a chip. ... The house I live in is not in my name. That’s how I live. I’m nobody,” he said.1 Tobacco is only one part of the illegal activity that takes place on some reserves. At Kahnawake, for instance, the band council has endorsed and promoted the installation of one of the world’s largest servers for hosting online gaming websites. The state-of-the-art building is equipped with the latest technology, is self-sufficient in electricity if need be, and is surrounded by motion detectors. It houses 60 per cent of the worldwide online gaming industry, representing billions of dollars in annual revenues. 1

16

Read more: http://www.montrealgazette.com/news/Mohawks+gangs+tobacco/1437136/story.html#ixzz13J2OdW1

Contraband tobacco in 2010 : Smoke Shack Alert

SMOKE SHACK SIGNAGE: DEGRADATION OF THE RESERVES’ VISUAL ENVIRONMENT Finally, nothing illustrates the huge negative transformation that affected Native reserves have undergone over the past 10 years better than the unbridled, unregulated proliferation of tobacco signage aimed at luring smokers into buying contraband. To highlight the stark fact that Native reserves are beyond reach of any legal constraints or obligations, many smoke shack proprietors are openly using legal trademarks and abusing intellectual property rights – a practice that doesn’t occur without consequences off the reserve.

Contraband tobacco in 2010 : Smoke Shack Alert

17

Smoke Shacks and the Sale of Tobacco to Minors Through three separate investigations undertaken in the past year, it was demonstrated that few smoke shacks seem to be asking for age verification. This practice demonstrates an unacceptable lack of responsibility and accountability within the contraband network – from the smugglers and smoke shack operators to the band councils who claim to regulate this activity. INVESTIGATION 1 JOURNAL DE MONTRÉAL (MONTREAL DAILY NEWSPAPER) Date: September 19, 2009 Age of customers: 15 and 17 (boys) Results: 5 out of 5 at Kahnawake 4 out of 6 at Kanesatake Total: 9 out of 11 (compliance rate of 19%) INVESTIGATION 2 CCSA/JOURNAL de Date: Age of customer: Results: Total: 1

MONTRÉAL April 24, 2010 15 (girl) 5 out of 5 at Kahnawake 5 out of 5 at Kanesatake 0 out of 10 (compliance rate of 0%)

INVESTIGATION 3 CCSA Date: Age of customer: Results:

June 29, 2010 15 (girl) 8 out of 10 at Six Nations (compliance rate of 20%)

Video of this investigation is available on YouTube under the title: Irresponsible tobacco sale on Six Nations reserve (Ontario)

COMPLIANCE RATE AMONG THE 27,000 CONVENIENCE STORES IN CANADA ACCORDING TO HEALTH CANADA:

18

2007:

85.9%

Contraband tobacco in 2010 : Smoke Shack Alert

2008:

85.9%

2009:

84.3%

5 What can we do about it? Ultimately, the simple solution, to end the illicit tobacco market once and for all, would see the vast majority of illegal smoke shacks close peacefully following a reduction in “excessive” tobacco tax rates. The CCSA is confident that a reduced demand for contraband tobacco would go a long way toward limiting criminal activity and improving responsible practices of tobacco retailers located on Native reserves. In the CCSA’s estimate, a 50 per cent taxation level (which would still be the highest on any product in Canada), instead of the current 75 per cent, would go a long way toward curbing contraband and bringing smokers back into the legal fold. If, despite all efforts, contraband can’t be brought below 10 per cent for a sustained period, the CCSA believes governments will have no choice other than recourse to this solution. In the meantime, the CCSA is committed to pressuring both the federal and provincial governments until some real action and mobilization in the fight against contraband is effected. The good news is that change is happening, as is evident by announcements made over the past year: The Federal government - In May 2010, a new border security reinforcement plan, a new canine unit and a national advertising campaign (one of the CCSA’s demands) were announced to ensure that Canadians are aware that contraband is illegal; - According to some reports, the Federal government has shifted its tobacco strategy to make the fight against contraband its number one public health policy priority in its tobacco reduction strategy and approach. However, the adoption of Bill C-32, which bans the sale of flavoured cigarillos in convenience stores, has granted the smoke shacks and smugglers a monopoly on these products and has been vigorously denounced by the CCSA. The Quebec government - December 2009 saw the Adoption of Bill 59, comprising several legislative measures that give additional powers to the authorities to intervene, seize contraband and levy fines against smugglers. With this Bill, municipal and provincial police have new tools to carry out their role and increase crackdowns; - No new tobacco tax increases have been imposed over the past few years to avoid fuelling contraband; - A recent report by the Quebec Health Ministry stated that the fight against contraband tobacco has become its number one priority with regard to its tobacco reduction strategy.

The Ontario government - The CCSA has yet to see a plan or priority against contraband established, even though Ontario is the Canadian province most affected by this problem.

The maritime governmentS - In the Maritimes, both Nova Scotia and Newfoundland have raised taxes on tobacco despite rising levels of contraband. Not only does this enhance the lure of illegal cigarettes among smokers, it also accelerates the pace of tax evasion.

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6 Who has joined the fight? The 10%-2010 Campaign: Mobilizing MPs & MPPs in every Riding The campaign appealed to politicians in Ontario, Quebec and the Maritimes to officially sign the campaign pledge to work at reducing contraband levels in their ridings, through a variety of suggested community-based initiatives, to 10% in 2010. The CCSA is very happy to have received the enthusiastic support of 66 politicians from all parties in Canada. We pay tribute to their courage and determination.

ONTARIO MPS AND MPPS WHO HAVE SIGNED THE PLEDGE TO FIGHT AGAINST CONTRABAND TOBACCO IN THEIR RIDINGS: FEDERAL

PROVINCIAL

CONSERVATIVE PARTY OF CANADA Larry Miller, Bruce-Grey-Owen Sound Lois Brown, Newmarket Aurora Patrick Brown, Barrie Peter Kent (Hon.), Thornhill Phil McColeman, Brant Rick Dykstra, St-Catharines

CONSERVATIVE PARTY OF ONTARIO Frank Klees, Newmarket Aurora John O’Toole, Durham Julia Munro, York Simcoe Norm Miller, Parry Sound-Muskoka Norman Sterling, Carleton-Mississippi Mills Peter Shurman, Thornhill Randy Hillier, Lanark-Frontenac-Lennox and Addington Ted Chudleigh, Halton

LIBERAL PARTY OF CANADA Bryon Wilfert (Hon.), Richmond Hill Gurbax Malhi (Hon.), Bramalea-Gore-Malton John McKay (Hon.), Scarborough Guildwood Martha Hall Findlay, Willowdale Robert Oliphant, Don Valley West Yasmin Ratansi, Don Valley East NEW DEMOCRATIC PARTY OF CANADA Irene Mathyssen, London-Fanshawe

20

Contraband tobacco in 2010 : Smoke Shack Alert

NEW DEMOCRATIC PARTY OF ONTARIO Michael Prue, Beaches East York

QUEBEC MPS AND MNAS WHO HAVE SIGNED THE PLEDGE: FEDERAL

PROVINCIAL

BLOC QUÉBÉCOIS Guy André, Berthier-Maskinongé Gérard Asselin, Manicouaguan André Bellavance, Richmond-Arthabaska Robert Bouchard, Chicoutimi-Le Fjord Paule Brunelle, Trois-Rivières Serge Cardin, Sherbrooke Robert Carrier, Alfred-Pellan Claude DeBellefeuille, Beauharnois-Salaberry Nicole Demers, Laval Christiane Gagnon, Québec Roger Gaudet, Montcalm Monique Guay, Rivière-du-Nord Claude Guimond, Rimouski-Neigettes Témiscouata-Les Basques Michel Guimond, Montmorency-Charlevoix Haute-Côte-Nord Jean-Yves Laforest, Saint-Maurice-Champlain Marc Lemay, Abitibi-Témiscamingue Yvon Lévesque, Abitibi-Baie-James Nunavik-Eeyou Luc Malo, Verchères-Les Patriotes Serge Ménard, Marc-Aurèle-Fortin Pierre Paquette, Joliette Louis Plamondon, Bas-Richelieu-Nicolet Bécancour Roger Pomerleau, Drummond Robert Vincent, Shefford

ACTION DÉMOCRATIQUE DU QUÉBEC (ADQ) François Bonnardel, Shefford Gérard Deltell, Chauveau Janvier Grondin, Beauce-Nord Sylvie Roy, Lotbinière INDEPENDENTS Eric Caire, La Peltrie Marc Picard, Chutes-de-la-Chaudière PARTI QUÉBÉCOIS Jean-Martin Aussant, Nicolet-Yamaska François Gendron, Abitibi-Ouest QUÉBEC SOLIDAIRE Amir Khadir, Mercier

CONSERVATIVE PARTY OF CANADA Maxime Bernier, Beauce Steven Blaney, Lévis-Bellechasse LIBERAL PARTY OF CANADA Marcel Proulx, Hull-Aylmer

FEDERAL

ATLANTIC REGION MPS AND MPPS WHO HAVE SIGNED THE PLEDGE: PROVINCIAL

LIBERAL PARTY OF CANADA Lawrence MacAulay (Hon.), Cardigan Shawn Murphy (Hon.), Charlottetown

NEWFOUNDLAND AND LABRADOR PROGRESSIVE CONSERVATIVE PARTY Tom Osborne, St. John’s South District

NEW DEMOCRATIC PARTY OF CANADA Leslie Megan, Halifax

NEW BRUNSWICK LIBERAL PARTY Abel Leblanc, Saint John Lancaster Brian Murphy, Moncton-Riverview-Dieppe NOVA SCOTIA LIBERAL PARTY Stephen McNeil (Hon.), Annapolis Diana Whalen, Halifax Clayton Park PEI LIBERAL PARTY Sonny Gallant, Evangeline - Miscouche

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