KUALA LUMPUR (Reuters) - The U.S. State Department will downgrade Malaysia in its annual report on human trafficking to be released later on Thursday, a source told Reuters, just a year after the Southeast Asian nation was upgraded for making progress.

Malaysia will be downgraded back to Tier 2 Watch List, a category denoting nations that deserve special scrutiny, in the State Department’s closely watched Trafficking in Persons (TIP) report, the source said, declining to be identified as the report is not yet public.

The source said while Malaysia had made good progress on combating human trafficking, it had not been able to meet all its promises. The source did not provide details.

Malaysia’s Home Ministry was not immediately available for comment.

The U.S. embassy in Kuala Lumpur directed queries to the State Department, which said the TIP report would be released at 2 p.m. ET (1800 GMT) on Thursday.

Last year, Malaysia was upgraded to Tier 2, a list of nations making significant efforts to comply.

The government had demonstrated increased efforts by expanding trafficking investigations, prosecutions, and convictions, the State Department said then.

However, it had said Malaysia did not meet the minimum standards in several key areas, including victim protection.

It had also said complicity among law enforcement officials, in the form of accepting bribes to allow undocumented border crossings, hampered some anti-trafficking efforts. Culpable officials typically avoided punishment, the report said.

Malaysia has long been known as a destination for trafficking victims, including documented and undocumented workers.

It relies heavily on foreign workers from Bangladesh, Indonesia, Nepal, and the Philippines, among others. It has nearly 2 million registered migrant workers, but there are millions more in the country without work permits.

Malaysia was in Tier 3 - the lowest ranking in the TIP report - until 2015, when it was upgraded to the Tier 2 Watch List, a move that drew criticism in both Malaysia and the United States.

Several U.S. lawmakers had then questioned if the Obama administration move to upgrade Malaysia was politically motivated in an effort to get Kuala Lumpur to sign the Trans Pacific Partnership (TPP) trade agreement. Countries with the lowest human trafficking rating could not join the trade pact - from which the United States has now withdrawn.

The upgrade came just weeks after Malaysian authorities found 139 graves in abandoned trafficking camps near the Thai border in the northern state of Perlis. The victims were believed to be mostly Rohingya Muslims fleeing Myanmar.

Human rights activists have criticized Malaysia’s actions over that case as inadequate. It charged four foreigners with human trafficking, but said it lacked evidence to charge Malaysian police officials who were suspected of being involved in the trafficking syndicate.