This article first appeared in The Edge Malaysia Weekly on July 6, 2020 - July 12, 2020

MALAYSIA has lost about RM1 billion in unpaid taxes during the Movement Control Order (MCO) period that started in mid-March, according to estimates from JT International Bhd (JTI Malaysia).

Its managing director, Cormac O’Rourke, says the RM1 billion estimate is derived from the supply of 2.5 billion sticks of cigarettes by the “Big Three” companies — British American Tobacco (M) Bhd (BAT Malaysia), JTI Malaysia and Philip Morris (M) Sdn Bhd — that has been disrupted during the MCO period as cigarettes are not considered essential items.

“Retailers — many of which derive up to 30% of their revenue from the sale of tobacco products — have been severely impacted,” he tells The Edge.

The Covid-19 pandemic has disrupted illegal trade enforcement initiatives across the world as governments relocate federal funds and resources to combat the spread of the virus. This is seen as a setback for the Big Three firms in their effort to crack down on the trade of illicit cigarettes in Malaysia.

According to Interpol director of organised and emerging crime Paul Stanfield, much of the countries’ resources for combating tax crimes have diminished as they have been diverted to Covid-19 response.

“What we have seen around the world is that law enforcement agencies were not prepared for this pandemic and found it difficult to deal with and to protect themselves and the public from the virus. As a result, a lot of them put themselves in harm’s way and their focus has shifted to public safety measures, which led to less opportunity to tackle some of these new emerging threats,” he said last week at a webinar titled, “Global Illicit Trade: Profiteering from pandemic”.

Indeed, Malaysia has seen sales of illegal cigarettes and illicit nicotine vaping products gaining ground as law enforcement agencies struggle to manage the pandemic. BAT Malaysia noted an 11% decrease in total legal industry volume in the first quarter of the year.

In recent years, tackling the illegal tobacco trade in Malaysia has been the top priority for BAT Malaysia, JTI Malaysia and Philip Morris Malaysia, which say they cannot compete on pricing as illegal cigarettes are sold for a fraction of the price of legal ones.

Illegal cigarettes make up 66% of total cigarette consumption in the country today, an increase from 62.3% in 2019 and 58.9% in 2018.

O’Rourke notes that several operational issues faced by the legal tobacco industry have come to light during the MCO period. “In effect, the supply of legal tobacco products has been severely disrupted, and illegal tobacco traders have attempted to ramp up the use of e-commerce for sale and even food delivery services for distribution.

“Year to date, the market has declined more than 10%, with revenue declining further owing to downtrading towards the value-for-money segment. This has put a squeeze on margins and directly impacted the industry’s ability to sustain investment across the board,” he says.

Interpol’s Stanfield pointed out that while border restrictions have led to a reduction of traditional crimes such as theft and burglary, it has also resulted in an influx of cyber crimes. “The movement restrictions have led to criminals shifting online to commit frauds. Criminals are very quick to adapt. They are motivated primarily by money. So, they see the opportunity where there is a demand for personal protective equipment (PPE) and other medical goods and they seize it.”

OECD Directorate for Public Governance acting director János Bertók, who also spoke at the webinar, concurred. He said the pandemic has shown the capacity of organised criminal groups to rapidly adapt to the shift towards online since lockdown. “As a result, the online environment has become extremely misused.”

Bertók cited the emergence of more than 100,000 new websites representing Covid-19-related products such as the distribution of PPE and pharmaceuticals in the past 2½ months. “This is extremely dangerous because there is very little control over the quality of the ingredients. We also noticed a rapid increase of falsified medicine entering the market.”

He said raising awareness of the safety and health risks and documenting the cases will help put a stop to the illegal activity. “We are not only talking about the economic impact but also the lives of people using fake pharmaceuticals.”

Japan Tobacco International global senior director of anti-illegal trade Ian Monteith, however, cautioned against introducing extreme measures such as raising tax rates to combat illicit trade.

At the webinar, he cited the case of Malaysia, which has seen a spike in illicit cigarette trade since the government introduced a 40% excise tax increase on cigarettes in late 2015.

“The major issue is, once the illegal cigarette trade takes over, none of these taxes are paid. And once it gains a foothold in society, it can be extremely difficult for governments and law enforcement agencies to remove it because it is looked upon as a victimless crime. But it is not a victimless crime; it is actually hurting the society,” Monteith stressed.

Public, private collaboration helps tackle illegal trade

Monteith said public-private partnerships (PPPs) are the way to go when it comes to combating illegal trade. “There are two aspects to it, that is, strong enforcement with reasonable and moderate taxation. These are the key drivers or ingredients to try and reduce the supply of illegal commodities in the market.

“That is because none of the money from the illegal criminal activities goes back to the government. It does not benefit the society. It only benefits criminal gangs, terrorists and traffickers. The International Monetary Fund has highlighted the widening of income inequality and this is a desperate situation that requires very careful partnership [and a] controlled approach among governments, law enforcement agencies, the private sector and civil society in working together.”

JTI Malaysia’s O’Rourke agrees, noting that “addressing the long-standing illegal trade problem in Malaysia requires a whole of government approach involving ministries and law enforcement agencies”.

“The establishment of a multi-agency task force (MATF) in January led by the Royal Malaysian Customs Department had paved the way for a PPP with clear terms of reference that would address the illicit trade issue comprehensively. This initiative indeed yielded some positive results prior to the MCO, albeit still far short of bringing the illegal cigarette trade incidence in Malaysia under control.

“We believe that the MATF — involving the Royal Malaysia Police, Ministry of Domestic Trade and Consumer Affairs and Ministry of Finance, among others — needs to be urgently re-established and strengthened to drive enforcement efforts and also to ensure sensible regulatory policies are discussed and validated, so as to not exacerbate the problem any further,” says O’Rourke.

“This is a national problem costing the country between RM5 billion and RM6 billion a year in lost tax revenue. It is further costing the small and medium enterprise sector, in particular retailers, billions of ringgit in lost margins. This is damaging not only from a jobs point of view, but reputation-wise for the country as it strives to compete for its fair share of foreign direct investments,” he adds.

Given the adverse impact on the legitimate tobacco industry, retailers and associated enterprises, JTI Malaysia is calling on the government to redouble its efforts to protect jobs and industry in Malaysia.

“A moratorium on excise tax would be a good start. Further, there is an opportunity to lessen the load on the legitimate industry’s cash flow by deferring payment of excise and import duties, and allowing for duty payment drawbacks for unsold goods, as well as a reduction of import duties on Asean-sourced products, which are currently at 5% of cost. Releasing locked cash would ease some financial burden and, more importantly, allow the industry to provide support to retailers, which have been hit hard by the pandemic,” says O’Rourke.

Meanwhile, Japan Tobacco International’s Monteith said the private sector can play a significant role in helping to combat illicit trade by providing information to law enforcement agencies.

“We (private sector) can bring quality intelligence, forensic analysis and transport reach — everything that will assist law enforcement agencies in initiating or continuing with their investigations. These are global criminal activities. Law enforcement agencies can be and are restrained by international boundaries and different government regulations. The private sector is not restrained by that,” he added.

Interpol’s Stanfield concurred. “Before you can actually tackle organised crime, you need to understand it. To do so, you need to have access to information and data. And that data is not held in the hands of police agencies, but the private sector such as social media companies and banks in particular, because these criminal activities are motivated by money.

“The reality is that today, only 1% of global illicit finances is actually recovered or seized and that means 99% is getting through. So, we need to do much more than what we are doing now,” he said.

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