FAFT AML Deficient
Higher Risk Areas
US Dept of State Money Laundering assessment
Not on EU White list equivalent jurisdictions
Medium Risk Areas
Non - Compliance with FATF 40 + 9 Recommendations
Corruption Index (Transparency International & W.G.I.)
World Governance Indicators (Average Score)
Failed States Index (Political Issues)(Average Score)
Offshore Finance Centre
Malaysia is not on the FATF List of Countries that have been identified as having strategic AML deficiencies
Compliance with FATF Recommendations
The last Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Malaysia was undertaken by the Financial Action Task Force (FATF) in 2015. According to that Evaluation, Malaysia was deemed Compliant for 16 and Largely Compliant for 21 of the FATF 40 Recommendations.
Money Laundering / Terrorism Financing Risks (FATF Mutual Evaluation)
Malaysia is exposed to a range of significant money laundering (ML) and terrorist financing (TF) threats and vulnerabilities. Malaysia’s open economy, strategic geographic position and porous land and sea borders increase its exposure to ML/TF risks. Malaysia’s geographic location within South East Asia positions it as a transit country for drugs originating from the Golden Triangle and Europe. Typologies illustrate that illicit funds generated within South East Asia flow into the regional financial centres, including Australia, Singapore and Malaysia. Similar to other countries in the region, Malaysia has an important cash-based and informal economy.
The TF risks in Malaysia are evolving, with TF traditionally carried out using cash and relying on a network of trusted members within a terrorist organisation. New global risks, in particular in relation to foreign fighters, have increased the prevalence of self-funded TF within Malaysia.
Malaysia’s 2012 and 2013 National Risk Assessments (NRA) identified fraud, goods smuggling, drugs, tax crimes and corruption and bribery as high risk. The 2013 NRA identified forgery, theft and robbery, counterfeiting of currency, human trafficking and migrant smuggling, TF and organised crime as medium risk crimes. The banking, MSB (MVTS and money changers) and casino sectors were rated as high risk. Moderate scope limitations in the NRA process point to other crimes that may pose high risks to Malaysia including ML/TF linked with transnational crimes and criminal organisations.
Prior to the 2012 NRA some agencies undertook threat and vulnerability assessments on specific topics, including some at the national level. Malaysia’s understanding of ML/TF risks has improved substantially since it started the process of systematic assessments, which culminated in a NRA in December 2012, and an expanded NRA in December 2013. The last NRA indicates that the country is exposed to a range of ML risk associated with high threat areas including fraud, smuggling, illicit drugs, tax crimes and corruption. With the exception of TF and, to an extent organised crime, the NRA appropriately highlights the findings of these crime areas as priority risk areas for attention. Understanding the interconnectivity of risks, e.g. in relation to organised crime, corruption and domestic and foreign crimes appears to be limited requiring moderate improvements. For example, while corruption risk is rated as high, its linkages to other lower rated crimes (e.g. illegal logging) do not appear to have been sufficiently assessed and understood.
Terrorism and TF is considered as medium risk in the 2013 NRA, but in practice, the authorities consider it has high risk partly due to post NRA developments. Malaysia has faced a number of threats related to terrorist financing, including from Al Qaida, Jemaah Islamiya, the Liberation Tigers of Tamil Ealam (LTTE), Abu Sayef Group, and others. Recently significant threats related to the financing of ISIL recruits have emerged. Malaysia has porous national borders, rendering the country susceptible to the smuggling of cash and weapons and the relatively easy movement of people. Since 2004, some 156 Malaysians and a number of foreign nationals have been arrested in Malaysia for adherence to terrorist groups.
Malaysian authorities provided information on terrorism threats and the country’s increasing vulnerability of being used as a source of TF or recruits for terrorist groups active in other countries, including ISIL. Malaysian officials estimated that in 2014 more than 75 Malaysians had joined or attempted to join ISIL. The authorities indicated that most of the cases detected so far involve low income, unsophisticated individuals but recent reported cases involve recruitment and financing operations using the internet. This suggests the emergence of more organized and sophisticated operations and that the understanding of this risk is still evolving in pace with TF methods. In November 2014, SB arrested those suspected of recruiting Malaysians via Facebook to send to Syria.
Malaysian authorities indicated that there is no evidence linking the proceeds of criminal activities such as kidnapping, extortion, robbery, smuggling, fraud and drug trafficking to terrorist groups, despite the prevalence of these activities in ‘hot spots’ associated with terrorism risks (Southern Philippines and Southern Thailand). There have been incidents of kidnapping in Malaysia’s territory, i.e. Sabah, by the Abu Sayyaf group for ransom to further terrorism activities in their home country. Malaysia collaborates with the relevant regional authorities to share risk information to address these threats.
In the past, Malaysia, through its cooperation with international partners, has had the experience of investigating terrorist groups that have raised monies in support of their causes on a larger scale. Malaysia has identified fundraising through contributions made by terrorist group members through a collection of infaq2 of approximately 5% of monthly income in cash.
Malaysia has also focused on the use of the internet by terrorism-affiliated entities to channel logistical assistance to militant groups, recruitment, and funding terrorist activities. Between February 2013 and late 2014, SB has arrested 45 suspected militants of whom 22 have been charged, including three connected to Tandzim Al-Qaeda. The authorities contend that most of the cases detected so far involve low income unsophisticated individuals but recent reported cases involve recruitment and financing operations using the internet which suggests more organized and sophisticated operations.
Religious, charitable and political NPOs account for about 40% of NPOs and are considered a highrisk TF area in the NRA. The NRA indicates that a small proportion of NPOs account for the majority of international financial transactions and activities (approximately 1000 of a total of more than 47 000 NPOs) and that relatively few transactions are linked to high risk and conflict countries. NPO receipts during 2013 more than tripled far exceeding payments which had been steady during the previous 8 years. TF risk associated with this sector was rated as medium in the NRA. While awareness of TF risks in the NPO sector has been generally low in the past, oversight and risk mitigation have started to improve but is limited by resources. Outreach of TF has increased including through online portals and an annual conference. All of these factors point to a reducing but still high vulnerability for the NPO sector.
Malaysia has taken strong regulatory and enforcement measures to control the MSB sectors (remitters and money changers) in response to signifiicant risks, but unauthorized illicit MSBs continue to pose a significant vulnerability, including with respect to TF. Malaysia is a net outbound remitter of funds, with a large presence of migrant workers both legal and illegal. Strengthened controls, enforcement and other supervisory measures are resulting in significant increases in formal channels for remittance which should mitigate the level of risk posed by this sector.
Malaysia’s highly cash-based economy (vulnerability rated as high) and significant informal economy (vulnerability rated as moderate) is considered by the NRA. The NRA indicated that terrorists have used cash couriers in Malaysia in the past including cross-border operations. Malaysia’s states that its efforts to increase financial inclusion have reduced the size of the informal economy while national efforts to promote e-money are aimed at reducing the use of cash. The World Bank’s Global Findex for 2014 shows that 81% (an increase from 66% in 2011) of the adult population had access to accounts in formal financial institutions.
Malaysia’s assessments and understanding of risk, as well as the assessment team’s discussions with RIs and LEAs, indicate that use of informal nominee and front or ‘mule’ accounts in Malaysia is a challenge for RIs across Malaysia. The mule accounts identified by Malaysian authorities mainly involve individual account holders rather than legal persons. Use of formal nominees is also a feature in the offshore corporate sector. The authorities and private sector recognize this vulnerability and enforcement measures have been taken against those identified as mule account holders.
Malaysia has a small but important offshore financial centre in Labuan, which was rated as medium risk in the NRA. The assessment and understanding of ML/TF risks associated with Labuan-based businesses is partly based on the size of the sectors and the absence of cash transactions. Nonetheless, since many of the services are not substantially asset-based (e.g. company, trust, foundation and related services), these factors may be insufficient to properly assess and understand their associated ML/TF vulnerabilities and risks.
Many of the FIs operating in Labuan are owned or controlled by onshore banks (considered high risk), and a large proportion of business (e.g. loans by offshore banks) are to Malaysian customers. The Labuan offshore sector has exposure to a number of high-risk jurisdictions. These institutional, commercial and cross-border linkages and the associated ML/TF risks do not appear to have been sufficiently assessed and understood, requiring moderate improvements in the assessment and understanding or risk.
Only one large casino has been licensed in the country and is the single non-financial sector vulnerability rated as high risk in the NRA. This rating was well supported and the inherent ML risks and vulnerabilities are well known. The casino offers a wide range of high-risk services (e.g. those associated with client account and transaction practices), has several cross-border subsidiaries, affiliates and customers (e.g. through junket operations). The risks arising from the casino’s foreign operations have yet to be viewed on a consolidated basis.
Malaysia has a significant Islamic Finance sector involving banks, takaful (Islamic insurance) and other intermediaries which are subject to the same AML/CFT legal and regulatory regime as conventional and Islamic Finance institutions. Supervisors are of the view that, based on their supervisory experience, there are no material differences in risks when compared to conventional FIs (for example Islamic banks and non-Islamic bank are all rated as high-risk sectors). The NRA and other assessments considered ML and TF risks for all sectors of FIs and did not separately assess ML/TF risk and vulnerabilities in the Islamic Finance verse the conventional Finance sector as it did, for example, for the domestic and offshore sector.
The role of Zakat3 and its potential connection with charitable organisations (NPOs) was another area that has been considered by the authorities, although it was not discussed directly in the NRA. Malaysia has centralised and closely monitors systems for collection and disbursement of Zakat to mitigate risks in the sector.
APG Yearly Typologies Report - 2015
Emerging Trends; Declining Trends; Continuing Trends (INCSR)
Based on STRs submitted to the FIU as at August 2014, the top 3 suspected offences are taxrelated, fraud and smuggling.
The continuing trends identified from the STRs analysis include the following:
Increasing trend in reports on internet/wire transfer scams involving cross border transfer of funds: -
- Foreigners or individuals associated to foreigners opening accounts in different/multiple banks;
- Multiple inward remittances received from various entities in different countries;
- Funds received were withdrawn in cash and via ATM at various locations immediately upon receipts, leaving low balances in the accounts;
- Mismatch between transactions and accountholder profiles.-
- Large and rapid movement of funds (transit accounts);
- Large value cheques and cash were deposited into bank accounts followed byimmediate cash withdrawals;
- Funds transferred in and out of an account on the same day or within a relatively short period of time;
- Camouflaging movement of funds to third parties with cash withdrawals.
Unjustified banking transactions: -
- Deposits are not justified considering the nature of the business or profession;
- Deposits were inconsistent with the volume generated by the business;
- Deposits at various branches and times for no logical reason;
- Substantial inter-account transfer between related accounts;
- Multiple cash deposits into an account followed by a large transfer to other third parties account/countries.
US Department of State Money Laundering assessment (INCSR)
Malaysia is categorised by the US State Department as a Country/Jurisdiction of Primary Concern in respect of Money Laundering and Financial Crimes
Malaysia is a highly open, upper-middle income economy with exposure to a range of money laundering threats. The country’s porous land and sea borders, strategic geographic position, and well-developed financial system increase its vulnerability to domestic and transnational criminal activity, including fraud, corruption, drug trafficking, wildlife trafficking, smuggling, tax crimes and terrorism finance. Malaysia has largely up-to-date AML statutory instruments, well- developed policies, institutional arrangements, and implementation mechanisms. But while the country’s AML framework is generally sound, it has produced minimal outcomes in terms of investigations and prosecutions, especially of foreign-sourced crimes. Based on Malaysia’s high degree of technical compliance and its continuing progress in efforts to improve AML enforcement, Malaysia was granted full membership in the FATF in February 2016.
VULNERABILITIES AND EXPECTED TYPOLOGIES
Malaysia is primarily used as a transit country to transfer drugs originating from the southeastern Asian Golden Triangle to Europe. Drug trafficking by ethnic Chinese, Iranian, and Nigerian drug trafficking organizations is an important source of illegal proceeds. Malaysia is also a source, destination, and transit country for wildlife trafficking with some contraband (i.e., ivory) used as currency by the trafficking networks. Corruption has also emerged as a significant money laundering risk: state-owned development fund 1Malaysia Development Berhad (1MDB) faces credible allegations that billions of dollars were misappropriated from its accounts for political purposes or personal gain. It is the subject of several international probes, including investigations in Singapore, Switzerland, and the United States. Other predicate offenses generating illicit proceeds in Malaysia include fraud, criminal breach of trust, illegal gaming, credit card fraud, counterfeiting, robbery, forgery, human trafficking, and extortion. Financial fraud, including fake investment schemes and internet-based scams, pose a high money laundering risk. Smuggling of goods subject to high tariffs is another major source of illicit funds.
Malaysia has a large-scale cash and informal economy and a relatively small offshore sector on the island of Labuan, which is subject to the same AML laws as those governing onshore financial service providers. The financial institutions operating in Labuan include both domestic and foreign banks and insurers. Offshore companies must be established through a trust company, which is required by law to establish true beneficial owners and submit STRs.
There are issues in tax and customs duties evasion and outflow of funds through illegal remittances by money changers. Unauthorized illicit money service businesses continue to pose a significant vulnerability.
Free trade zones in Malaysia are divided into Free Industrial Zones (FIZ), where manufacturing and assembly takes place, and Free Commercial Zones (FCZ), generally for warehousing commercial stock. Currently there are 17 FIZs and 17 FCZs in Malaysia. Companies wishing to operate in a FIZ or FCZ must be licensed.
Casinos are licensed and regulated by the Ministry of Finance. Malaysia has one licensed casino, in operation for over 40 years, which the central bank, Bank Negara Malaysia, periodically assesses for compliance with the AML/CFT regulations.
Malaysia is a global leader in Islamic finance. The country’s Islamic financial sector also is subject to the same AML legal and regulatory regime as conventional finance institutions. Malaysian regulators are of the view that, based on their supervisory experience, there are no material differences in risks when compared to conventional financial institutions. Malaysia’s national risk assessment did not separately assess AML risks and vulnerabilities in the Islamic finance sector.
KEY AML LAWS AND REGULATIONS
Malaysia’s Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) covers the money laundering offense, financial intelligence, reporting obligations, investigative powers, the confiscation regime, and the cross border declaration regime. Other laws supplement AMLA, such as the Dangerous Drugs (Forfeiture of Property) Act 1988 (DDFOPA), Malaysian Anti-Corruption Commission Act 2009 (MACCA) and the Criminal Procedure Code. Malaysia’s AML regime includes comprehensive KYC and STR regulations.
Malaysia has a high degree of technical compliance with international standards on combating money laundering, but there are several remaining deficiencies. Most notably, Malaysia has not effectively targeted high-risk offenses (other than fraud) or foreign-sourced threats in its prosecution of money laundering. Malaysia has preferred to pursue other criminal justice measures, particularly confiscation, rather than money laundering prosecutions. Additionally, the sanctions imposed for money laundering have been low and have not been demonstrated to be effective.
Malaysia has committed to an action plan for improving its effectiveness in several areas, including enhancing focus on investigation and prosecution of high-risk money laundering crimes and expanding the usage of formal international cooperation to mitigate risks. The FATF granted Malaysia full membership based on the commitment demonstrated by Malaysia on the action plan and its continuing progress in efforts to improve its AML regime.
There are no international sanctions currently in force against this country.
Rating (100-Good / 0-Bad)
Transparency International Corruption Index
World Governance Indicator – Control of Corruption
INVESTMENT CLIMATE - Executive Summary (US State Department)
The Government of Malaysia in general strongly encourages foreign direct investment (FDI), although it maintains restrictions or limits on investment in some sectors. It actively reaches out to targeted industries and negotiates incentive packages to attract FDI. Malaysia provides a number of incentives, particularly in export-oriented high-tech industries and "back office" service operations. Prime Minister Najib Razak (Najib) has made generating new domestic and foreign investment a centerpiece of his economic reforms. Despite this, while FDI inflow continues to recover from the effects of the 2008-2009 global financial crises, Malaysia’s performance in attracting FDI relative to both earlier decades and the rest of the Association of Southeast Asian Nations (ASEAN) has slowed.
According to a recent Organization for Economic Cooperation and Development (OECD) Investment Policy Review of Malaysia, FDI to Malaysia began to decline in 1992, and private investment overall started to slide in 1997 following the Asian financial crises. The OECD concludes that Malaysia’s FDI levels are at record high levels in absolute terms, but at an all-time low as a percentage of GDP. Moreover, Malaysia’s percentage of foreign direct investment into the ASEAN member states is now lower than its share of the group’s GDP.
As a destination for FDI, Malaysia’s attractiveness for lower-wage manufacturing has diminished as years of steady economic growth have increased average wage levels making Malaysia an upper middle-income country. The Malaysian Government seeks to move the economy further “up the value chain” to high income status by promoting investment in higher value added manufacturing and service sectors. The National Economic Advisory Council (NEAC), a blue ribbon panel of experts on Malaysia’s economy, in 2010 issued two reports identifying shortcomings in Malaysia’s investment climate and proposing policies necessary to improve Malaysia’s competitiveness as a foreign investment destination and meet the country’s goal of becoming a high-income economy by 2020.
Since then, the Najib administration has progressively introduced a series of initiatives, including the Economic Transformation Program (ETP) in 2010, focusing on policy measures to improve competitiveness and investment in 12 key economic areas to accelerate economic growth. Another initiative, the Government Transformation Program (GTP) addresses governance and quality of life issues, and aims to reduce corruption and crime, to improve education, urban public transport and rural basic infrastructure, and to reduce the number of low-income households. The Tenth Malaysia Plan (10MP) underpins these programs and guides public sector capital expenditures. The ETP identified 12 specific sectors in which the Malaysian government is encouraging foreign and domestic investment, including: electrical & electronics; medical devices; green energy, machinery & equipment; oil and gas, and transportation equipment. Also targeted for growth are a number of resource-based industries and some services sub-sectors including logistics, although the sectors are subject to foreign investment conditions or restrictions. The ETP announced in mid-2013 that that 86% of committed investments for projects in 2011 and 2012 had been realized.
March 2015 - IMF Report: Malaysia: 2014 Article IV Consultation-Staff Report
In November 2014, Malaysia’s AML/CFT regime was subject of an on-site assessment by the Asia Pacific Group on Money Laundering (APG) under the new methodology of the Financial Action Task Force (FATF), the global standard setter for AML/CFT. LEG participated in the assessment and is contributing to the final report, which is scheduled for discussion in APG’s July 2015 Plenary. In addition, FATF admitted Malaysia as an observer country in October 2014, and is working with authorities towards meeting all requirements for full FATF membership.