Journal of Money Laundering ControlCombating money laundering in MalaysiaBala Shanmugam Haemala Thanasegaran

Article information:To cite this document:Bala Shanmugam Haemala Thanasegaran, (2008),"Combating money laundering in Malaysia", Journal ofMoney Laundering Control, Vol. 11 Iss 4 pp. 331 - 344Permanent link to this document:http://dx.doi.org/10.1108/13685200810910402

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Users who downloaded this article also downloaded:Zakiah Muhammaddun Mohamed, Khalijah Ahmad, (2012),"Investigation and prosecution of moneylaundering cases in Malaysia", Journal of Money Laundering Control, Vol. 15 Iss 4 pp. 421-429 http://dx.doi.org/10.1108/13685201211266006Bala Shanmugam, Mahendhiran Nair, R. Suganthi, (2003),"Money laundering in Malaysia", Journal ofMoney Laundering Control, Vol. 6 Iss 4 pp. 373-378 http://dx.doi.org/10.1108/13685200310809699Bala Shanmugam, (2005),"Hawala and money laundering: a Malaysian perspective", Journal of MoneyLaundering Control, Vol. 8 Iss 1 pp. 37-47 http://dx.doi.org/10.1108/13685200510621181

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Combating money launderingin Malaysia

Bala Shanmugam and Haemala ThanasegaranMonash University Malaysia, Bandar Sunway, Malaysia

Abstract

Purpose The aim of this paper is to highlight the importance of countering the dangers posed bymoney laundering activities and the measures taken to date by the Malaysian authorities in thisrespect.

Design/methodology/approach The paper achieves this by looking at the current moneylaundering trends in Malaysia, followed by a detailed account of the initiatives taken by the Malaysianauthorities to curb such activities. These proactive initiatives range from the enactment andimplementation of the Anti-Money Laundering (AML) Act 2001, the establishment of the FinancialIntelligence Unit of the Central Bank of Malaysia and the Southeast Asia Regional Centre forCounter-Terrorism which work with international enforcement agencies, to the requirement ofsuspicious transaction reporting amongst professional accountants and lawyers and more.

Findings Malaysia continues to make a broad and sustained effort to combat money launderingand terrorist financing flows within its borders.

Practical implications The practical implication of this paper is to stress the importance ofkeeping abreast with the increased challenges posed by money laundering, especially via the internetand the vital need for the banking and financial sector to invest heavily in transaction monitoringdevices/software and training in AML detection, in order to tackle the menace.

Originality/value This paper makes for a useful read for practitioners, academics, policymakersand students alike.

Keywords Money laundering, Malaysia, Regulation, Law enforcement, Terrorism, Financial reporting

Paper type Research paper

IntroductionIn the aftermath of September 11, 2001, commonly referred to as 9/11, there have beentremendous efforts globally by individual governments to curtail money launderingactivities. What is interesting to note is that the worlds biggest economy, the USA hasbeen recently exerting subtle pressures on anti-money laundering (AML) initiatives,and non-compliance is not considered an option.

Delving into history, money laundering is believed to have been developed by theUS Mafia, as a quick fix to legitimise dirty money obtained from prostitution, gamblingand extortion. The Mafia bought up and operated large numbers of legitimatebusinesses to make it appear as honest cash flows.

Generally various techniques can be employed to make dirty money look clean butit essentially breaks down to three stages:

(1) Moving the money from the scene of the crime:

(a) To a remote location.

(b) Ideally to a bank account in another country, if possible anonymously.

(2) Disguising the trail leading from (a) to (b).

(3) Making the cash available to the criminals (Shanmugam, 2004).

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1368-5201.htm

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Journal of Money Laundering ControlVol. 11 No. 4, 2008

pp. 331-344q Emerald Group Publishing Limited

1368-5201DOI 10.1108/13685200810910402

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In Malaysia, the common money laundering technique is via structured transaction. Thismethod also known as smurfing, involves numerous deposits of cash at various branchesof one financial institution, which is then followed with the purchase of a secured bankinstrument, such as a bankers cheque (New Straits Times, 2002a, February).

Apart from this, other methods of money laundering includes currency exchanges,postal orders or buying of shares.

The Internet has also given another avenue for such illegitimate activities. Widelyknown as cyber payments (New Straits Times, 2002a, February), money launderersare today able to pass currency across international borders, anonymously andinstantaneously.

Two commonly used methods are stored-value smartcards and internet-basedpayment modes. In the first method, cash is used to purchase a plastic card withpurchasing value assigned to the card. Once the purchase of the card is completed, thetrail disappears. Other electronic methods include Internet gambling casinos andfraudulent Internet businesses. The success of such methods depends on the speed andanonymity factors associated with transactions on the Internet.

Money laundering trendsAccording to the Deputy Finance Minister Datuk Dr Ng Yen Yen, an internationalsurvey suggested that banks lose 10 times more money due to such fraudulentactivities, compared to bank robberies (Business Times, 2004a,b,c, September).

However, what is most unfortunate is that the proliferation of money launderingglobally over the last ten years is partly due to the liberalisation of markets around theworld and the deregulation of exchange controls. In combination, both have opened upmany more channels for laundering dirty money and created more opportunities tohide its origins.

In the case of Malaysia, money laundering activities, which is also considered awhite collar crime, has became a lot more sophisticated with the advent of informationand communication technology. It has increasingly become difficult for the Malaysianpolice force to determine the profile of the criminals, as anyone with computerknowledge could indulge in such crimes.

In a news report by Eddie Chua, it was stated that about RM25 million in dirtymoney, via money laundering activities goes out of the country on a weekly basis,mainly through loopholes in the banking system. In the same report he said that it wasestimated that casino junket operators people who organised overseas gamblingholidays are responsible for moving about RM10 million in dirty money a week(Malay Mail, 2002, October).

Malaysias initiatives to curb money launderingFollowing the 9/11 tragedy, it became cognizant that a consolidated and concertedeffort is needed to counter money laundering, which is seen as a conduit for terroristfinancing. In that sense Malaysia has taken various measures, via appropriate moneylaundering laws, and the initiation of sharing information and law-enforcementcooperation to combat money laundering.

According to Tunku Abdul Aziz, the former chairman of Transparency InternationalMalaysia (www.transparency.org), Malaysian banks have a role in ensuring that ourAML laws, among the first in the developing world, are put to effective use in theinterests of sound business ethics (New Straits Times, 2002b, March).

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To this end the Malaysian Central Bank (Bank Negara Malaysia BNM), in closecooperation with the government has played a pivotal role in curbing moneylaundering activities in Malaysia (www.bnm.gov.my).

According to the Director of the Financial Intelligence Unit (FIU) at BNM(Koid Swee Lin), a number of measures have been implemented to counter moneylaundering. Among the measures taken are:

The national coordination committee (NCC) to counter money launderingFormed in April 2000, this committee comprises of representatives from thirteenMalaysian Ministries and law enforcement agencies, with BNM playing the principal role.The objective of the committee is to develop and ensure the proper implementation ofmeasures to counter money laundering and terrorism financing, based on internationallyaccepted norms, as contained in the recommendations of the Organisation for EconomicCo-operation and Development (OECD)s Financial Action Task Force (FATF) on moneylaundering (www1.oecd.org/fatf/). BNM, which also acts as the secretariat to the NCC,measures and coordinates the implementation of anti money laundering measures andensures that the national efforts are aligned with regional and international initiatives.Representatives of member agencies in the NCC meet several times a year to coordinatetheir concerted efforts in fighting money laundering and in counter-attacking terrorismfinancing. In fact, it was the NCC that oversaw the drafting of Malaysias Anti MoneyLaundering Act 2001 (AMLA). The 2003 annual report also states that each NCC memberis responsible to study and report on pertinent AML/counter financing terrorism measuresas well as implement, and report on the development of any NCC decision.

The anti-money laundering act 2001 (AMLA)The Government gazetted the AMLA in July 2001 which was brought into force in January2002. The AMLA criminalised money laundering and lifted bank secrecy provisions forcriminal investigations involving more than 150 predicate offences. The AMLA covers theoffences of money laundering in general, which also includes the investigation, freezing,seizure and forfeiture of the proceeds of serious crimes, suspicious transactions, reporting,record-keeping and the establishment of the FIU. Additionally, the AMLA has also beeninvoked in financial, as well as non-financial institutions spanning conventional, Islamicand off-shore banking in the country. In fact, Sections 44 and 45 of the AMLA state that itis able to freeze and seize property, when there are reasonable grounds to suspect anygains obtained via money laundering activities.

As an added measure of commitment to AML activities, the Malaysian Parliamentpassed the AMLA (Amendment) in November 2003, which was gazetted as law on25 December 2003.

Apart from banking institutions, the amended act included several other categories ofbusinesses, such as insurance companies, money changers and Islamic bankinginstitutions in their need to report to BNM on suspicious transactions. As of December2003, there were 973 institutions that were reporting under the AMLA (www.bnm.gov.my). Table I shows details of Reporting Institutions under the AMLA (Figure 1).

The financial intelligence unit (FIU)The FIU, under the auspicious of BNM, works with more than twelve domestic and foreignenforcement agencies, receiving, analysing and sharing information and financial

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intelligence with them. In July 2003, BNM was admitted as a member of the Egmont Groupof FIU. The Egmont Group provides a forum to expand and exchange information onfinancial intelligence, improve expertise and capabilities of personnel, and foster bettercommunication among FIUs. The FIU of BNM has also signed Memoranda ofUnderstanding (MOUs) with the FIUs of Australia, Indonesia, and the Philippines. MOUs

Invocation date Type of reporting institutionsNumber of institutions

(as at December 31, 2004)

January 15, 2002 Commercial Banks 23Finance Companies 11Merchant Banks 10Islamic Banks 2

April 15, 2002 Discount Houses 7Offshore Banks 54Offshore Insurance Companies 101Offshore Trust Companies 44Insurance Companies 10Insurance Brokers 35Takaful Operators 4

June 1, 2002 Money Changers 649January 15, 2003 Bank Kerjasama Rakyat 1

Malaysia 1Bank Simpanan Nasional 1Lembaga Tabung Haji 1Pos Malaysia Bhd Genting Casino 1

Total reporting institutions 973

Source: BNM (2004)

Table I.Reporting institutionsunder AMLA

Figure 1.Reporting institutions

Lembaga Tabung Haji,Pos Malaysia, Casinos,

Bank Simpanan Nasionaland Bank Rakyat

LOFSA

Futures BrokingBusinesses

Money Changers

Securities Businesses

Building Credits,Credit Tokens,

Factoring Leasing

Takaful Operators

Insurance Companies

Islamic Banks

Commercial Banks,Finance Companies,

Merchant Banks

Bank NegaraMalaysia

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with the USA, the UK, Japan, South Korea, The Netherlands, Finland, Albania, Thailand,and Argentina are pending. Malaysia has also endorsed the Basel Committees CorePrinciples for Effective Banking Supervision and is a member of the Offshore Group ofBanking Supervisors and the Asia/Pacific Group on Money Laundering.

Due diligence requirementsIn addition to this, Malaysia has adopted due diligence or banker negligence laws thatmake individual bankers responsible if their institutions launder money. Failure to reportany suspicious transaction to BNM is considered an offence under the AMLA and shall, onconviction, be liable to a fine not exceeding RM100,000 or imprisonment for a term notexceeding six months, or both. In order to protect the reporting institution from being usedby criminals as a vehicle to integrate or layer their illegal proceeds, the AMLA requires allreporting institutions to place an effective compliance programme, adopting a bestpractices approach. Under the AMLA, any person or group who engages in, attempts toengage in, or abets the commission of money laundering would be subject to criminalsanction. Reporting institutions are required to file suspicious transaction reports under theAMLA. All reporting institutions are subject to the same review by the FIU and other lawenforcement agencies. Reporting institutions include: commercial banks, money changers,discount houses, insurers, insurance brokers, Islamic insurance and reinsurance (takafuland retakaful) operators, offshore banks, offshore insurers, offshore trusts, the PilgrimsFund (to pay for Haj trips to Mecca), Malaysias postal service, development banks such asMalaysias National Savings Bank (Bank Simpanan Nasional), The Peoples CooperationBank (Bank Kerjasama Rakyat Malaysia Berhad), and licensed casinos (Figure 1).

The customs departmentIn addition to the proactive judicial system, the Malaysian Customs Department hasalso put the AMLA into action by identifying several companies involved in majormoney laundering and smuggling.

The police forceLike the Customs Department, the Malaysian police force has also established AMLunits nationwide to track the underworlds money trail. In fact, the Federal CommercialCrimes division is planning a major expansion programme, which would includegetting additional personnel to facilitate this move, in the later part of 2005. Part of thedepartments plan is to beef up the Commercial Crimes Division with an additional1,900 personnel (NST, April 2003).

The bar councilIn another effort to curb money laundering activities in the country, lawyers will haveto report any suspicious transactions. Among the suspicious transactions are large andfrequent currency exchange, use of multiple deposit accounts and activity inconsistentwith customer profile. Lawyers were entrusted with this responsibility under theamended AMLA 2003.

The transactions under this Act include buying and selling of property, the settingup of trusts, providing a registered office and company secretary services. To thiseffect, the Malaysian Bar Council has issued a circular to its members reminding themof their duty, following amendments to the AMLA.

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According to the Malaysian Bar Council secretary Mr Sreenevasan, it has becomemandatory for advocates and solicitors to promptly report any suspicious transactionsencountered in the course of preparing for or carrying out, transactions involvinglawyers acting as formation agents of legal entities and acting as directors orsecretaries of companies. Failure to report suspicious transactions may result in a finenot exceeding RM100,000 or a term of imprisonment or both.

Another positive move by the Malaysian Bar Council is that it has also formed atask force to help lawyers understand the new reporting procedures. According to thenew guidelines lawyers should become suspicious of a client or a transaction if basicinformation is withheld or if the client appears to be acting on the instruction of others.The following are suspicious transactions such as managing clients money likeaccount nominees, selling and buying of immovable properties like houses and land,and creating, operating or managing legal entities or arrangements like sale andpurchase agreements.

Non governmental organisations (NGOs)Malaysia also has rules regulating charities and other non-profit entities. The Registrarof Societies is the principal government official who supervises and controls charitableorganizations, with input from the Inland Revenue Board and occasionally theCompanies Commission. The Registrar mandates that every registered society of acharitable nature submits its annual returns, which include financial statements.Should the Registrar find activities he deems suspicious, he will inform the FIU of suchactivities. Negotiations are currently underway to expand the scope of the AMLAreporting institutions to include charitable organizations governed by the Registrar ofSocieties. Malaysias tax law allows contributions to charitable organizations (Zakat,as required by Islam) to be deducted from ones total tax liability, encouraging thereporting of such contributions. Such contributions can be taken as payroll deductions,another tool to prevent the abuse of charitable giving.

The securities commission (SC)Malaysias equities market regulatory body, the SC has stated it will not hesitate touse its powers to take action against and penalise actual and prospective abuses ofpower by directors and CEOs (ID, 2004; www.sc.com.my). Disqualification ofcompany directors is also provided for under section 130 of the Companies Act 1965 forthose convicted of offences involving fraud or dishonesty including facilitating moneylaundering activities for a maximum period of five years. In addition, the scope of theSecurities Industry Act (SIA) has been broadened significantly with amendments tothe Act which came into effect in January 2004.

In fact, Under Section 100 of the SIA, the SC can take pre-emptive action even beforea crime is committed, against any director who is found likely to contravene anysecurities laws. It is also worth noting that the SC can also seek a court order to removeand bar that director from office, or from becoming a director of any other public orpublic-listed company.

Also, the SC may now apply to the courts under section 99C(3) of the SIA to removea CEO or director from office where that person has been convicted of an offence underany securities laws, or where the SC has taken civil proceedings or actions against thatperson for any breaches of securities laws or for non-compliance with exchange rules.

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Under this provision, the SC may apply to the courts for the director or CEOs removalfrom office for any period that the courts deem fit.

Apart from these regulations, the SC has also stated in its web site that it wouldcontinue to work closely with other authorities in maintaining corporateaccountability, integrity and transparency in the market. It states that where itfinds evidence of transgressions of laws, whether securities related or otherwise, suchas criminal breach of trust, tax evasion, fraudulent financial transactions, moneylaundering and illegal transfer pricing mechanism, it will continue to work with fellowregulators to ensure that national public interest is not compromised. This makes theSC yet another body which is working towards curbing money laundering.

Foreign exchangeIn 1998, Malaysia imposed foreign exchange controls that restricted the flow of the localcurrency, the ringgit, from Malaysia. Onshore banks must record cross-border transfersover RM5,000 (approximately US$1,300). Since April 2003, an individual form iscompleted for each transfer above RM50,000 (approximately US$13,170). Recordingis done in a bulk register for transactions between RM5,001 and RM50,000. As far asmoney changers are concerned, under the Money-Changing Act 1998 effective June 1st2002, the 649 money changers in the country are not permitted to transmit money. Themoney changers must register their businesses with the police and keep customeridentification and transaction records for cash transactions equal to or over RM10,000.

The international offshore financial centre (IOFC)The Labuan IOFC is located in the island of Labuan, off the eastern coast of Malaysia. It isvulnerable to money laundering and the financing of terrorism. Accordingly, the LabuanOffshore Financial Services Authority (LOFSA) director-general, Rosnah Omar said thatLOFSA is committed to ensuring that the integrity of the Labuan IOFC is not compromisedin any way. She believes that in the medium to long-term, LOFSA which is under theauthority of BNM, will ensure that all offshore financial institutions will formulate andimplement AML framework as required by the AMLA and the OECDs FATFs 40recommendations (Business Times, 2004a,b,c, September and www.lofsa.gov.my).

The offshore sector has different regulations for the establishment and operation ofoffshore businesses, compared to onshore businesses. However, the same AML laws asthose governing domestic financial service providers govern the offshore sector. LOFSAlicenses offshore banks, banking companies, trusts and insurance companies, andperforms stringent background checks before granting an offshore license. The financialinstitutions operating in Labuan are generally among the largest international banksand insurers. Nominee (anonymous) directors are not permitted for offshore banks,trusts or insurance companies. Offshore companies must be established through a trustcompany. Trust companies (as are required of offshore banks and insurance companies)have to establish true beneficial owners and submit suspicious transaction reports asnecessary, under the countrys AML law. Bearer instruments likewise are prohibited inLabuan, but there is no requirement to reveal the true identity of the beneficial owner ofinternational corporations. LOFSA officials may require any organization operating inLabuan to disclose information on its beneficial owner or owners.

LOFSA works closely with 12 government enforcement agencies in orderto ensure the effectiveness of efforts and initiatives to combat money laundering.

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As of December 2004, there were 2,348 registered offshore companies (both trading andnon trading) in Labuan, including 53 offshore banks and investment banks, 101offshore insurance and insurance-related companies, 30 trust companies, 15 fundmanagement groups, 3 money banking companies and 59 leasing companies. All theseinstitutions have been informed of the need to report money laundering activities.Many of the companies established in Labuan are Japanese firms established primarilyto service Japanese companies in Malaysia. Malaysia prohibits offshore casinos andInternet gaming sites.

Islamic financeMalaysias fledgling Islamic finance sector, accounting for approximately 10 percent oftotal deposits, is subject to the same strict supervision to combat financial crime as thecommercial banks. A combination of legacy exchange controls imposed after the1997-1998 Asian financial crisis and robust regulation and supervision by BNM makesthe Islamic financial sector as unattractive to financial criminals as the conventionalfinancial sector.

The free trade zones (FTZ)The Free Zone Act of 1990 is the enabling legislation for FTZs in Malaysia. The zonesare divided into free industrial zones (FIZ), where manufacturing and assembly takesplace, and free commercial zones (FCZ), generally for warehousing commercial stock.The Minister of Finance may designate any suitable area as an FIZ or FCZ. Currentlythere are 13 FIZs and 14 FCZs in Malaysia. The Minister of Finance may appoint anyfederal, state or local government agency or entity as an authority to administer,maintain and operate any FTZ. Legal treatment for such zones is also different. Thetime needed to obtain such licenses from the administrative authority for the givenFTZ depends on the type of approval. Clearance time ranges from two to eight weeks.There is no information available suggesting that Malaysias free industrial and FCZsare being used for trade-based money laundering schemes or by the financiers ofterrorism. However, the Malaysian government considers these zones as areas outsidethe country and receive more lenient tax and customs treatment relative to the restof the country. As such, the FTZs are vulnerable to money laundering.

International cooperationMalaysia cooperates with regional, multilateral, and international partners to combatfinancial crimes and permits foreign countries to check the operations of their banksbranches. Despite the absence of legislation criminalizing terrorist financing, theMalaysian government has cooperated closely with US law enforcement agencies ininvestigating terrorist-related cases since the signing of a joint declaration to combatinternational terrorism with the USA in May 2002. The Malaysian governmentcurrently has the authority to identify, freeze terrorist or terrorist-related assets andhas issued orders to all licensed financial institutions, both onshore and offshore, tofreeze the assets of individuals and entities listed by the UN Security CouncilResolution 1267. As evidence of its willingness to cooperate internationally in theglobal effort to thwart terrorism, the Ministry of Foreign Affairs, in conjunction withMalaysias AML unit within BNM, opened the Southeast Asia Regional Centre forCounter-Terrorism (SEARCCT) in August 2003.

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The KPMG surveyWhile these initiatives may be regarded as commendable, a consulting firm, KPMGInternational in a 2004 survey maintained that Malaysia still has some way to go inachieving its aim of eliminating money laundering (www.kpmg.ca/en/industries/fs/banking/globalAntiMoneyLaundering.html; www.moneylaundering.com/email/ezines/euro04/eu20041229.htm). In its AML Survey, KPMG argues that the challengefor policymakers and law enforcement agencies was to engage the banking industrymore effectively, give banks evidence that their efforts are leading to higher detectionrates and prevent the industry from being used by criminals.

The same KPMG Survey also observed that most banks were expecting spendingrelating to money laundering controls, to rise by more than 40 percent over the nextthree years. This does indicate that much remains to be done to enhance AML systemsand controls, and the Malaysian banking system needs to buck up.

The KPMG Survey also shows that banks across the world are putting more moneyinto AML systems and meeting compliance requirements more than ever before. Of the209 financial services institutions interviewed about their spending over the last threeyears, 83 percent have stated they have invested, on average by 61 percent more inAML systems in the last three years since September 11, 2001.

The KPMG Survey further adds that the main driver behind the past and projectedincrease in spending is transaction monitoring. Banks are steadily increasing thesophistication of their monitoring methodology, with over 40 percent of respondentshaving already implemented externally developed automated monitoring software.While many banks continue to rely on staff vigilance and exception reports, majorityare planning to implement more sophisticated IT systems.

Training in AML detection is the second biggest contributing factor to increasedspending, with banks showing a strong preference for face-to-face training rather thancomputer-based training. No doubt the KPMG Survey says increased regulation andfears over financing of terrorist groups have undoubtedly boosted investment in AMLmeasures. In this regard, the banks have rightly identified transaction monitoring andtraining as key areas for investment.

As reported by Zamani (Business Times, 2004a,b,c, September), Deputy Governor ofBNM, the NCC in line with the KPMG Surveys findings has continued to play a significantrole in ensuring continuous enhancement of the national AML and counter financing ofterrorism (CFT) programme, within an effective regulatory and supervisory framework.

Case studiesThe AMLA was finally tested in April 2004 when the Malaysian Sessions Courtallowed an application by the prosecution to jointly prosecute a woman doctor oneight charges of money laundering. Dr Hamimah Idruss, 55 made history to become thefirst person in the country to be charged for money laundering under the AMLA.Hamimah was alleged to have received money, amounting to RM41.2 million throughthe account of Megabridge Sdn. Bhd. at an OCBC Bank branch in Damansara Utamaon June 10, 2003. The offence, under Section 4(1) of the AMLA 2001, is punishable by afine of up to RM5 million, or up to five years imprisonment or both.

In December last year, Dr Hamimah was again slapped with ten newcharges of abetment at the Sessions Court, bringing the total number of charges to18 under the AMLA. In the ten new charges, she was alleged to have abetted one

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Yusaini Wan Abi Sabian, 35, her former employee, in forging ten promissory notes ofSafire Pharmaceuticals (M) Sdn. Bhd. worth RM45.6 million. The offences were allegedto have been committed from March 1 to March 10, 2003 at Safires premises at 33,Persiaran Industri, Seri Damansara. Under Section 109 of the Penal Code, read togetherwith Section 468 of the same Act, she is liable to a maximum of seven yearsimprisonment or a fine or both, upon conviction.

Apart from Dr Hamimah, the second person charged under AMLA 2001 was inFebruary this year. According to the facts of the case, a former freelance land brokerwas charged in the Sessions Court with money laundering involving RM2 million.Gan Kiat Bend, 47 of Sungai Jeram in Jenjarom, Selangor, pleaded not guilty toreceiving the money, allegedly proceeds from illegal activities, in a Standard CharteredBank cheque from an account belonging to one Syed Ahmad Faudzi Syed Abu Bakar,35. The offence was allegedly committed at Standard Chartered Bank Malaysia Bhdat 2, Jalan Ampang on January 9, 2004. The Malaysian government is currentlyprosecuting these cases as well as investigating several others.

The Malaysian institute of accountants (MIA)To this end, the MIA is of the opinion that Malaysia has enacted appropriate legislationthat provides for information exchange and is a party to a number of arrangements toenhance cooperation in AML and CFT. Some of the measures undertaken include:

Terrorist financingThe Malaysian banking system operates under a strict regulatory and supervisoryframework to make sure the system is not open to abuse by terrorists and not used as acentre for terrorist financing. On that note, the LOFSA has issued circulars in line withthe United Nations Security Council Resolution and the Controller of Foreign Exchange(Controller) under Section 44(1) of the Exchange Control Act 1953, directing all licensedfinancial institutions to freeze the funds and financial resources belonging to Osamabin Laden, the Al-Qaida and the Taliban and individuals associated with them.

Anti-terrorist lawsIn order for Malaysia to accede to the 1999 United Nations Convention for theSuppression of the Financing of Terrorism, new legislative provisions were proposedfor the following laws:

. The Penal Code[1].

. AMLA 2001.

. Subordinate Courts Act 1948.

. Courts of Judicature Act 1964.

. The Criminal Procedure Code.

Parliament passed amendments to the AMLA, the Subordinate Courts Act, and theCourts of Judicature Act in November 2003. The Criminal Procedure code is the lastmajor piece of domestic legislation that needs an amendment before it can beincorporated into domestic law.

The changes to the AMLA incorporated new definitions of terrorist property andterrorist financing offence. These provisions provide the mechanism to reportsuspicious activities, including suspected terrorism financing activities, measures for

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the detection and prevention of terrorism financing and the freezing, seizing andforfeiting of terrorist property, as a new part of Part IVA of the AMLA 2001. Theamendments to the AMLA will make the financing of terrorism one of the 168 predicateoffences for which money laundering can be charged as a crime but additional reviewmandated by Parliament has delayed the amendments entry into force.

A Select Committee is currently reviewing proposed changes to The CriminalProcedure Code. When implemented, the amendments will increase penalties forterrorist acts, allow for the forfeiture of terrorist-related assets, allow for the prosecutionof individuals who provide material support for terrorists, expand the use of wiretapsand other surveillance of terrorist suspects, and permit video testimony in terroristcases. Enactment of the amendment will enable the Malaysian government to accede tothe 1999 UN Convention for the Suppression of the Financing of Terrorism. In addition,the Cabinet has approved, as policy, the ratification of all remaining counterterroristconventions. In this respect, Malaysia is also a party to the 1988 UN Drug Convention.

Suspicious transaction reportingIn fact Section 14(b) of the AMLA specifically sets the statutory obligations forfinancial and non-financial institutional officers and employees to report anysuspicious transactions. This section of AMLA states that should there be reason tosuspect any transaction as being related directly or indirectly to any serious offence orforeign serious offence the reporting institution has to file a suspicious transactionreport with the FIU at BNM. As mentioned earlier, there are more than 150 predicateoffences listed under the Second Schedule of the AMLA.

What constitutes suspicious transaction is a matter of judgement for the reportinginstitution. In order to find out transactions that may involve proceeds of illegalactivities, the reporting institutions must know their clients or customers well.Knowing the customer or client involves verification of identity, keeping records andongoing monitoring of the transactions. Usually, the suspicion can arise when thetransaction conducted does not match the customer profile, is of unusually large valueor does not make economic sense.

In adopting a best practices approach, the AMLA requires all reporting institutionsto conduct customer due diligence to ensure that there should not be any fictitious noranonymous accounts/transactions being conducted with any persons. Therefore, thereporting institution has to establish an appropriate Know Your Customer Policy(KYC). Essentially, KYC includes:

. Obtaining proper identification of customers and beneficial owners viaidentification cards, passports or incorporation documents.

. Ascertaining basic background of the customers such as occupation,employment history, intended business of the company or ownership andcontrol structure of the company.

. For customers who are politically exposed persons, the AMLA requires financialinstitutions to obtain senior management approval to establish customerrelationship and the source of wealth.

All transactions regardless of their size are recorded, and such records need to be keptfor a minimum of six years. Failing this KYC acid test, financial institutions shouldnot proceed with the transaction and consider lodging a suspicious transaction report.

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All such transactions are to be reported to BNMs FIU. Officials of the FIU indicatethat they receive regular reports from institutions, but cannot divulge the volume orfrequency of such reports. Reporting individuals and their institutions are protected bystatute with respect to their cooperation with law enforcement agencies. WhileMalaysias bank secrecy laws prevent general access of financial information, thosesecrecy provisions are waived in the case of money laundering investigations underthe AMLA.

Training initiativesAs mentioned earlier in this paper, Malaysia recognises the importance of making surethe personnel involved in the fight against money laundering in financial institutionsare equipped with the necessary skill and expertise. To this end, continual trainingprogrammes are conducted, which include AML/CFT awareness, policy formulation,investigative skills, forensic accounting, analysis of suspicious transactions, mutuallegal assistance for criminal matters and asset forfeiture.

ConclusionMalaysia is not a regional centre for money laundering. However, its formal andinformal financial sectors are vulnerable to abuse by narcotic traffickers, financiers ofterrorism and criminal elements in general. Malaysias relatively relaxed customsinspection at ports of entry and FTZs, its uneven enforcement of intellectual propertyrights, and its offshore financial services centre serve to increase its vulnerability.

To circumvent this, Malaysia has been progressively constructing a comprehensiveAML regime, beginning with the establishment of the NCC in 2000. The NCC in turnoversaw the drafting of the AMLA, which came into effect in January 2002 along withthe establishment of the FIU. Malaysias FIU was admitted as a member of the EgmontGroup of FIUs in July 2003, and it has MOUs with several other countries. The MutualAssistance in Criminal Matters Bill was passed in April 2002. In November 2003,amendments were made to the AMLA, the Subordinate Courts Act and the Courts ofJudicature Act. The SEARCCT was in turn opened in August 2003.

Transactions are not processed if the KYC guidelines set by the AMLA revealirregularities, and a report needs to be lodged. By virtue of the due diligence orbanker negligence laws, individual bankers are held responsible if their institutionsare involved in money laundering. Professional societies for lawyers and accountantshave added suspicious transaction reporting requirements to their bylaws. Likewise, inconsultation with the SC, stockbrokers and brokerage houses are now required tosubmit suspicious transaction reports. Meanwhile, the LOFSA ensures that theintegrity of the IOFC is not compromised. Thus, far, there has been no informationimplicating the 27 FTZs, in money laundering activities or terrorism financing.

The Malaysian government has a well-developed regulatory framework, includinglicensing and background checks, to oversee all financial institutions. These robustregulations and the supervisory framework, within which they operate, have thus farmade both the conventional and Islamic financial sectors unattractive to financialcriminals. BNMs stringent guidelines require customer identification and verification,financial record keeping, and suspicious activity reporting. These guidelines areintended to require banking institutions to determine the true identities of customersopening accounts and to develop a transaction profile of each customer with the

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intent of identifying unusual or suspicious transactions. A comprehensive supervisoryframework has been implemented to audit financial institutions compliance with theAMLA. Currently, there are 300 examiners who are responsible for money launderinginspections for both onshore and offshore banks.

It comes as no surprise then, that Malaysia has been praised for its concerted efforts inreducing money laundering. International bodies such as the Asia/Pacific Group onMoney Laundering and the International Monetary Fund have viewed Malaysias AMLinitiatives as positive and proactive (MIA, 2004, October). The detailed regulations forexamining money laundering are however, still in the development stages for all segmentsof the financial industry. By using a consultative approach, BNMs FIU continues toexpand the scope of institutions which must report suspicious transactions. This approachhas encouraged Malaysias professional societies for lawyers and accountants to addsuspicious transaction reporting requirements to their bylaws. Likewise, in consultationwith the SC, stockbrokers and brokerage houses are now required to submit suspicioustransaction reports. The Malaysian governments consultative approach has in turn,minimized potential political fallout from the statutes expansion.

With these initiatives, Malaysia continues to make a broad and sustained effort tocombat money laundering and terrorist financing flows within its borders. For allentities such as trust companies and International Business Companies (IBCs),Malaysia should insist on fit and proper tests for all management, and identificationof all beneficial owners. Malaysia should also insist on the registration of trusts and ofthe beneficial owners of the 4,000 IBCs. There should be stringent auditing andexamination requirements of its offshore financial centre, to prevent the misuse of theoffshore financial centre by organized crime and terrorist organizations. Customsregulations and inspections should be strengthened, particularly in the FTZs. Malaysiais a signatory to the UN Convention against Transnational Organized Crime, whichcame into force in September 2003. Malaysia should ratify that Convention in order togive it any effect. The Malaysian Parliament has enacted terrorist financing legislationin 2005 and in keeping with this the Malaysian government should accede to and ratifythe UN International Convention for the Suppression of the Financing of Terrorism andall other terrorist-related UN Conventions.

Note1. Penal Code (Amendment) Act 2003 (date of Royal assent: December 17, 2003), Date of

publication in the Gazette: December 25 2003. See the new sections 130N, 130P and 130Q of thePenal Code.

References

Bank Negara Malaysia (BNM) (2004), Annual Report.

Business Times (2004a), PLCs told to be one step ahead of financial fraudsters, 17 September.

Business Times (2004b), Govt. constantly monitoring financial crimes, 21 September.

Business Times (2004c), Promoting sound banking practices, 29 September.

ID (2004), Law breakers to face the wrath of the SC, 16 February.

Malay Mail (2002), Cleaning dirty money, 10 October.

Malaysian Institute of Accountants (MIA) (2004), press release, 12 October.

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New Straits Times BC (2002a), Facing the issue of money laundering, 6 February.

New Straits Times (2002b), Anti-money laundering laws must be put to effective use, 13 March.

New Straits Times (2003), Police to set-up more anti-money laundering units, 8 April.

Shanmugam, B. (2004), Hawala and money laundering: a Malaysian perspective, Journal ofMoney Laundering Control, Vol. 8 No. 1.

Further reading

Business Times (2003), Asian gifts act to crack down on money laundering, 1 August.

Business Times KPMG (2004), Anti-money laundering still much work in progress,23 October.

BNM (2003), Annual Report.

New Straits Times (2004c), Money laundering: court allows joint trial, 17 September.

New Straits Times (2004d), Directive to report suspicious moves, 15 October.

New Straits Times (2004e), Cleaning up the money changing act, 12 December.

PricewaterhouseCoopers (n.d.), Pricewater-houseCoopers Alert Newsletter, Issue 42.

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This article has been cited by:

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2. Wee Ching Pok, Normah Omar, Milind Sathye. 2014. An Evaluation of the Effectiveness of Anti-money Laundering and Anti-terrorism Financing Legislation: Perceptions of Bank Compliance Officersin Malaysia. Australian Accounting Review 24:10.1111/auar.2014.24.issue-4, 394-401. [CrossRef]

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