Malaysian Maritime Enforcement Agency (MMEA) Tawau Division Operations Director Maritime Commander Azman Samsudin said the passengers were rescued by villagers nearby.
Azman said they mobilised a MMEA patrol boat on a search and rescue mission after receiving information at about 2.30am.
He said the team arrived at the location at 4.30am, adding that the boat, which was similar to a fisherman boat, was already submerged by the time they found it at 6.05am.
"The team only found several lifejackets floating close to boat and the operation ended at 7.30am after we received information that all the victims were safe," he said.
He said MMEA will continue to conduct enforcement duties off Sabah waters particularly off Tawau, to curb crime and smuggling activities. He urged those with any information on such activities to contact 089-750116 / 089-752115.