Govt should get tough on duty-free zones

Illicit trade in Malaysia is a persistent threat that only keeps expanding with the rise of technology

By AMELIA LIM / Pic By BLOOMBERG

As PAKATAN Harapan prepares its first budget, government officials will be considering all ideas to shore up the government’s finances.

Top of this list should be plugging the holes in the budget made by the sale of illegal or fake goods, known as illicit trade.

Pakatan Harapan took aim at this problem in their manifesto, vowing to address smuggling — specifically, of alcohol and cigarettes — through tighter controls along the border and heavier punishments to those convicted.

But, as with many of the new government’s promises, the question now is how exactly they are going to deliver this.

Illicit trade in Malaysia is a persistent threat that only keeps expanding with the rise of technology, an evolving global economy and constant developments in regulation, all of which provide new opportunities for counterfeit and contraband products to infiltrate Malaysian supply chains.

Just last year, an estimated RM8 billion in tax revenue was lost to illicit products — mainly tobacco, food and beverages, machinery and cars.

We’ve all seen it before: One glimpse into Petaling Street’s open display of fake designer goods would suffice in demonstrating its prevalence.

Just two months ago, celebrity entrepreneur and Naelofar Hijab founder Noor Neelofa Mohd Noor met with the Council of Eminent Persons to discuss her company’s struggles with counterfeit goods, and to suggest alternative methods in combatting the issue.

Working with Ministry of Domestic Trade and Consumer Affairs in preventing the peddling of counterfeit goods has proven too costly for her, Noor Neelofa said in the meeting.

And of course, Noor Neelofa is not alone in this struggle. Many other business owners have dealt firsthand with the consequences of illicit trade, mainly large losses in sales and revenues — a hindrance to fair and open markets reaching their full economic potential.

But it is not just legitimate business that stands to suffer if illicit trade goes unchecked. Organised criminal networks are often funded by the market for illicit products.

Several smuggling networks have been found to have affiliations with armed insurgent groups such as ISIL (Islamic State of Iraq and the Levant), who use the illegal trade as a means of financing their disturbing criminal activities, such as mass murder and child trafficking. Illicit trade can also pose a real threat to public health, particularly through Malaysia’s active market for counterfeit medicines.

In 2012, the Ministry of Health (MoH) seized more than 40,000 unregistered products. Easy accessibility and false marketing of counterfeit drugs result in high levels of consumption, which is extremely dangerous as many counterfeit drugs contain harmful ingredients such as talc, printer ink and even drywall.

It is no secret that tobacco is a huge part of the illicit market. Following a major tax increase in 2015, prices of legal cigarettes were hiked up 40% in an attempt to reduce consumption levels.

What happened instead was a dramatic increase in the price gap between legal and illicit packs of cigarettes and subsequently, a rapid growth in the illicit market, which stood at nearly 60% of the overall cigarette market earlier this year.

As a result, two major tobacco companies shut down their operations in Malaysia last year as easy access to cheap, illegal packs discouraged the purchasing of the more expensive legal product.

But that is not to say that the battle against illicit trade has been one of only defeats.

Last year, the Royal Customs Department seized RM1 billion worth of taxes of contraband cigarettes as authorities intensified actions to curb the rise of illicit tobacco products.

This comes after a change in Customs’ approach to the sale and distribution of contraband cigarettes.

Instead of conducting raids shop by shop, Customs now focuses on cutting supply at its roots by interfering before products reach its sellers.

Yet, despite notable government efforts to clamp down on illegal traders, it is clear that more needs to be done.

Looking around the world, the countries that have been successful in combatting illicit trade have implemented a diverse range of measures, whether it is a complete technological overhaul of custom procedures, or an increase in penalties and fines. But what all the successful strategies have in common is political will.

Illicit trade has only been stamped out where there have been determined and sustained efforts to do so, driven by ministers themselves.

It won’t happen on its own. The government needs a determined strategy that originates from the very top and is consistently carried out across ministries and all relevant enforcement officials.

With the political will in place, perhaps, it is also the time to consider more radical measures.

Targeting some specific routes where illicit trade is known to operate should be taken more seriously.

The volume of illicit tobacco and alcohol coming from duty-free areas is a prime example and should be addressed.

In 2016, the government found that 3.3 billion sticks of cigarettes and 22.2 million litres of alcohol had gone unrecorded at the tax-free islands of Labuan, Langkawi and Tioman. Evaded duties on these products totalled approximately RM5 billion.

The new government should introduce much stricter controls and the implementation of a total ban on dutyfree cigarettes should be considered. Such a measure isn’t one that Malaysia is exactly unfamiliar with, either.

Pangkor Island was gazetted as a dutyfree island late last year, but the dutyfree status is not inclusive of alcohol, cigarettes and motorised vehicles.

Back in 2004, the MoH proposed a ban on the sale of duty-free cigarettes at international airports and duty-free zones in the country, but it was later dropped.

If the new government wants to get serious about reducing illicit trade, perhaps now is the time to revisit this idea.

There is no single cure to illicit trade, but the consequences of an unchecked illicit trade can be particularly damaging to the Malaysian economy.

The government should thus reconsider and reprioritise the ways in which we can minimise its growth as much as possible. All ideas should be on the table.


Amelia Lim is research assistant at the Institute for Democracy and Economic Affairs. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and its editorial board.