Malaysia fell to 'Tier 3' in this year's closely watched Trafficking in Persons (TIP) report as it continued to conflate human trafficking and migrant smuggling crimes, and did not adequately address or criminally pursue credible allegations on labour trafficking, the report said.

Malaysia's home ministry has not commented publicly on the report and did not immediately respond on Friday to a request from Reuters for comment. 

In a teleconference with reporters, Acting Director of the State Department's trafficking office Kari Johnstone said the overwhelming majority of trafficking victims in Malaysia are migrant workers, of which there are an estimated 2 million who are documented, and a greater number undocumented. 

"The sectors primarily where we see the greatest forced labour – which is the predominant form of the crime within Malaysia – includes on palm oil and agriculture plantations, in construction sites, in the electronics, garment and rubber product industries," said Johnstone. 

The downgrade comes after a string of complaints by rights groups and U.S. authorities over alleged exploitation of migrant workers in plantations and factories. 

Neighbouring Thailand was downgraded to 'Tier 2 Watchlist' in the report, which found a high number of trafficking victims subjected to forced labour in the fishing and agriculture industry. 

"Trafficking victims are also subjected to sex trafficking in brothels, massage parlours, bars, karaoke lounges, hotels and private residences," Johnstone said. 

Thailand's foreign ministry called the downgrade disappointing and said it does not fairly reflect significant efforts and progress it has made to combat human trafficking. 

It said it has taken several measures, including granting workers from Cambodia, Laos, and Myanmar an extended period of stay during the coronavirus crisis. 

"The TIP Report, after all, unilaterally makes an evaluation from the U.S' very own view and by no means represents any international standard," the ministry said in a statement. 

Thailand has faced criticism from rights groups in recent months over a "bubble and seal" COVID-19 containment policy prohibiting migrant workers in factories and construction site from leaving their workplace during an outbreak.