While the illicit trade in itself is not new in Malaysia, the recent increase is widely attributed to the global economic crisis. 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."

So far as reaching government revenue targets goes, increasing taxes on cigarettes may seem like a good strategy, but, as CMTM points out, "the increase is limited as the illicit trade eats into the volumes." So while income has increased somewhat, it is not as much as hoped for.

"CMTM is asking for moderate tax increases so we can weather the market better and manage the incentive to trade in illicit cigarettes," Ibrahim said. "The aim is to reduce the temptation for consumers, to reduce the incentive to buy illicit brands." In large part, the solution lies in the hands of the government and its policies.

"The government needs to look at its health objectives and its revenue goals and reassess its priorities," according to Ibrahim. "It is the licit manufacturers that are getting hit here as well as government revenues. The smugglers are unaffected by tax increases: every day is a good business day for them."

But for every good day for the illicit traders the legitimate industry suffers further losses, both in income and in brand equity.

"Like many international manufacturers across various industries with facilities in Malaysia, Philip Morris Malaysia is concerned that the availability of illicit products will erode the long-term viability of legitimate industry," said Morgan.

CMTM enjoys a good working relationship with the various arms of the government connected with the tobacco industry. A good flow of information and support allows the government to act against smugglers when information exists. But Malaysia has a huge coastline, and it is impossible to police it effectively. Sabah has less of a problem with illicit cigarette sales than peninsula Malaysia, which is much more densely populated.

In fact, the evidence suggests that illicit trade remains more of a rural than an urban issue.

"Urban consumers more concerned with image and style, whereas rural market is more about affordability," according to Ibrahim. "But the economic slowdown and migrant labor involved in infrastructure projects are certainly affecting urban consumption patterns."

Indonesian workers, for example, remain the largest consumers of kretek in Malaysia, both licit and illicit brands.

Imported brands are legal if an import licence is applied for and granted by customs – but as imported cigarettes pay import and excise duty the price would no longer be competitive against locally-produced brands.

If the problem is difficult to deal with now, come January 2010 the market is likely to experience further upheavals as cheaper cigarettes with import duties of 5% will be legally allowed to enter Malaysia under AFTA agreements. Dumping of cheaper cigarettes that could impact on local manufacturers is a possibility, and market dynamics are obviously going to change.

For now, CMTM currently enjoys good access to most regulatory and enforcement agencies, regular round table discussions with customs where issues of concern to all parties are discussed, and holds regular meetings with customs at regional and state level. It also enjoys regular engagement with other government enforcement agencies, including maritime, and with the Ministry of Domestic Trade. The Ministry of Health however remains an exception.

"Malaysia’s problem with illicit cigarettes is a common problem for many countries," Ibrahim concluded. "Malaysia is not unique. It is very important that whether individually or as a group the industry needs to work with the government to share information, discuss strategies and develop initiatives. This has been a core strength of the CMTM."

Ultimately, the solution lies in the hearts and minds of consumers.

"Strategies need to be developed to wean consumers off illicit products as the demand comes from the end users," Ibrahim pointed out.