Kuala Lumpur, 24 October 2018 – Today, IDEAS has published a Policy Ideas titled: “Countering Illicit Trade: Lessons from Abroad”. The report proposes a series of practical recommendations to help combat illicit trade based on experiences from other countries around the world. The new government committed in its manifesto to taking concrete action to reduce illicit trade in Malaysia, which damages legitimate business, causes social harm and deprives the government of much needed revenue.
As we approach Budget 2019, the report urges the government to adopt a new tougher strategy to reduce illicit trade. Illicit trade is not a problem unique to Malaysia. Many countries around the world have sought to tackle the smuggling of contraband and the spread of counterfeit goods by adopting better technology, stricter penalties and educating the public, among other initiatives. The main recommendations of the report are:
- Adopt a new cross-government strategy, with clear political ownership. Efforts to tackle illicit trade have been sporadic and led by individual agencies. The government should set out a new, overarching illicit trade strategy to implement the promises of Buku Harapan. A new Illicit Trade Task Force should be established, chaired by the Minister of Finance with participation from these agencies to oversee implementation of the strategy and ensure all agencies contribute.
- Formalise cooperation with the private sector. Under the strategy, cooperation with the Private Sector should be improved through the formation of a new Trade Enforcement Committee with membership from government agencies and industry to share information, consult on new policies and support operations. This cooperation should include establishing a customs recordal mechanism.
- Set specific targets for seizures and publish data on performance. The government should adopt specific targets for seizures in line with the scale of the problem to ensure consistent and proactive effort by the different agencies. The government should publish systematic annual statistics on seizures and penalties, so that the public is able to gauge the overall trends in illicit trade and hold the government accountable for its efforts to reduce it.
- Review policies on enforcement staff across different agencies to put the right incentives in place and reduce the scope for corruption. There are a series of steps the government should consider as part of an overall process of improving incentives and reducing the scope for corruption: introduce performance based pay, with rewards linked to high value seizures; automate all processes where possible; introduce a clear sanctions process; and introduce staff rotation in high-risk positions.
- Do not further increase excise duties on tobacco, and consider a review of the current tax regime. Multiple tax hikes on cigarettes have led to a drastic increase in the legal price of cigarettes and this has led to stark increases in the illicit trade in tobacco. The government should not raise the price any further and instead review the existing taxation regime in light of experience in other countries, such as Canada and Pakistan, that have successfully reduced illicit cigarette trade after reforming excise duties.
- Ban the sale of duty free cigarettes at Langkawi, Labuan and Tioman. The previous government had admitted that the tax free islands were a source for illicit tobacco, but previous proposal to ban sales of duty free tobacco had failed in favour of restrictions. The government should now ban the sale of duty-free cigarettes, but this can be done on a time limited basis to be reinstated once enforcement capacities have been improved.
- Introduce bank guarantee scheme for transhipments. A major route for illicit products is transhipments – the government should require transhipments to place a bank guarantee until delivery at final destination can be confirmed. In order to reduce the impact on legitimate trade, this should be conducted on a risk based approach, targeting only high risk products, and operators with good track records excluded.
- Proceed quickly with plans to increase penalties to RM100,000. The current levels of penalties to do not act as a sufficient deterrent and need to be increased in line with the proposals from Royal Malaysian Customs.
- Consider restricting access for certain imports to a single point of entry. Under this measure, imports of those products which are identified as high risk should only be allowable at a single point of entry into the country. So that enforcement resources can be focussed 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. This new policy should only be used for very specific products, such as tobacco, subject to high risk of illicit trade.
- Launch public education campaigns. The government should focus on raising public awareness on the personal health risk associated with consuming illicit products and the fact that the proceeds of illicit trade can be used to fund more harmful criminal activity.
Commenting on the release of the report, IDEAS CEO Ali Salman said that: “As we approach the Budget, it is crucial that the government step up its efforts to counter illicit trade, which is draining the government of much needed revenue and harms legitimate business. The government should follow the example of other countries and establish a clear strategy, governed at the highest levels to tackle this problem. There are also number of the specific steps the government should take, including increasing penalties and improving cooperation with the private sector. Illicit tobacco in particular remains a major problem and the government should hold back from any further increase in prices and review the existing tax structure as well as tightening enforcement on known smuggling routes.”
The report builds on previous research by IDEAS, “Illicit Trade in Malaysia: Causes and Consequences”, which outlined the scale of illicit trade in Malaysia, the driving factors behind it. Today’s report is being shared with the Ministry of Finance and other government agencies.
The full report can be accessed here.