June 23, 1926

DETROIT AND WINDSOR SUBWAY COMPANY


Mr. PRANK S. CAHILL (Pontiac) moved: That in accordance with the recommendation contained in the fifth report of the select standing committee on Railways, Canals and Telegraphs Lines, the sum of seven hundred dollars be collected from the promoters by the Clerk of the House as the fee chargeable on the capital stock of the Detroit and Windsor Subway Company, as fixed by section 7 of Bill No. 174, incorporating the said company. Motion agreed to.


CUSTOMS INQUIRY

REPORT OF SPECIAL COMMITTEE-MOTION FOR CONCURRENCE AND AMENDMENTS THERETO


The House resumed from Tuesday, June 22, consideration of the motion of Mr. Mercier (St. Henri) for concurrence in the report of the special committee appointed to investigate the Department of Customs and Excise, and the proposed amendment thereto of Hon. Mr. Stevens. .


LIB

Dugald Donaghy

Liberal

Mr. DUGALD DONAGHY (North Vancouver) :

A great deal of time was consumed

by the committee and by the auditors engaged by the committee in checking up the books and records of some of the Canadian distilleries. Two questions of considerable importance were brought to our attention in that connection. The first question was as to the liability of these distilleries for sales tax on liquor exported to the United States, and the second question was as to the liability of these distilleries for excise duty on exports presumably made under somewhat peculiar circumstances to foreign lands, such as Cuba and Mexico.

With regard to the payment of sales tax on the shipment of liquor from Canada to the United States, as a general rule the distilleries have not paid this tax. It is quite true that the law and regulations as they now stand covering exports of liquor or manufactured articles of any kind, from Canada to foreign countries do not call for the payment of sale* tax. We may always entertain a doubt as to these liquors actually reaching the United States; they are shipped and smuggled into that country by such secret methods that the exporters are probably unable to produce proof to the government that this liquor ever reached the United States. In the absence of proof of the liquor having reached the foreign country it may well be and probably is the law that they will be liable for this sales tax.

14011-309J

Customs Inquiry-Mr. Donaghy

In regard to their liability for excise duty on shipments fictitiously billed to Cuba and Mexico it is a matter of common knowledge that boat loads of whiskey will clear from Vancouver, British Columbia, for Ensenada, Mexico. The cargo of liquor is released from bond with no excise duty being paid, and it is placed on board this ship. As security for payment of this excise duty the exporter gives a bond to the government that he will prove that this liquor reached Ensenada, Mexico. If he is unable to prove that, the bond calb for a penalty of double the amount of the excise duty. If, however, he then proves that the liquor has reached Ensenada, Mexico, the bond is cancelled and under our ,aw there is no excise duty paid, our law providing that in the case of liquor manufactured in Canada and shipped to a foreign port the payment of excise is not required on proof of landing being furnished. Now, the question arises as to whether or not these exporters have furnished sufficient proof of the landing of this liquor in Ensenada, Mexico. In many cases they have brought back and left with the collector of customs at Vancouver certificates signed by the Mexican government official at Ensenada to the effect that this liquor was landed there. There is not much doubt in my mind that these certificates are false. I am quite satisfied that practically all of this liquor was unloaded off " rum row " opposite San Francisco, and found its way into the United States; I think a checking up of the records in Ensenada will prove that fact. The same circumstances are to be found on the Atlantic coast where shipments of liquor were cleared, presumably and on the face of the documents, for Nassau and Havana but never reached those ports. The excise duty will not be payable on these shipments if it can be proved the liquor reached the ports in question. The question is whether satisfactory proof has been furnished to that effect, and as to what the real facts are. The committee realized that this question is extremely important because it runs into hundreds and hundreds of thousands of dollars of revenue. After giving the matter as careful consideration as we are able in the time allotted to us, we brought in a recommendation. It is to be found in paragraph 10 of our report, the first part of which reads as follows:

The committee finds that it is the common practice of the department to grant clearances to vessels wholly or partly laden with liquor for the United States, or allegedly bound for a foreign port, but admittedly sailing to "rum rows," and that false landing certificates have been produced to obtain cancefllation of bonds given for foreign export of cargoes so cleared.

The committee further find that a strong presumption is raised that some proportion of the liquor so shipped and cleared finds its way back into Canada for con-

sumption. The committee, therefore, recommend that excise and sales tax be levied on all Canadian made intoxicating liquors released from bond, no matter where they are carried and consumed, and that duty and sales tax be levied on all alcoholic liquors entering Canada, whether in bond or otherwise, irrespective of their ultimate destination.

Allied with the question which I have just been discussing is the treaty made between the United States and this country for the prevention of smuggling. A treaty for that purpose was also negotiated between Great Britain and the United States. The treaties are not alike; the principles are quite different. But Canada is bound by the British treaty, its vessels being British ships. Shortly put, the British treaty provides that the American government shall have authority to board any British vessel suspected of an attempt to smuggle liquor into the United States, and to examine that vessel provided the ship is within one hour's sailing distance of the American coast. Further, if, on examination of the ship, evidence is found of an attempt to smuggle liquor into the United States, the treaty provides that the American authorities may seize the vessel and bring it into an American port to be dealt with according to American law. Now, Canadian ships being under the British flag are British ships; they are all bound by that British treaty. However, a separate treaty for the prevention of smuggling was negotiated between the Dominion of Canada and the United States in June, 1924. That treaty provides for two things. It does not go as far as is popularly believed to be the case. The first thing it provides is that each government shall notify the other government of all clearances and transportation of goods starting from one country into the other where such goods are dutiable. In the second place it provides that clearances shall not be given to boats containing a cargo of liquor clearing for a distant or foreign country where it is evident from the size of the boat that it would not be able to make the voyage or weather the seas. The latter provision would prohibit our government from granting a clearance to a gasoline launch, loaded with whiskey, sailing from Windsor, Ontario, to Mexico. Obviously such a launch could not reach its destination. But let me point this out to you: The treaty does not deal with nor prohibit the granting of a clearance to a gasoline launch loaded with whiskey clearing from Windsor, Ontario, for Detroit, Michigan. I know the popular conception is to the contrary. That fact, when it was ascertained from an examination of the treaty, caused

Customs Inquiry-Mr. Donaghy

some surprise to a few members on the committee. Nevertheless it is the case, and those exporters of liquor who are smuggling it to-day into the United States are acting within the law and the statutes of this country when they get a clearance for a gasoline boat, loaded with whiskey, to sail from Windsor, Ontario, to Detroit, Michigan. The only thing the treaty provides in regard to that is, that our government shall notify an official of the American government that the boat has sailed. The United States having that warning are then given the opportunity, by policing the lakes and rivers, of intercepting and capturing the craft. Now in the judgment of the committee that state of the law is not satisfactory, and we have brought in a recommendation dealing with it. That recommendation, which is part of paragraph 10, reads as follows:

The committee further recommends that, as soon as possible, regulations be made to prohibit clearances being granted to vessels carrying Jiquor as cargo, saiiling from a Canadian port to a United States port, such regulations to make an exception in favour of liquor being imported into the United States in accordance with the laws of that country.

The last clause deserves some explanation. We are told that under the American law provision is made for importing into the United States liquor to be used for medicinal and sacramental purposes, under a permit issued by the government of that country. That is why the saving clause is at the end of the recommendation.

In our investigation of Canadian distilleries the most of our time was directed to a small distillery in Montreal named the Dominion Distilleries. Very little of our time was directed against the large distilleries of Canada; in fact in the majority of the largest combination of distilleries in this country known as the Consolidated Distilleries our examination amounted to nothing. The Dominion Distilleries was incorporated two or three years ago and opened a distillery in Montreal. The brains of the concern appeared to be Mr. James Cooper, Walkerville, Ontario. Mr. Cooper for fifteen years had been the selling agent of Walker's whiskey manufactured by Hiram Walker & Sons, Limited. When the prohibition laws came into force in the United States, and when it became an offence in the United States for any one to import liquor into that country, Mr. Hiram "Walker, who lives in Michigan, had some fears that he might be prosecuted in that country for conspiracy to violate its laws if he were a party to his distillery in Walkerville, Ontario, smuggling whiskey from Canada into the United States. We find the Dominion Distilleries was incorporated and

that all the whiskey manufactured by Hiram Walker & Sons, Limited, and destined to be smuggled into the United States, was sold by Hiram Walker's distillery to the Dominion Distilleries of Montreal. There is some doubt as to whether those sales were bona fide or merely paper sales. The suspicion is that they were paper sales for the reason that the Dominion Distilleries' profit was fixed at a commission of $1 a case. That would indicate that the Dominion Distilleries was the selling agent. However the sales were put through on paper as genuine sales to all appearance. Hon. members have heard of the mysterious method by which liquor was shipped from Walkerville. Ontario, to the Dominon Distilleries at Montreal, Quebec, in carloads, and how these cars without unloading were returned over the same track, back along the same line through Walkerville to Ford and Windsor, Ontario. The public [DOT] was curious as to the cause of this unexplainable expense in railway freight. The matter was very simple when it was explained to us before the committee by Mr. Cooper. He told us that Walker's distillery decided that it would not be a party to the smuggling of its liquor from the distillery into the United States. Accordingly the Dominion Distilleries was formed for the purpose of doing that work, and it did that work, and would appear to be a selling agency of Hiram Walker. Although that may strike the public as being somewhat mysterious, permit me to say that it was not against the law of this country, and further that on these sales from Hiram Walker and Sons of their liquor shipped to Montreal the sales tax was paid in every instance. As to whether the law fully provides for what the people of Canada think the law should provide is another question, but I want that fact distinctly emphasized, that in this transaction which I have just outlined the law gave full authority for these transactions.

Allied with this subject comes up the question of denatured alcohol. The hon. member for Vancouver Centre (Mr. Stevens) referred to this subject. I intend to make a few remarks to explain and make fully clear just what the law is in regard to this matter. First let me say that alcohol in bond in a distillery when mixed with drugs and chemicals under the supervision of a customs officer, such drugs being of a kind, quantity and proportion prescribed by our law, pays no excise duty. It is called denatured alcohol. There are two principal kinds of denatured alcohol; one kind is mixed with poison and drugs of such characteristics that the mixture cannot subsequently be separated into

Customs Inquiry-Mr. Donaghy

its original ingredients. The alcohol cannot subsequently be extracted from the mixture so as to be safely consumed by human be-vsgs. 'lnere is a second kind of denatured alcohol called specially denatured alcohol. It is generally used for medicinal purposes, largely used for rubbing in case of sickness. It has this striking peculiarity, so far as its chemical composition is concerned, that chemists can separate the ingredients of this mixture into their original elements, placing the pure alcohol in one vessel and the drugs in another. The alcohol thus redeemed is like first hand distilled liquor, and may be used for human consumption.

Dominion Distilleries manufactures a great deal of this specially denatured alcohol. We examined very carefully witnesses, government officials and records, to ascertain whether or not Dominion Distilleries complied with the law and regulations in that respect. It was abundantly proved by the customs officers who superintended the denaturing of this alcohol that it was done in accordance with the regulations. That being the case, this alcohol no longer remained subject to payment of excise duty. Most of this alcohol was then exported by Dominion Distilleries to the United States. It was as lawful to export denatured alcohol as it was to export whiskey to the United States. It was not contrary to the laws of Canada as they stand to-day to export either or both to the United States. I mention these things because, as I said in the beginning, a great deal of time was consumed by the committee in investigating Dominion Distilleries. We have not given them a clean sheet; we have recommended in our report that a suit be brought against them for the purpose of ascertaining what sums, if any, are owing by that concern and if any are found owing, for the recovery thereof. What that may be, the result of the litigation will prove.

Let me further say at this point in regard to the dispute between Canadian distilleries generally and the government of Canada concerning the liability of distilleries for sales tax on liquor exported to the United States, that the government has instituted actions at law in Toronto against two or three of those distilleries for the purpose of making a test case as to the law and the liability of those distilleries to pay sales tax on liquor so exported. Those lawsuits have been instituted and the cases will come up for trial .n due course, so that that subject is being safely taken care of.

In my remarks last night I had occasion to mention the name of Mr. J. E. Bisaillon and

I said that I should have something further to say regarding him later on. We spent days and weeks investigating- this man, investigating transactions with which we suspected he was connected. He was on the witness stand dozens of times. He was subjected to the most severe and gruelling crossexamination that I have ever heard giver a witness in any court of law. He was cross-examined by an able counsel who had previous knowledge of many matters that came before the committee and who was well armed to perform his task. I think we were all satisfied Mr. Bisaillon was probably one of the cleverest witnesses at side-stepping and evasion that we had ever heard. There is a large volume of evidence given by him. Whether or not the attempt to catch him in the web has been successful would be improper for me to say at this stage, for this reason. We have recommended that the evidence given by this gentleman should be forwarded to the proper authority, the proper authority under our constitution being the Attorney General of Quebec who is charged with the administration of criminal law in that province. I take it that if this recommendation is adopted by this House, that evidence will in due course reach the hands of the Attorney General of Quebec; that it will be considered by him and his officers, and that if the evidence warrants a prosecution against this man, such prosecution will be duly instituted and he will be tried. It is for that reason I say that it is quite improper at this stage for any man to express an opinion as to the guilt or innocence of this man as he may be tried later on.

But we are quite free to examine his career as a public servant. He was appointed a customs officer about fifteen years ago. He has been a long time in the service of Canada. In 1920 while acting as customs officer he carried on a side line, namely, that of a dealer in liquor. His business ran into a turnover of a million and a half dollars, as was brought out during the inquiry held by our committee. I take it that the government in power in 1920 did not know that this servant of the people, enforcing the customs laws of this country, was carrying on as a side line a large business as a liquor dealer, otherwise they should have disciplined him. As a matter of fact this did1 not come out until the matter came up before the committee. There are many things concerning this gentleman that came out for the first time before our committee.

In 1924 the Civil Service Commission of Canada appointed this man, as lay in their

Customs Inquiry-Mr. Donaghy

power and jurisdiction, to the office of chief preventive officer of the district of Montreal. This gave him charge of the customs officers whose duty it was to prevent smuggling in that area. He entertained at his home in Montreal a member of the Civil Service Commission who has since resigned. During our investigations, which by the way were very thorough, regarding this man some remarkable cases were ventilated before the committee and I am going to mention one or two of them by way of illustration.

One of the most notorious is known as the LortienSt. George case and deals with the smuggling of narcotics. This case was mentioned by the hon. member for Vancouver Centre (Mr. Stevens) in his speech in this House on February 2 last when he made his charges against the present government. As a matter of fact this smuggling took place in 1919 and it is one of the worst cases that we have to deal with. The facts are simple. In 1919 a boy drove up to the station of the Canada Steamship Company in Montreal with a wagon drawn by one horse. He had two trunks which he unloaded. He produced to the baggageman two first-class tickets to Cornwall, Ont., and he asked to have the two trunks checked on those tickets. The baggageman checked the trunks and gave the boy the checks. As he rolled over the trunks he noticed something was shaking inside them and he asked the boy what the trunks contained. The boy said, "Personal effects." The boy went away. The baggageman was suspicious and called the customs officer who subsequently procured a key and opened the trunks which he found full of narcotics. In a short time two ladies arrived. They were looking after the baggage and they inquired as to the cheeking of the trunks. The customs officer asked them if they had the key for the trunks, and they said they had not and he opened them in their presence. The women declared that the truniks did not belong to them, being the property of a Doctor Lortie in France. This doctor had requested them to have the trunks forwarded to Cornwall and, according to their story, they were checking them. The trunks were seized and confiscated, but unfortunately the two women were not arrested. This was a somewhat remarkable circumstance. Mr. Bisaillon was present when the two women were being interrogated-he was customs officer at that time-and they were allowed to go. After a considerable search, however, they were arrested and brought to trial, and it was necessary at the trial to establish their identity with the two women who had been at the

station when the trunks were opened. Bisaillon was called as a witness and was asked whether these were the two women who had been at the station some weeks previously. His memory failed him, and he was unable to say anything about it. The two women, however, were fined $500 each, and the two trunks of narcotics worth $35,000 were ordered by the judge to be confiscated. They were placed in the custody of the court, and that night the custody of the court was violated and the two trunks were stolen. They have not since been found.

The other case of some interest which I desire to mention is that of the barge Tremblay. In November, 1924, word was sent to the officers of the Quebec Liquor Commission that a certain barge was sailing up the St. Lawrence river. It was watched and it was seen to sail past the port of Quebec without entering. The officers of the Quebec Liquor Commission endeavoured to keep track of it, and at midnight of the following day they found the barge in a secluded spot along the banks of the St. Lawrence at a place called St. Sulpice. There were eight motor trucks at this place unloading the barge, which contained about 16,000 gallons of alcohol, brought from a foreign country, on which no duty had been paid and which it was sought to smuggle into the country. The officers of the Quebec Liquor Commission compelled the men to restore to the vessel that portion of the cargo that had been removed. They took charge of the barge, arrested the captain and the entire crew, and proceeded with the barge to the port of Montreal. There were on board two Americans who professed to be the owners of the cargo, and they too were placed under arrest. Before the barge left St. Sulpice a customs officer named Duval arrived on the scene. This officer in his evidence informed us that he had been sent by Bisaillon to watch the vessel, and he arrived in a Ford car with his wife. This struck the committee as a rather small contingent to send out to seize a barge of this size containing a cargo of such considerable value. We doubted the bona fides of Officer Duval and consequently we have recommended his dismissal from the service. On the arrival of the barge at Montreal one of the first men to appear at the wharf was Bisaillon who claimed, by virtue of his authority as an officer of the Dominion, to have the right to supersede the officers of the Quebec Liquor Commission. Accordingly he drove them off after they had informed him that the captain, the crew and the two

Customs Inquiry-Mr. Donaghy

Americans were under arrest. Bisaillon proceeded to unload the barge and he took the cargo to the bonded warehouse of His Majesty. The two Americans were allowed to escape and we have been unable to find out who they are. They have never been prosecuted for this attempt to violate the laws of this country.

Following this rather singular incident Mr. Bisaillon was arrested for conspiring to violate the laws of the country in connection with the barge Tremblay, and some others were apprehended along with him. In due course he appeared for hearing before the courts, but at the preliminary trial it was found that there was no evidence against him. He was travelling in very good luck. He was released At that trial his bank account was produced and it appeared that over a period of three years his turnover in the bank had amounted to $69,000. He did not have $69,000 actually in the bank, but his turnover during that period had totalled that sum. He was asked to account for these moneys, and in a very rambling way, not at all clear, he intimated that he had deposited some money belonging to the government, moneys which he had collected as a part of the revenues of Canada, in his personal account from time to time overnight, pending an opportunity to transfer them to government account. That of course would be a singular thing to do, and when the Customs department read in the press this statement of Bisaillon's, they proceeded to hold an investigation to ascertain whether the revenues of the country were being deposited by any of the collectors of customs in their private banks. Now the hon. member for Vancouver Centre (Mr. Stevens) in his speech on February 2 emphasized as one of the main charges against this administration the allegation that the administration had allowed customs collectors to take tens of thousands of dollars of the revenue of the country and deposit it in their private banks.

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

I know my hon. friend does not want to be unjust and he will allow me to correct him. I said on that occasion that Bisaillon had either deposited the money in his own bank or he had perjured himself in his testimony in Quebec. My hon. friend will admit that the evidence now shows that in all probability Bisaillon did perjure himself. I said that one or the other was-the case.

* Mr. DONAGHY: I am sure the hon. gentleman will not object to my reading from Hansard at page 687, just what he said:

I purpose to show that this man Bisaillon the chief customs preventive officer, raised to that position after the government had knowledge of his rascality and his criminality, received moneys of the crown, some $69,000, discovered in several cases, including $14,000 referred to in this examination which I shall read in a moment; that he received moneys of the crown to the extent of tens of thousands of dollars, deposited them to his own account, and this examination will disclose that he never remitted those moneys to the account of the Receiver General.

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

That was according to

his own evidence.

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LIB

Dugald Donaghy

Liberal

Mr. DONAGHY:

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

Will my hon. friend permit me at that point? Will he not admit that the cheques to which he now refers were paid into the account in the Canadian Bank of Commerce? The deposits referred to btr Bisaillon in his sworn evidence before the Quebec courts amounted to $69,000, and were placed in his own bank, the Bank of Hoche-laga.

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LIB

Dugald Donaghy

Liberal

Mr. DONAGHY:

My hon. friend is quite

wrong in that. These are the cheques which were under discussion at the time.

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

The cheques paid into

his own bank.

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LIB

Dugald Donaghy

Liberal

Mr. DONAGHY:

My hon. friend is quite

wrong. The department was not quite satisfied even with that report, and the chief accountant of Customs and Excise at Ottawa was requested to investigate the matter. On March 2 he wrote to the deputy minister as follows:

Referring to the attached newspaper clipping-

That is the newspaper clipping of Bisaillon's evidence.

-and to your request for information pertaining to the manner of depositing and remitting collections at the out.pont of Famiham during the period for which auditor J. E. Bisaillon-

That should be officer.

-acted as sub-collector there.

I find that under date of October 28, 1921 (File 95809) the Department of Finance approved use of the Canadian Bank of Commerce at that point; for the purpose of making deposits and collections, that the collections taken at that outport appear to have been deposited in the Canadian Bank of Commerce at Farnham as the regular sub-collector, as well a* officer Bisaillon during his period on relief duty, have remitted their collections by Cheque on the Farnham branch of the Canadian Bank of Commerce. These in turn were deposited by the collector at the chief port of St. Johns paid at Farnham, and the amount included in the collector's draft and deposit receipts covering remittance for each period concerned. The collections thus deposited and remitted by

3 p.m. officer Bisaillon during the period he served Farnham total $29,463.97. I attach hereto the returns K-10A from (the outpont, the covering K-lO's received from the chief port, the relative deposit receipts from the chief port, and cheques from the outport. Will you bindily return those to me when they have served your purpose in order that they may be redistributed to their respective files.

(Sgd.) F. A. Rorke,

Chief Accountant of Customs and Excise.

Now, whatever may have been the crimes, if we may so describe them, of Bisaillon, there was one thing he was careful not to do-to steal the money of the Dominion of Canada. You have now, Sir, a very fair outline of this gentleman's characteristics, and you may be curious to know how he eventually met his Waterloo-how we got rid of him. It is a very simple narrative. I read 'from page 83 of the evidence. The present Minister of Customs has been sworn and is in the witness box. The examination is as follows:

Q. Mr. Boivin, you are the Minister of Customs and Excise ?

A. Yes.

Q. When did you assume that office, Mr. Boivin?

A. Speaking from memory, I was appointed on the 4th day of September, 1925, sworn on the 5th of September, 1925, and took over the administration of the department from the then acting minister, the Hon. Mr. Cardin, on the 31st day October, 1925.

Q. It wase about the end of October when you assumed active duty?

A. Yes.

Q. We -have had produced by you here a large volume apparently of evidence, being the examination of a great number of witnesses on an investigation held by Inspector Duncan ?

A. Yes.

Q. How did Inspector Duncan come to examine those witnesses ?

A. Very shortly after my arrival at Ottawa on the 31st of October, 1925, I repeated to the Hon. Mr. Robb, the then Minister tof Finance, some of the rumours which had reached my ears in the city of Montreal during the general election campaign, concerning inefficiency and maladministration on the part of the preventive service, in the city and district of Montreal. I remember that I mentioned Mr. Bisaillon's name, but I cannot remember the other names of the officers who were complained of in those rumours. Mr. Robb immediately said that the proper thing to do would be to have an investigation. I told him that that was my idea too, but that I did not know

Customs Inquiry-Mr. Donaghy

exactly to wham I could itum to secure a competent investigating officer. He told me that he had in the employ of the Department of Finance as investigation agent Inspector Walter Duncan, who had !been with them for several years and who had always given them complete satisfaction. If I remember correctly, he told me that Inspector Duncan was engaged upon some particular work for the Department of Finance, but that he would send him to my office in a day or two, in order that I might arrange with him to make this investigation. As near as I can remember, it was about ten days later.

Q. Later than what?

A. Later than this conversation, which took place about two or three days after my arrival at Ottawa, and therefore it would be about the 15th of November when Inspector Duncan came to my office and spent several hours in consultation with me.

Let me pause here to say that within two or three days after the present Minister of Customs arrived in Ottawa to take over the duties of his office he called upon the Minister of Finance, told him of the rumours he had heard in connection with the preventive service in Montreal, mentioned Mr. Bisaillon's name, and asked Mr. Robb if he could suggest a competent investigating officer. Now we will see what follows; the examination continues:

Q. Tha.t is the middle of November, you mean?

A. About the 15th of November. I asked him if he would undertake to investigate the administration of the preventive service office or staff at Montreal; he said that he would, but unfortunately he could not go at once because he had some work to terminate for the Department of Finance, (but that he would go just as soon as it was possible for him to do so. He reported later, but I cannot remember whether it vas personally or through my secretary, that he would proceed to Montreal and commence his investigation on the 1st of December. A few days after the 1st of December he was in Ottawa; he came to my office, and I asked him if he had yet discovered anything worth while.

Q. By the way-pardon me for interrupting you-in this evidence which Inspector Duncan took of the various witnesses, I see that the 1st of December is the date upon which he examined the first witness? A. Yes.

Q. Go ahead?

A. A few days after the 1st of December he was in Ottawa; I asked him if he had discovered anything worth while, and he told me that the only convincing and absolute proof he had at that time was that Mr. Bisaillon had been guilty of inefficiency and maladmin-instration to such an extent that he should be dismissed. I asked him tor an interim report, and told him that I could noit go before the council with nothing but a verbal statement from an investigator, and explained to him that While I did not want to delay matters long enough to have him transcribe the evidence and prepare a formal report, I would be very glad if he would give me an interim report. An interim report was handed to me either on the 10th or 11th of December.

Q. Is this the interim report?

A. That is the interim report, which I have already produced.

Q. The report we have on file here is dated December 10th ?

A. Yes.

Q. That is his report to you? fMr. Donaghy.]

A. That is his report to me.

Q. The report is dated the 10th, but you may have got it on the 11th?

A. I may have got it on the 11th. I would like to point out, however, that the report, as I understand it, is produced but not filed.

Q. On receiving this report on the work of some of the officers of the department, what did you do?

A. I immediately communicated with the Prime Minister, and asked him if he would be kind enough to call a special meeting of council, for the purpose of considering a recommendation to council from my department for the dismissal of Mr. Bisaillon.

I shall revert to this a little later on, when I intend to make some references to the present Minister of Customs. I turn now to .paragraph 6 o-f the report, which is as follows:

The evidence submitted ito ,the committee leads to the general conclusion thait for a long time the Deoartment of Customs and Excise had been slowly degenerating in efficiency and that the process was greatly accelerated in the last few years. Apparently the Hon. Jacques Bureau, then Minister of Customs, failed to appreciate and properly discharge the responsibilities of hiis office and as a result there was a lack of efficient, continuous and vigorous control of subordinates by the headquarters staff at Ottawa.

Let me pause to say that there was not one dissenting voice raised in the committee against the adoption of that paragraph, to every word of which I heartily subscribe. I am also going to read paragraph 13 of the report, which some people may call drastic but which, in the discharge of their duties, the committee felt bound to insert. It is as follows:

The committee finds that the following officers have been delinquent in their duties and recommends that their services be dispensed with:-

1. R. P. Clerk, Inspector o-f the port of Montreal;

2. A. E. Giroux, Superintendent of Customs and Excise, Montreal;

3. W. Duval, Preventive Officer at Montreal;

4. John Laridy, Customs Officer, Montreal;

5. Collector E. Brownlee, of Beebe, Quebec;

6. Marvin A. Sawyer, Customs Officer at Rock Island;

and tha.t in .the interest of the public service arrangements should be made for the retirement of the following persons:-

1. R. R. Farrow, Deputy Minister;

2. W. S. Weldon, Collector of Customs at Montreal;

3. Henry McLaughlin, Surveyor of Customs at the port of Montreal.

Some of these officers are more blameworthy than are others. Bisaillon is not mentioned in that list because he was discharged in the middle of last December by the present Minister of Customs through an order in council. Inspector R. P. Clerk of the port of Montreal is mentioned; it was he who debauched several servants of the government and caused the resignation of two of the most important officials in this country. I do not know that anything useful would be served by making bitter comment upon any of these

Customs Inquiry-Mr. Donaghy

men whose services we hope will be dispensed with immediately after the adoption of this report by the House.

The system of appraisal or valuation of goods imported into this country was given long and serious consideration by your committee. If the system 0f valuation, the fixing of the amount upon which the assessment of duties is to be paid, is not done properly, great losses to the revenue may occur. Many devices are resorted to for the purpose of deceiving the officials of the customs department in matters of this kind. I regret to say that many of the appraisers appointed by the Civil Service Commission would probably fail in a practical test if goods were placed before them and they were asked to assess their value. 1 ou will easily appreciate how that might happen. Take for instance the importations of silks, one of the many valuable articles that are brought in here and pay a high duty. There are many grades of silk, and it is only a silk expert that could tell their value. Our appraisers in that department are not silk experts; they may have been grocers, they may have been anything. The committee has made a recommendation on that matter. It is contained in paragraph 18 of the report which reads as follows:

The evidence adduced before the committee disposed two outstanding facts, namely.-

First, the methods of appraisal are exceedingly careless and fail to safeguard the interests of the importer or the revenues of the country from being defrauded by undervaluation, and

Secondly-, persons appointed as appraisers are in many instances untrained in the branch to which they are appointed.

The committee recommends that the appraisal branch be reorganized and that all appraisers be chosen because of their competency to estimate the values of the class of goods they are appointed to appraise.

I am going to mention two instances of the devices used to deceive the officers. One is known as the Keith-Vaughan-Harrison case. There arrived in the port of Montreal by steamship from Europe six packing cases invoiced as cocoa. The Royal Canadian Mounted Police, who were acting for the Customs department at that time, were suspicious of these packing cases and examined them. They found that three of the packing cases had a blue cross marked on them; the other three had not. They opened the cases and they found that the three with the blue cross marked on them did contain cocoa; the three cases that had no blue cross marked on them were filled with narcotic drugs. The scheme which the smuggler had devised was very simple He intended to so manipulate it that when the customs examiner came to examine these boxes he would examine one with the blue

cross mark. The one he would examine would be a case with the blue cross marked on it and it would be a case of cocoa. He would then pass the whole six cases and collect duty on cocoa; and three cases of narcotic drugs would enter this country surreptitiously. This seizure of drugs was worth about S160.CMX' Of course no blame attaches to the customs administration in connection with that; but the efforts of the committee in bringing out devices of this kind are not only enlightening to the public but, no doubt, will be useful to the enforcement officers of the Customs department in future.

Another very interesting case is known as the John W. Gaunt case. John W. Gaunt was an importer of German toys; he imported tens of thousands of dollars worth of these toys. For some years he was in business by himself. In 1923 he committed an offence against the Customs Act. He brought into Canada and had in his office at Montreal invoices from Germany without any list of goods written on them. They were blank invoices, but they contained the signature of the German manufacturer certifying to the fair market value of the goods. But the invoices were blank; they were to be filled in later on. That was an offence against the laws of this country, and for that offence John W. Gaunt, upon being prosecuted, was fined $500. A suspicion arose that this man had been defrauding the customs, and officers of the department went to his warehouse and made a seizure. Right here we should bear this fact in mind; before the customs officers had made any seizure on this man he had induced a very estimable gentleman named Colonel Porteous, a returned officer and a man of unimpeachable honour, to buy half an interest in his business. Colonel Porteous had paid, I think, about $20,000 for the half interest. Then they incorporated a company and the company owned the stock of goods. Right after that the customs officers seized this stock of goods, and professed to hold them for some offences or defaults of Gaunt of the year before. That, of course, is not justice. There is no reason why the goods of an honest man like Colonel Porteous should be seized and forfeited to the people of Canada for any fraud which had been committed by another man the year previous, before Colonel Porteous had any interest in the business. The matter came before the Minister of Customs for consideration. As I say, Gaunt was fined. He was also compelled to put up a cheque for $3,200 odd, pending investigation as to whether or not he had defrauded the government in the

Customs Inquiry-Mr. Donaghy

days when he. had carried on business alone. I think the hon. member for Vancouver Centre (Mr. Stevens) said in his speech yesterday that "the minister had made a settlement with this man, Gaunt." The evidence is not to that effect. The committee had before it the receipt for the 83,200 and the receipt read "Received from John W. Gaunt & Company the sum of 83,200 on account." Gaunt was before us as a witness and we asked him if he had a full settlement and release from the government, and he said "Not by any means." I should not have mentioned this feature of the case had it not been for the implied criticism directed by the hon. member for Vancouver Centre against what to my mind is a proper action on the part of the Minister of Customs in connection with that case.

We proceeded to have our auditors go over the books of this man Gaunt for the purpose of ascertaing whether or not he had defrauded the customs. Our examination revealed one of the cleverest manipulations I have ever heard of. The manipulation had to do with the falling value of the German mark. We found that in Germany, on January 1, say, Gaunt would buy toys of a value of 100,000 marks. He would get an invoice made out showing the price and value of 100,000 marks, and to buy the marks would cost him so many dollars, varying according to rate of exchange. His goods would not arrive in Canada for three months. He would pass these goods through the customs office as having been bought for 100.000 marks, but during that interval of three months the mark had fallen in value perhaps 35 or 40 per cent, and the value of his goods depreciated accordingly, but were entered in the customs at the reduced value. The customs duty is calculated on a percentage basis. He bought at one value for the dollar, but at the time the goods arrived three months later the mark had depreciated, and it was worth very much less to the dollar, and he entered it at the low value. He took advantage of what is known as the process of the tobogganing of the mark, and he got by with it.

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LAB

James Shaver Woodsworth

Labour

Mr. WOODSWORTH:

Is it not a very common practice that we are paying interest on bonds that were issued at a time when money was worth an altogether different amount from its value to-day?

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LIB

Dugald Donaghy

Liberal

Mr. DONAGHY:

I think the hon. member is quite correct in that observation. The reason I have given these details is that the hon. member for Vancouver Centre made a

charge against the Minister of Customs that he had allowed this man Gaunt to defraud the government of Canada out of $58,000 of revenue. The charge is refuted by the evidence adduced before the committee, and I think the lawyers on that committee, on both sides of politics, had very grave doubts as to whether a civil action at law would succeed against Gaunt, except, for one thing; the wooden packing cases in which these dolls were shipped into Canada were not entered by him for customs. He neglected to put them on his customs invoice and he had not paid any duty on the wooden boxes. I think that amounted to $200 or $300.

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

Would the hon. member justify the action of Gaunt in bringing in somewhere about 1,000 certified blank German invoices?

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LIB

Dugald Donaghy

Liberal

Mr. DONAGHY:

I think I have already stated that Gaunt had in his office, brought from Germany, blank certified invoices. I cleared that up to start with. It was an offence. He was punished for it. I do not know how we are going to punish him again for the same offence.

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

He was only fined for having them in possession. He was never fined on the other charge. The charge against him of using these blanks was never brought to trial.

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LIB

Dugald Donaghy

Liberal

Mr. DONAGHY:

The offence with which he was charged was that he did bring into Canada and have in his possession blank certified invoices, contrary to the laws of the country.

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

The minor charge.

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June 23, 1926