New Zealand is being marketed as a destination for illegal immigrants, Australian Home Affairs Minister Peter Dutton says.

"Some people, it seems, have been told different stories about their destination," Dutton said.

"New Zealand is now being marketed as a definite destination," he told a news conference today.

Malaysian police intercepted 127 Sri Lankans and arrested 16 other people – Indonesians, Malaysians and Sri Lankans - in an operation targeting a modified tanker off the Malaysian coast early yesterday.

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Illegal Sri Lankan migrants on a rusty tanker near kota tinggi in Johor state, Malaysia. Photo / AP
Illegal Sri Lankan migrants on a rusty tanker near kota tinggi in Johor state, Malaysia. Photo / AP

Dutton said the ship had the potential to reach New Zealand, and warned the country was now being "marketed as a definite destination" by people smugglers.

The Etra was carrying 131 Sri Lankans - 98 men, 24 women and nine children - when it was stopped off the coast of Malaysia by Malaysian police, according to reports.

Four Sri Lankans were arrested and the other 127 would be charged for not possessing legal travel documents, according to the New Straits Times.

Three Indonesians and four Malaysians, who were on a fishing boat onboard the rusty tanker, which was believed to have been used to ferry the immigrants to the tanker, were also arrested.

Five Malaysians believed to be linked to the people-smuggling syndicate were also arrested, according to Singapore-based Channel News Asia.

"With these arrests, the Royal Malaysia Police has successfully foiled a large and cunning human smuggling syndicate," police chief Mohamad Fuzi Harun said.

"This syndicate has been operating since mid-2017 and has international connections across Sri Lanka, Australia, New Zealand, Indonesia and Malaysia," he said.

Yesterday, New Zealand's Immigration Minister Iain Lees-Galloway said New Zealand was strongly committed to regional efforts to combat people-smuggling.

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"It's common knowledge that New Zealand has been mentioned as a target in the past," he said.

Lees-Galloway thanked Malaysian authorities for intercepting the tanker carrying illegal immigrants.

"I can confirm that New Zealand was not involved in the operation but the Malaysian success in disrupting this attempt sends a very clear signal to any people involved in people-smuggling.

"Exploitation of individuals and families by people-smugglers is repugnant and will not be tolerated.

"This sort of venture would put lives at extreme risk in the most vast and treacherous ocean in the world. We thank the Malaysian authorities for their efforts," Lees-Galloway said in a statement.

Australia has stopped asylum seekers from attempting to reach its shores aboard rickety fishing boats from Indonesian ports by refusing to allow boat arrivals to ever resettle on the Australian mainland.

Australia pays the poor Pacific nations of Nauru and Papua New Guinea to keep asylum seekers from Asia, the Middle East and Africa in immigration camps indefinitely.

The boats used to arrive on Australian shores at a rate of more than one a day, but no boat smuggling people has arrived in Australia in almost four years.

But Dutton said 14,000 asylum seekers were waiting in Indonesia for a chance to come to Australia.

"People realise that New Zealand is a backdoor way into Australia, that New Zealand is a comparable society to Australia," Dutton said.

"It has a similar welfare system, similar health, education offerings, housing, etc — it is marketed in the same way as Australia is as a positive destination."

Image released by the Royal Malaysian Police shows the intercepted tanker near Kota Tinggi in Johor state, Malaysia. Photo / AP
Image released by the Royal Malaysian Police shows the intercepted tanker near Kota Tinggi in Johor state, Malaysia. Photo / AP

Air Vice-Marshal Stephen Osborne, commander of Australia's Operation Sovereign Borders which blocks or turns back asylum-seeker boats that head toward Australia, described the ship stopped by the Malaysians as a "much larger vessel than we've seen for some time" and the smuggling operation as "far more complex and sophisticated" than previous attempts.

Malaysian police also raided a fishing boat used to transport the migrants to the vessel and detained three Indonesians and four Malaysians on board, Fuzi said. Another five Malaysians were arrested for suspected involvement in the smuggling syndicate.

A total of 127 Sri Lankans will be charged for entering Malaysia illegally while nine Malaysians, four Indonesians and four Sri Lankans will be investigated for human smuggling, Fuzi added.

- additional reporting AP