A Smuggler's Story
A story of deceit, terror and billions lost.
- The Illicit Cigarette Boom
- A Closer Look At The Black Market
- The Missing Five Billion
- How They Operate
- The Victims
- Containing The Spread
The smuggling of illegal products, like illegal cigarettes, is a big problem for Malaysia. And this is having an impact on the wider region. The black market needs to be stopped now, while we can still get ahead of it.
The Illicit Cigarette Boom
There is a syndicate in our backyard hiding in plain sight. They have managed to turn heads when they made news of controlling most of Malaysia’s tobacco black market. How much? About 60% of it.
It all started at the southernmost state in Peninsular Malaysia, Johor. A smuggling syndicate first used Johor as a base for trafficking goods such as tires and fruits to our neighbouring city-state, Singapore. In 2012, The Syndicate started to venture into illicit cigarette smuggling.
Right after the drastic increase in cigarette excise in 2015 that significantly increased the price of legal cigarettes, the demand for cheap black market tobacco boomed overnight.
Almost instantly The Syndicate became a multimillionaire. Leveraging on the thoroughly organised and structured operations, The Syndicate began to merge the business of other smaller smuggling syndicates forming a consortium that controls 60% of the tobacco black market. But, just like a cunning gangster in the movies, The Syndicate was also careful to cover themselves through legal loopholes so as to not have any ties with these criminal activities.
- The Star. Smuggled ciggies worth RM7.6mil seized in Johor. 2021
- Harian Metro. Ben 'Bapa Segala Bapa'. 2021
A Closer Look At The Black Market
Economics 101: The Law of Supply and Demand dictates that a lower price point will increase demand for that particular commodity. As such, higher prices will directly cause demand to decrease resulting in buyers looking for a cheaper alternative.
In 2015, the Malaysian government imposed a 40% increase in excise tax rates for cigarettes that resulted in the overnight surge in legal cigarette prices. One may think that this would be a good move for the economy and towards reducing the smoking incidence, but the skyrocketing prices were not taken well.
This turned into an opportunity for The Syndicate to expand its operations manifold. As the demand for more affordable tobacco options increased, The Syndicate’s organised structure made full use of their smuggling operations that were already in place.
A research report also confirmed that Malaysians could not afford legal cigarettes as they lack purchasing power. Malaysia’s cigarettes are also seen as one of the most expensive in the world, relative to income. This was based on a study comparing the minimum wage to local cigarette prices samples from several countries according to Kamarul Anwar, CGS-CIMB Securities Sdn Bhd analyst (The Malaysia Reserve, 2021).
Additionally, where there is chaos, silent operations can work their magic undetected. This is especially true thanks to Malaysia’s unstable political scene. Contributing factors include high unemployment rates, relatively low income, huge price gaps between legal and illicit tobacco products, and corruption - The Syndicate and their peers will continue to feed the black economy.
- The Malaysian Reserve. Affordability the real problem for tobacco industry. 2021
The Missing Five Billion
Since 2017, Malaysia has been losing over RM5 billion in uncollected taxes year on year. Come 2021, one of the biggest challenges Malaysians have been facing during the Covid-19 crisis is a loss of income and difficulty in managing savings alongside the rising cost of living. By falling outside of the legitimate market, the sales of illegal cigarettes avoid both excise duty and the sales tax on final prices. In doing so, they deprive the government of substantial tax revenues of around RM9/pack (excise and sales tax combined).
To some, smoking is seen as a necessity to get through the day. The excise hike in 2015 had led to the prices of legal cigarettes skyrocketed. This left Malaysian smokers who cannot afford expensive legal cigarettes to seek cheap black market tobacco.
The tobacco black market presents significant problems for the government, including:
- Undermining its health agenda, as total cigarette consumption has actually increased since 2015’s shock increase in excise duty, driven by the growth of the unregulated illicit tobacco; - Depriving the government of tax revenues, and so curbing its ability to deliver basic services and valuable social programmes;
- Fueling other more serious illegal activities in Malaysia, particularly, corruption;
- and Discouraging legitimate business operations.
For us to stop them, we must first understand how The Syndicate operates.
How They Operate
Traditionally, black market tobacco is being smuggled into Malaysia mainly through seaports. Notwithstanding mis-declarations, syndicates had been abusing transshipment facilities to bring in large quantities of illicit tobacco.
In November 2020, the Government announced several key measures to address the tobacco black market as part of Budget 2021. Measures include restrictions on transshipment of cigarettes, freezing the issuance of cigarette import licenses, imposing a tax on the importation of cigarettes with drawback facilities for re-export, and strengthening of the Multi-Agency Task Force on illicit tobacco. The measures introduced had indeed produced positive results. The illicit cigarette study released recently showed a drop in illicit incidence from 63.8% in 2020 to 57.9% in May 2021.
However, syndicates are shifting their modus operandi to counter the government’s enhanced enforcement measures by exploiting Malaysia’s long and porous coastlines. Illicit tobacco is being smuggled using large cargo vessels that sail from source countries onto small speed boats or fishing vessels which would then drop them off at private jetties and landing spots throughout the country's vast coast. From there, lorries and vans will transport the illegal cigarettes to undisclosed warehouses or staging points for distribution. In addition, syndicates are also using sophisticated technologies like drones to facilitate smuggling activities.
- New Straits Times. Illegal cigarette syndicates are circumventing enforcement measures. RTBA Malaysia. 2021
- New Straits Times. Ben Gang controls 60 per cent of tobacco market. 2021
How They Operate
Livelihoods continue to be adversely affected by the seemingly never-ending spiral of the Covid-19 crisis. The common man still needs to find ways to feed the family.
The Rakyat who are between medium to low wage earners who could not afford the expensive legal cigarettes that are sold at a regulated minimum price of RM 12.00/pack had to seek cheap black market tobacco priced between RM 6.00 to RM 9.00/pack.
To make matters worse, the contents of black market tobacco are unregulated and unrestricted, and would often contain higher contents of tar and nicotine, There are also instances where foreign substances (e.g. dead worms and rat faeces) were found in the black market tobacco that are consumed by the Rakyat.
On the other hand, a recent expose revealed that fishermen are involved in the smuggling of black market tobacco. The Syndicate would entice the fishermen with a reward of up to RM 3,000 depending on the number of illicit cigarettes to be smuggled into Malaysia. The poor fishermen are being ‘manipulated’ by the Syndicate to commit crimes. They are being used as ‘transporters’ of black market tobacco and in the event of enforcement, the fishermen would be held liable whilst the Syndicate would get off scot-free.
Since the introduction of Budget 2021 measures against smuggling of activities, albeit positive progress has been made, the black market tobacco remains a serious problem. Malaysia is losing RM 5 billion annually in uncollected tax from the black market tobacco.
In addition, black market tobacco smuggling activities act as a catalyst for corruption and other more serious crimes such as human trafficking, narcotics or wildlife trafficking which are also perpetrated by organised criminals.
Leveraging on the strong demand, The Syndicate would find ways including the use of criminal intimidation against law enforcement agencies and bribery to smuggle cigarettes into Malaysia. For the record, Malaysia dropped six places in the Transparency International Corruption Perception Index (CPI) 2020.
In a bigger picture, black market tobacco in Malaysia is also harming other neighbouring nations as well as APEC economies. There are several news reports stating that Malaysian criminal syndicates had been smuggling illicit products into Australia and New Zealand markets because of the price differential of cigarettes (New Straits Times, 2020).
According to a report published by Oxford Economics in June 2019 entitled “The Economics of Illicit Tobacco Trade in Malaysia”, at the peak of the tobacco industry in 2013 and before the implementation of the hike in excise duties, the total GDP contribution of the sector was RM0.83bil based on 2017 prices.
With the plant closures, jobs too were lost and according to the same report, it was estimated the two plants owned by BAT and JTI supported around 5,750 jobs in Malaysia, of which 600 were direct employment at the two factories and nearly 3,600 jobs sustained by the RM500 million spent by the two factories with local suppliers.
"Naturally foreign investors will be turned off by the perception of high levels of corruption and breakdown in the rule of law. Their investments may be jeopardized due to out-of-control economic crime," Pankaj Kumar, Economic and Investment Analyst.
The illicit cigarette trade is endemic within the Malaysian market. The illicit trade may have already caused Malaysia to lose the contribution supported by the closed factories and the exploitation of the rakyat, but efforts should still be stepped up to curb illegal tobacco activity.
Containing the Spread
As someone who has seen both sides of the spectrum, The Syndicate is cunning and ever ready to exploit loopholes seen or unseen.
"There is no doubt that Budget 2021 measures have been effective in curbing the smuggling of illicit tobacco, but the effectiveness of these measures will be short-lived if further initiatives are not taken to strengthen anti-smuggling efforts. Syndicates have already changed their tactics to circumvent the government's measures to tackle smuggling, so the authorities and the various stakeholders must now build on the foundations of the Budget 2021 measures.” Country Report, Illegal Tobacco Trade, 2021, Malaysia.
The report by RTBA also provided four (4) recommendations on how the illegal tobacco trade can be brought further under control:
- Extending moratorium on excise duties;
- Excise reforms to close the price gap between legal and illegal tobacco products;
- Enhancing enforcement; and
- Using all available laws against The Syndicate.
As 2021 comes to a close, one can only hope that Budget 2022 will also take into consideration massive reforms and efforts to stop the tobacco black market just like in Budget 2021. Issues such as our low income, high unemployment rate, the wide price gap between legal and illegal cigarettes, and corruption will need to be nipped in the bud or the tobacco black market will continue to thrive.
We hope you take the steps to save our people and country.
Help us Stop The Black Market today.
- Country Report. Illegal Tobacco Trade. 2021. Malaysia. RTBA