Incidence of illicit cigarettes “critical”

The level of illicit cigarettes in Malaysia remains high.

According to a press release by JT International Berhad, the results of an Illicit Cigarettes Study, commissioned by CMTM, showed “the incidence of illicit cigarettes from June-August 2010 remaining critical at nearly 40%”.

JTI added:

For 2011, JTI Malaysia expects the operating environment to be extremely challenging with illicit cigarettes continuing to be a threat to the legitimate cigarette manufacturers. On 1 October 2010, the Government implemented a hefty increase of 16% on cigarette excise tax, resulting in tobacco manufacturers, including JTI Malaysia, to increase the retail selling price of cigarettes by 70 sen per pack of 20 sticks. This further widened the retail selling price gap between legal and illicit cigarettes. Consumers with lower spending capacity switched to cheaper illicit cigarettes, which are widely available and sold below the Government mandated Minimum Cigarette Price (MCP) of RM7.00 per pack of 20 sticks.

The question is how are these illicit cigarettes being smuggled the country? Tobaccoasia.com provides us some clues:

Interestingly, counterfeit cigarettes are not the issue here. The majority of brands being sold illegally are “legitimate” products that are shipped to Malaysia tax-free by crime syndicates that earn vast sums through the trade – at the expense of the government and legitimate domestic manufacturers and importers.

“Probably the global economic slowdown has impacted the proliferation of regional brands coming in by the container load,” opined Ibrahim. “These are not counterfeit cigarettes, they are all tax unpaid, lower-priced brands from Vietnam, Cambodia, Philippines and Indonesia.”

Illicit kretek consumption has gone up significantly over the last five years, reportedly directly related to the number of Indonesian workers in the country, many of whom entered and remain in the country illegally.

“Licit product typically sell for higher prices, illicit brands are lower quality but are significantly lower priced,” said Ibrahim. “Legal products retail between M$6-7. This is what CMTM members’ products typically retail for. The most popular illicit brands are not usually well-known international brands. Illicit brands are much lower priced and therefore attractive to lower-income smokers.”

Adding to the problem is that illicit product is widely available. Illicit retailers are earning good profits, there is a good incentive to participate. The trade is predominantly in the hands of syndicates, and distribution channels are already in place, through massage parlors and so on.. The fine for being convicted of retailing illicit cigarettes currently stands at 10 times the value of uncustomized goods seized. Accordingly, the bulk of supplies held elsewhere than with the retailer. There are retailers being caught and charged in court, but it is widely assumed that the fines are paid by the syndicates who can afford to cover this operational expense and maintain the good will and cooperation of the retailers.

The upshot is that legal manufacturers have seen a decline of 11% by sales volume to illegal operators, and there is clearly a need for urgent and decisive action.

“The efforts of local authorities, particularly Royal Malaysian Customs, to disrupt the illicit cigarette trade have shown some benefits,” said Morgan. “It is important that there be a continued focus on detecting and intercepting shipments of illicit cigarettes entering Malaysia as well as identifying and countering the outflow of illicit cigarettes from other countries. But the fact remains that the incidence of illicit cigarettes is rapidly on the rise. PMM is committed to continue working with the government to enhance enforcement efforts. A strong focus on enforcement at retail level and the introduction of stricter penalties for offenders, including a minimum mandatory jail sentence, is urgently required to curb the growth of illicit cigarettes in Malaysia.”

Ibrahim agrees. “We need to look at current legislation to make it more punitive,” he said. “We would like to see more people caught, charged and put behind bars. Of course, there is every possibility the smugglers are paying the compound fines for those that are caught to show support for retailers and ensure sustainable outlets. This strategy must be circumvented if the problem is to be resolved.”