Tackling the rampant smuggling of cigarettes and its black market

Experts believe the traditional method of raising taxes has failed to curb the rise of smuggling

By MARK RAO / Pic By TMR

Malaysia needs a holistic approach to address the billions of ringgit lost due to illicit trade and smuggling, and the flourishing of the black market for contrabands.

Experts believe that the traditional method of raising taxes in the hope of stamping the consumption of cigarettes and alcohol has failed to curb the rise of smuggling. Instead, such move has fuelled the rise of smuggling activities and the existence of the black market.

According to the Galen Centre for Health and Social Policy, the federal government collected an average of RM5.09 billion a year from sin taxes or excise duties on products and services perceived as vices from 2012 to 2017.

Duties on cigarettes and tobacco products averaged RM3.46 billion, while alcoholic beverages averaged RM1.63 billion over that period.

The imposition of steep duties on “sin” products has driven higher volume into the black market as consumers bargain for cheaper alternatives, largely from contraband and illegal products.

Industry estimates noted that for every 100 sticks of ciggies smoked by Malaysians, 63 are contraband. Overall, smuggling activities rob the government about RM8 billion in taxes, according to some estimates.

In 2016, it was estimated that Malaysians smoked 18 billion sticks of cigarettes, but 57.1%, or 10.29 billion sticks, were illegally brought into the country.

Galen CEO Azrul Mohd Khalib said the government lost more than RM4 billion in tobacco-related tax revenue last year due to the illicit market.

He said cigarette price increases are a “double-edged sword” as they reduce consumption among younger smokers who are price-sensitive, but at the same time drive these users to increase the market share of illicit brands.

“The strategy to reduce and prevent smoking must move beyond using the crude price increases to move cigarettes out of affordability,” he told The Malaysian Reserve.

He said other methods are needed to address the problem.

He said the influx and proliferation of illicit or contraband cigarettes needs to be addressed through improved and aggressive enforcement by the Royal Malaysian Customs Department.

“There must be stringent and committed enforcement strategies which acknowledge and address the problem and reality of organised crimes, compromising the very authorities charged to crack down on illicit tobacco,” he said.

“For example, senior officers should be rotated through key positions in two-year postings to avoid being too entrenched in one particular location,” he said.

He added that low-level personnel should be incentivised and encouraged to contribute to strategies which increase the effectiveness of current enforcement measures.

RM100,000 Fine and TranshipmentThe question now is the best strategy to curb Malaysia’s rampant black market.

Institute for Democracy and Economic Affairs (IDEAS) proposed several measures to combat illicit trade in the country, including revising the current tax structure, imposing stricter punitive measures and adopting concerted enforcement strategies.

IDEAS has proposed higher fines to RM100,000 or the value of goods seized — whichever is higher. The research institute believes this is a simple step that will increase revenue, which can in turn be reinvested in enforcement capability to further reduce illicit trade.

At the same time, the government could address the smuggling issue with transhipments. According to IDEAS, illicit goods enter Malaysia via transhipments — where goods are intended for onward transportation to other markets, but instead are removed and traded illegally for the local market.

“The government has introduced permits for transits and transhipments to tighten the control of this potential route. However, other countries have gone further by requiring that deposit or bank guarantees be provided, and only release it once the receipt of the cargo is confirmed by authorities at the final destination,” IDEAS said.

Experts believe the government could follow the route similar to the ban on transhipments of rice at all ports to curb rice smuggling.

“Similar restrictions should be considered for other high-risk products,” said IDEAS.

The government has banned all transhipment activities of rice at all ports, including Sabah and Labuan.

In its paper last week, the research institute urged the federal government to review the existing tax regime on cigarettes as countries such as Canada and Pakistan successfully reduced the illicit trade of the products after reforming excise duties.

It also proposed increasing penalties to RM100,000 for illicit trade activities and forming a cross-government task force comprising relevant agencies to collaborate on and implement an effective crackdown strategy.

The think tank also concurred with the Asian Strategy and Leadership Institute who suggested restricting cigarette imports to a single port to free up resources for monitoring and enforcement.

“Under this measure, imports of products which are identified as high risk should only be allowed at a single point of entry into the country,” it said.

“This is so that enforcement resources can be focused on this point, and imports of these products arriving at other points can be seized as a matter of routine, simplifying the process at these points.”

A Worrying Future for Local Tobacco

Legitimate companies have suffered due to the rise in smuggling activities. Cigarettes companies are among the worst hit as their market share has shrunk by more than 50% over the last 14 years.

Companies like British American Tobacco (M) Bhd (BAT), JT International Bhd (JTI) and Philip Morris (M) Sdn Bhd are feeling the pinch.

BAT, one of the blue-chip listed firms shut down its manufacturing operations in Petaling Jaya and sold the land. Hundreds of people were made jobless.

Another ciggie company, JTI, was reported to have also sold its manufacturing facility in Shah Alam, Selangor this year. Both companies claimed that the operating environment has been extremely challenging due to the alarming growth of illegal tobacco products.

Many industries want more action to confront the rise in smuggling.

Bank Negara Malaysia’s Financial Intelligence and Enforcement Department deputy director Zarifa Izan Zainol Abidin at a conference on Wednesday revealed that smuggling is ranked second among 21 serious crimes assessed in the National Money Laundering and Terrorism Financing Risk Assessment (NMLTFRA) 2017.

She said consumables and electronic goods, alcohol, tobacco, mobile phones, firecrackers and rice are common items smuggled into Malaysia.

The NMLTFRA 2017 ranked fraud, smuggling, corruption, illicit drug trafficking and organised crime as the top five crimes with high net risks among 21 serious crimes.

She also revealed that intelligence figures showed about 80% of security personnel and law enforcement officers along the Malaysian borders are involved in corrupt practices.

“We observed that smuggling offences are mostly perpetrated by crime syndicates. They abuse the long and porous borders, and are possibly assisted by complicit officials,” Zarifa Izan said.