Malaysia risks weakening systems in the fight against illicit trade

 Enforcement systems only work when physical authentication and digital tracking reinforce each other.

From Jane Yu

More than half of the cigarettes consumed in Malaysia are illicit. Billions in tax revenue disappear every year, and organised criminal networks have carved out a permanent place in the market, while public policy is seriously affected.

When a problem reaches that scale, the obvious response is to strengthen enforcement.

Yet at a time when countries like the UK are reinforcing their excise systems with hybrid physical-and-digital tax stamps, Malaysia appears to be considering the opposite move — shifting towards a digital-only model that removes the physical authentication layer enforcement officers rely on in the field.

That contrast raises a simple question: is Malaysia moving forward with the rest of the world, or stepping back?

Experiences from Europe 

The UK has committed 32 million pounds to introduce vaping duty stamps (VDS) from Oct 1 to combat youth vaping. The chosen approach: banknote-grade physical security paired with digital tracing.

These are not simply digital tracking codes. They are physical security stamps integrated with digital traceability — a hybrid system designed to support both supply-chain monitoring and real-world enforcement.

The UK could have chosen a digital-only system. It did not. Why? Because digital-only systems have not worked well enough to stop criminals.

Digital systems are valuable for capturing and processing data. But enforcement still happens in the real world — in shops and warehouses as well as at border checkpoints — where officers need a quick way to identify legitimate products.

A visible, tamper-resistant stamp does this by ensuring that a process authenticates the bearer before the data is consulted. Digital tracking systems embodied in plainly printed codes cannot achieve this on their own. The UK’s decision to use hybrid authentication for vaping products also reflects wider lessons from Europe.

The European Union introduced a digital track-and-trace system for cigarettes under the Tobacco Products Directive. Yet illicit trade across Europe remains substantial.

According to a 2024 KPMG study, 52.2 billion illicit cigarettes were consumed across 38 European countries in 2024, representing around 10% of total consumption and 19.4 billion euros in lost tax revenue.

The UK itself has struggled under this framework. Nearly 26% of cigarettes consumed in the country were illicit, equivalent to about 3.15 billion pounds in lost tax revenue.

These figures do not mean digital systems are useless. But they do show that data alone does not stop criminals. That is why some governments are strengthening the physical layer of enforcement, rather than abandoning it.

System at risk 

Ironically, Malaysia recognised this long ago.

This hybrid architecture — physical security printing layered with digital track-and-trace — mirrors what Malaysia’s customs department has operated for tobacco and alcohol products since 2014.

That physical marker does something important: it allows enforcement officers to identify legitimate goods quickly in the field. It also makes illicit trade measurable. Without a visible indicator of compliance, it becomes far harder to distinguish legal products from illegal ones.

Moreover, with the risk of hackers, data leakages and system breakdowns, it is absolutely key to retain strong material features to control products that traffickers of all kinds mainly target.

But recent policy discussions have suggested a shift towards digital-only tax marking systems.

The concern now is whether Malaysia is moving away from that hybrid model just as other countries are reinforcing it. As the world moves forward towards stronger hybrid approaches, is Malaysia keeping pace or stepping back?

Is Malaysia reinforcing its physical stamps as counterfeiters get more sophisticated? Is it deepening digital integration for real-time visibility? Or is it considering a move towards digital-only because it sounds modern?

That is the obvious question a government facing a 55% illicit market and rising fake stamp incidence should be prepared to answer clearly. Other countries already have.

Industry pushback 

Choosing to stick with hybrid enforcement might ruffle some feathers, but the flipside is growing illicit trade, which worsens public health by weakening public policies and reducing government revenue.

And it wouldn’t be the first time big business forces try to influence health and safety outcomes.

In 2024, Parliament passed the Control of Smoking Products for Public Health Act. Among its measures was a ban on displaying tobacco products at retail outlets. Implementation was later postponed after retailers and industry groups argued compliance would be too costly.

Policy reform moves forward. Stakeholders push back. Implementation gets diluted.

The risk is that enforcement tools end up weaker than originally intended. The Malaysian public, meanwhile, bears the burden — tobacco-related diseases cost the country billions in healthcare expenditure annually.

The question Malaysia must answer 

None of this means digital tools are bad. They are essential for modern tax administration. But enforcement systems work best when physical authentication and digital tracking reinforce each other.

Physical tax stamps are harder to counterfeit, harder to ignore, and — crucially — harder for industry actors to game. That is precisely why they work and why many governments, most recently the UK, continue to rely on them.

The scale of illicit trade in Malaysia is known today because the existing system makes it visible. The goal must be to make it smaller — not to go blind.

Malaysia helped pioneer that hybrid model a decade ago. Civil society groups are also calling for stronger track-and-trace measures, not weaker ones. The challenge now is not to abandon what works in the name of modernisation.

Because when illicit trade already controls more than half the market, the last thing Malaysia can afford is to make life easier for criminals. - FMT

Jane Yu is an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.