Amid economic turbulence, Malaysia’s illicit trade crackdown must stay the course

After an economically disappointing 2023, Malaysia faces further headwinds due to global economic and political uncertainties. New research published in late March has identified the country’s East Coast Rail Link (ECRL) among the Southeast Asian megaprojects affected by a $50 billion gap between China’s Belt and Road Initiative (BRI) commitments and delivery for the region. Reflecting the broader ASEAN growth agenda, the Malaysian government has placed BRI-funded infrastructure at the heart of its development plans, with the ECRL crucial to the nationwide transport connectivity needed to unlock its potential.

Malaysia has steadily fallen behind its regional neighbours over the past decade, with ASEAN’s favourable outlook set to widen this gap in the absence of ambitious public action. As Prime Minister Anwar Ibrahim seeks to capitalise on the country’s recent political stability and 2025 ASEAN chairmanship to turbocharge the Malaysian economy and take on a larger regional role, his government must remain vigilant in tackling an illicit trade costing the government significant tax revenue which could be used to fill its infrastructure investment gap.

Kuala Lumpur’s beleaguered ambitions

Since taking office in late 2022, Prime Minister Ibrahim has pursued a reform programme to spur growth in Malaysia’s future-oriented tech and green sectors, notably including the Madani Economy framework to cultivate good governance practices and attract foreign investment. These efforts have created the potential for a new Malaysia in the coming years; however, Kuala Lumpur will need to address a range of fiscal challenges to see them through. Last year’s weak growth has intensified concerns over significant government debt, rising spending and insufficient tax revenue generation.

While reform-driven rises in exports and inward investment are projected to ease the fiscal burden, the illicit tobacco trade continues to threaten public budgetary health, depriving the Malaysian government of a vital revenue stream. Over the years, Kuala Lumpur has taken a range of forward-thinking policy measures to clamp down on cigarette smuggling and tobacco consumption more broadly, including ratifying the WHO Framework Convention on Tobacco Control (FCTC). As the first and only ASEAN country to implement an independent track and trace system for tobacco and alcohol products, Malaysian authorities’ concurrent increase of cigarette excise tax rates appears to bolster public health and revenue and address the illicit trade.

Big Tobacco planting seeds of doubt

Despite this progress, persistent industry interference remains a major risk to Malaysia’s tobacco control agenda. Keen to discourage effective tobacco control policies and protect its commercial interests, Big Tobacco has consistently muddied the waters concerning the size and causes of Malaysia’s illicit trade. For example, in 2019, Japan Tobacco International (JTI) estimated Malaysia’s illicit trade market share at roughly 60% – a level that would position the country as one of the world’s worst offenders.

However, as later exposed by the Southeast Asia Tobacco Control Alliance (SEATCA), JTI neglected to mention that it had based its claim on an industry-funded and subsequently discredited Oxford Economics study. According to Dr Ulysses Dorotheo, SEATCA’s Executive Director, the industry figures were “exaggerated and intended to dissuade governments in Asia from increasing taxes,” a key tobacco control policy that the industry has long misrepresented as an illicit trade driver.

The World Bank has notably countered Big Tobacco’s erroneous claims, citing data suggesting that the actual size of Malaysia’s illicit market is roughly half of the industry-touted figure. What’s more, an independent study published in 2022 debunked the industry’s misleading cigarette smuggling tax narrative, finding that the Malaysian Government’s doubling of the excise tax rate in 2015 caused only a minor rise in the illicit market share and – crucially – no increase in the number of illicit cigarettes, reflecting the effectiveness of its track and trace system.

Track and trace in industry crosshairs

SEACTA has also cited research from the University of Bath’s Tobacco Control Research Group (TCRG) exposing the tobacco industry’s involvement in the illicit tobacco trade as well as its associated interference in the track and trace systems aimed at curbing smuggling.

Implemented in 2015, the Malaysian government’s track and trace system has heretofore avoided industry control, although JTI Malaysia has begun manoeuvring to change the status quo. Citing the dubious, British American Tobacco-funded ‘Illicit Cigarettes Study’ (ICS) 2023 report, JTI recently posited that a rise in fake tax stamps on cigarette packaging last year called into question Malaysia’s existing ‘dual’ system, which combines advanced digital traceability technology with enhanced tax stamps incorporating material security features akin to banknotes.

JTI Malaysia is now pushing for a similar to that of the European Union – based on fragmented governance and tobacco industry-preferred partners – to replace the current system, despite the European Commission’s recently published tax data revealing its system’s lack of revenue generation capacities, unlike Malaysia’s more robust system, whose removal would pose a significant threat to the country’s tobacco control efforts.

Moreover, JTI has conveniently failed to mention the long-running controversy involving Big Tobacco’s involvement in the EU system, which is based on building blocks entrusted to the industry itself – notably in direct violation of the WHO FCTC Illicit Trade Protocol (ITP) due to its illicit trade complicity. Even the EU’s own lawmakers are spotlighting the system’s flaws, with a new White Paper from MEPs identifying track and trace among its tobacco control policies manipulated by the industry’s lobbying efforts at the expense of public health and finances.

The EU system’s lack of industry independence has equally prompted leading civil society expert organisations such as the TCRG and the Global Alliance for Tobacco Control (GATC) to warn third countries against adopting similar systems.

Next steps for Malaysia

With its fight against the illicit tobacco trade and economic ambitions coalescing this year, the Malaysian government should resist industry interference and continue its encouraging smuggling and public corruption crackdown. Recent successes, such as the Malaysia Anti-Corruption Commission’s (MACC) March arrest of 34 customs officers involved in an RM2 billion smuggling scheme and seizure of luxury cars during an investigation into a tobacco and alcohol smuggling syndicate, signal that the country is on the right track.

As recommended in a 2022 study co-authored by the TCRG’s Allen Gallagher, an ideal next step for Kuala Lumpur would be to ratify the ITP Protocol, article 8’s requirement to keep track and trace independent of the tobacco industry – as in its current system – providing an ideal rampart to bolster the country’s defences against Big Tobacco’s influence and manipulation attempts. Capitalising on its growing role in ASEAN, Malaysia should also increase regional cooperation in law enforcement, intelligence and capacity-building to tackle the illicit tobacco trade, maximising the use of its implemented technology.

By removing the enablers of the illicit trade, Malaysia’s government would unlock a significant well of resources as it looks to get its economy back on track and find the resources necessary for vital infrastructure investment. With China’s BRI on a concerning trajectory, Kuala Lumpur must rely more on domestic resources to fuel its infrastructure-driven development and assume a greater role on the ASEAN stage.