KUALA LUMPUR: Malaysia's recent tier upgrade in the Trafficking in Persons (TIP) report to Tier 2 will help Malaysia repair its environment, social and governance (ESG) profile on migrant workers.
Hong Leong Investment Bank Bhd (HLIB research) in its note said it was Malaysia's second consecutive upward move under the Unity Government's administration.
This is also the highest rating that Malaysia has achieved, since 2017. Malaysia was rated Tier 3 (lowest tier) in 2021 and 2022, before moving up to Tier 2 watch list (WL) in 2023, and subsequently to Tier 2 this year.
"We highlight that Malaysia's upgrade in the 2024 TIP report was a crucial one as its previous "lifespan" in Tier 2WL (2023) was only limited to one year and failure to move up the tier in 2024 would have necessitated an automatic downgrade to Tier 3 on the rules for Tier-2WL countries. "We believe that the back-to-back tier upgrades will help Malaysia repair its ESG profile on migrant workers – which was tarnished during the pandemic on issues such as forced labour and human trafficking," it said in a note.
The tier placement is not directly based on the size of a country's problem but on the extent of its government's efforts to meet the US Trafficking Victims Protection Act 2000's (TVPA) minimum standards for the elimination of human trafficking.
Within Asean, HLIB research said Malaysia's Tier2 rating is at par with Indonesia, Thailand and Vietnam, but ahead of Laos (Tier 2WL) as well as Brunei, Cambodia and Myanmar (all Tier 3).
Asean neighbours that ranked ahead of Malaysia are the Philippines and Singapore which are both Tier 1.
HLIB emphasised the need to address issues in the plantation and glove sectors, as well as construction and electronics manufacturing services, which are consistently flagged in the report as problem areas.
"Given the repeat flagging of these sectors in the past few TIP reports and reiteration of its prioritised recommendations, local authorities may place greater scrutiny in these areas to ensure that Malaysia maintains (if not improves) its tier in next year's TIP report," said HLIB research.
The firm said given Malaysia's high dependency on foreign labour it needed to continue its efforts against human trafficking and forced labour.
Based on 2022 employment numbers by the Department of Statistics Malaysia, 11.6 per cent of Malaysia's workforce is made up of foreigners.
Failure to do so could potentially lead to economic ramifications such as sanctions, import restrictions and reputational risk leading to lost trade opportunities, especially in current times of heightened ESG scrutiny.
It said economic sectors in Malaysia that have a high "dependency ratio" – and thus exposed to a higher risk of trafficking and forced labour – are agriculture (33 per cent of the workforce are foreigners), construction (18 per cent) and manufacturing (15 per cent).
In 2019-2022, US Customs and Border Protection (CBP) issued eight Withhold Release Orders (WROs) and two findings on Malaysian companies, which were mostly plantation and gloves, on allegations of forced labour use.
However, most of these punitive restrictions have since been dropped following remedial action taken, with only two WROs still enforced, on FGV Holdings Bhd and Brightway Group, and no new WRO or findings have been issued on Malaysia since 2023.