Journal of Money Laundering Control

Combating money laundering in Malaysia

Bala Shanmugam Haemala Thanasegaran

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Bala Shanmugam Haemala Thanasegaran, (2008),"Combating money laundering in Malaysia", Journal of
Money Laundering Control, Vol. 11 Iss 4 pp. 331 - 344
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Bala Shanmugam, Mahendhiran Nair, R. Suganthi, (2003),"Money laundering in Malaysia", Journal of
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Combating money laundering

in Malaysia

Money
laundering in
Malaysia

Bala Shanmugam and Haemala Thanasegaran

Monash University Malaysia, Bandar Sunway, Malaysia

331

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Abstract
Purpose The aim of this paper is to highlight the importance of countering the dangers posed by
money laundering activities and the measures taken to date by the Malaysian authorities in this
respect.
Design/methodology/approach The paper achieves this by looking at the current money
laundering trends in Malaysia, followed by a detailed account of the initiatives taken by the Malaysian
authorities to curb such activities. These proactive initiatives range from the enactment and
implementation of the Anti-Money Laundering (AML) Act 2001, the establishment of the Financial
Intelligence Unit of the Central Bank of Malaysia and the Southeast Asia Regional Centre for
Counter-Terrorism which work with international enforcement agencies, to the requirement of
suspicious transaction reporting amongst professional accountants and lawyers and more.
Findings Malaysia continues to make a broad and sustained effort to combat money laundering
and terrorist financing flows within its borders.
Practical implications The practical implication of this paper is to stress the importance of
keeping abreast with the increased challenges posed by money laundering, especially via the internet
and the vital need for the banking and financial sector to invest heavily in transaction monitoring
devices/software and training in AML detection, in order to tackle the menace.
Originality/value This paper makes for a useful read for practitioners, academics, policymakers
and students alike.
Keywords Money laundering, Malaysia, Regulation, Law enforcement, Terrorism, Financial reporting
Paper type Research paper

Introduction
In the aftermath of September 11, 2001, commonly referred to as 9/11, there have been
tremendous efforts globally by individual governments to curtail money laundering
activities. What is interesting to note is that the worlds biggest economy, the USA has
been 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 the
US Mafia, as a quick fix to legitimise dirty money obtained from prostitution, gambling
and extortion. The Mafia bought up and operated large numbers of legitimate
businesses to make it appear as honest cash flows.
Generally various techniques can be employed to make dirty money look clean but
it 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).

Journal of Money Laundering Control

Vol. 11 No. 4, 2008
pp. 331-344
q Emerald Group Publishing Limited
1368-5201
DOI 10.1108/13685200810910402

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332

In Malaysia, the common money laundering technique is via structured transaction. This
method also known as smurfing, involves numerous deposits of cash at various branches
of one financial institution, which is then followed with the purchase of a secured bank
instrument, 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. Widely
known as cyber payments (New Straits Times, 2002a, February), money launderers
are today able to pass currency across international borders, anonymously and
instantaneously.
Two commonly used methods are stored-value smartcards and internet-based
payment modes. In the first method, cash is used to purchase a plastic card with
purchasing value assigned to the card. Once the purchase of the card is completed, the
trail disappears. Other electronic methods include Internet gambling casinos and
fraudulent Internet businesses. The success of such methods depends on the speed and
anonymity factors associated with transactions on the Internet.
Money laundering trends
According to the Deputy Finance Minister Datuk Dr Ng Yen Yen, an international
survey suggested that banks lose 10 times more money due to such fraudulent
activities, compared to bank robberies (Business Times, 2004a,b,c, September).
However, what is most unfortunate is that the proliferation of money laundering
globally over the last ten years is partly due to the liberalisation of markets around the
world and the deregulation of exchange controls. In combination, both have opened up
many more channels for laundering dirty money and created more opportunities to
hide its origins.
In the case of Malaysia, money laundering activities, which is also considered a
white collar crime, has became a lot more sophisticated with the advent of information
and communication technology. It has increasingly become difficult for the Malaysian
police force to determine the profile of the criminals, as anyone with computer
knowledge could indulge in such crimes.
In a news report by Eddie Chua, it was stated that about RM25 million in dirty
money, 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 was
estimated that casino junket operators people who organised overseas gambling
holidays are responsible for moving about RM10 million in dirty money a week
(Malay Mail, 2002, October).
Malaysias initiatives to curb money laundering
Following the 9/11 tragedy, it became cognizant that a consolidated and concerted
effort is needed to counter money laundering, which is seen as a conduit for terrorist
financing. In that sense Malaysia has taken various measures, via appropriate money
laundering laws, and the initiation of sharing information and law-enforcement
cooperation to combat money laundering.
According to Tunku Abdul Aziz, the former chairman of Transparency International
Malaysia (www.transparency.org), Malaysian banks have a role in ensuring that our
AML laws, among the first in the developing world, are put to effective use in the
interests of sound business ethics (New Straits Times, 2002b, March).

To this end the Malaysian Central Bank (Bank Negara Malaysia BNM), in close
cooperation with the government has played a pivotal role in curbing money
laundering 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 money
laundering. Among the measures taken are:

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333
The national coordination committee (NCC) to counter money laundering
Formed in April 2000, this committee comprises of representatives from thirteen
Malaysian Ministries and law enforcement agencies, with BNM playing the principal role.
The objective of the committee is to develop and ensure the proper implementation of
measures to counter money laundering and terrorism financing, based on internationally
accepted norms, as contained in the recommendations of the Organisation for Economic
Co-operation and Development (OECD)s Financial Action Task Force (FATF) on money
laundering (www1.oecd.org/fatf/). BNM, which also acts as the secretariat to the NCC,
measures and coordinates the implementation of anti money laundering measures and
ensures that the national efforts are aligned with regional and international initiatives.
Representatives of member agencies in the NCC meet several times a year to coordinate
their concerted efforts in fighting money laundering and in counter-attacking terrorism
financing. In fact, it was the NCC that oversaw the drafting of Malaysias Anti Money
Laundering Act 2001 (AMLA). The 2003 annual report also states that each NCC member
is responsible to study and report on pertinent AML/counter financing terrorism measures
as 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 January
2002. The AMLA criminalised money laundering and lifted bank secrecy provisions for
criminal investigations involving more than 150 predicate offences. The AMLA covers the
offences 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 been
invoked in financial, as well as non-financial institutions spanning conventional, Islamic
and off-shore banking in the country. In fact, Sections 44 and 45 of the AMLA state that it
is able to freeze and seize property, when there are reasonable grounds to suspect any
gains obtained via money laundering activities.
As an added measure of commitment to AML activities, the Malaysian Parliament
passed the AMLA (Amendment) in November 2003, which was gazetted as law on
25 December 2003.
Apart from banking institutions, the amended act included several other categories of
businesses, such as insurance companies, money changers and Islamic banking
institutions in their need to report to BNM on suspicious transactions. As of December
2003, 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 foreign
enforcement agencies, receiving, analysing and sharing information and financial

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Invocation date

Type of reporting institutions

January 15, 2002

Commercial Banks
Finance Companies
Merchant Banks
Islamic Banks
Discount Houses
Offshore Banks
Offshore Insurance Companies
Offshore Trust Companies
Insurance Companies
Insurance Brokers
Takaful Operators
Money Changers
Bank Kerjasama Rakyat
Malaysia
Bank Simpanan Nasional
Lembaga Tabung Haji
Pos Malaysia Bhd Genting Casino

April 15, 2002

June 1, 2002
January 15, 2003

Table I.
Reporting institutions
under AMLA

Number of institutions
(as at December 31, 2004)
23
11
10
2
7
54
101
44
10
35
4
649
1
1
1
1
1
973

Total reporting institutions

Source: BNM (2004)

Lembaga Tabung Haji,

Pos Malaysia, Casinos,
Bank Simpanan Nasional
and Bank Rakyat

Commercial Banks,
Finance Companies,
Merchant Banks
Islamic Banks

Insurance Companies

LOFSA

Bank Negara
Malaysia
Futures Broking
Businesses

Takaful Operators

Building Credits,
Credit Tokens,
Factoring Leasing

Money Changers

Figure 1.
Reporting institutions

Securities Businesses

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

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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 Core
Principles for Effective Banking Supervision and is a member of the Offshore Group of
Banking Supervisors and the Asia/Pacific Group on Money Laundering.
Due diligence requirements
In addition to this, Malaysia has adopted due diligence or banker negligence laws that
make individual bankers responsible if their institutions launder money. Failure to report
any suspicious transaction to BNM is considered an offence under the AMLA and shall, on
conviction, be liable to a fine not exceeding RM100,000 or imprisonment for a term not
exceeding six months, or both. In order to protect the reporting institution from being used
by criminals as a vehicle to integrate or layer their illegal proceeds, the AMLA requires all
reporting institutions to place an effective compliance programme, adopting a best
practices approach. Under the AMLA, any person or group who engages in, attempts to
engage in, or abets the commission of money laundering would be subject to criminal
sanction. Reporting institutions are required to file suspicious transaction reports under the
AMLA. All reporting institutions are subject to the same review by the FIU and other law
enforcement agencies. Reporting institutions include: commercial banks, money changers,
discount houses, insurers, insurance brokers, Islamic insurance and reinsurance (takaful
and retakaful) operators, offshore banks, offshore insurers, offshore trusts, the Pilgrims
Fund (to pay for Haj trips to Mecca), Malaysias postal service, development banks such as
Malaysias National Savings Bank (Bank Simpanan Nasional), The Peoples Cooperation
Bank (Bank Kerjasama Rakyat Malaysia Berhad), and licensed casinos (Figure 1).
The customs department
In addition to the proactive judicial system, the Malaysian Customs Department has
also put the AMLA into action by identifying several companies involved in major
money laundering and smuggling.
The police force
Like the Customs Department, the Malaysian police force has also established AML
units nationwide to track the underworlds money trail. In fact, the Federal Commercial
Crimes division is planning a major expansion programme, which would include
getting additional personnel to facilitate this move, in the later part of 2005. Part of the
departments plan is to beef up the Commercial Crimes Division with an additional
1,900 personnel (NST, April 2003).
The bar council
In another effort to curb money laundering activities in the country, lawyers will have
to report any suspicious transactions. Among the suspicious transactions are large and
frequent currency exchange, use of multiple deposit accounts and activity inconsistent
with customer profile. Lawyers were entrusted with this responsibility under the
amended AMLA 2003.
The transactions under this Act include buying and selling of property, the setting
up of trusts, providing a registered office and company secretary services. To this
effect, the Malaysian Bar Council has issued a circular to its members reminding them
of their duty, following amendments to the AMLA.

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According to the Malaysian Bar Council secretary Mr Sreenevasan, it has become

mandatory for advocates and solicitors to promptly report any suspicious transactions
encountered in the course of preparing for or carrying out, transactions involving
lawyers acting as formation agents of legal entities and acting as directors or
secretaries of companies. Failure to report suspicious transactions may result in a fine
not exceeding RM100,000 or a term of imprisonment or both.
Another positive move by the Malaysian Bar Council is that it has also formed a
task force to help lawyers understand the new reporting procedures. According to the
new guidelines lawyers should become suspicious of a client or a transaction if basic
information 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 like
account nominees, selling and buying of immovable properties like houses and land,
and creating, operating or managing legal entities or arrangements like sale and
purchase agreements.
Non governmental organisations (NGOs)
Malaysia also has rules regulating charities and other non-profit entities. The Registrar
of Societies is the principal government official who supervises and controls charitable
organizations, with input from the Inland Revenue Board and occasionally the
Companies Commission. The Registrar mandates that every registered society of a
charitable nature submits its annual returns, which include financial statements.
Should the Registrar find activities he deems suspicious, he will inform the FIU of such
activities. Negotiations are currently underway to expand the scope of the AMLA
reporting institutions to include charitable organizations governed by the Registrar of
Societies. Malaysias tax law allows contributions to charitable organizations (Zakat,
as required by Islam) to be deducted from ones total tax liability, encouraging the
reporting 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 to
use its powers to take action against and penalise actual and prospective abuses of
power by directors and CEOs (ID, 2004; www.sc.com.my). Disqualification of
company directors is also provided for under section 130 of the Companies Act 1965 for
those convicted of offences involving fraud or dishonesty including facilitating money
laundering activities for a maximum period of five years. In addition, the scope of the
Securities Industry Act (SIA) has been broadened significantly with amendments to
the Act which came into effect in January 2004.
In fact, Under Section 100 of the SIA, the SC can take pre-emptive action even before
a crime is committed, against any director who is found likely to contravene any
securities laws. It is also worth noting that the SC can also seek a court order to remove
and bar that director from office, or from becoming a director of any other public or
public-listed company.
Also, the SC may now apply to the courts under section 99C(3) of the SIA to remove
a CEO or director from office where that person has been convicted of an offence under
any securities laws, or where the SC has taken civil proceedings or actions against that
person 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 removal
from office for any period that the courts deem fit.
Apart from these regulations, the SC has also stated in its web site that it would
continue to work closely with other authorities in maintaining corporate
accountability, integrity and transparency in the market. It states that where it
finds evidence of transgressions of laws, whether securities related or otherwise, such
as criminal breach of trust, tax evasion, fraudulent financial transactions, money
laundering and illegal transfer pricing mechanism, it will continue to work with fellow
regulators to ensure that national public interest is not compromised. This makes the
SC yet another body which is working towards curbing money laundering.
Foreign exchange
In 1998, Malaysia imposed foreign exchange controls that restricted the flow of the local
currency, the ringgit, from Malaysia. Onshore banks must record cross-border transfers
over RM5,000 (approximately US$1,300). Since April 2003, an individual form is
completed for each transfer above RM50,000 (approximately US$13,170). Recording
is done in a bulk register for transactions between RM5,001 and RM50,000. As far as
money changers are concerned, under the Money-Changing Act 1998 effective June 1st
2002, the 649 money changers in the country are not permitted to transmit money. The
money changers must register their businesses with the police and keep customer
identification 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 is
vulnerable to money laundering and the financing of terrorism. Accordingly, the Labuan
Offshore Financial Services Authority (LOFSA) director-general, Rosnah Omar said that
LOFSA is committed to ensuring that the integrity of the Labuan IOFC is not compromised
in any way. She believes that in the medium to long-term, LOFSA which is under the
authority of BNM, will ensure that all offshore financial institutions will formulate and
implement AML framework as required by the AMLA and the OECDs FATFs 40
recommendations (Business Times, 2004a,b,c, September and www.lofsa.gov.my).
The offshore sector has different regulations for the establishment and operation of
offshore businesses, compared to onshore businesses. However, the same AML laws as
those governing domestic financial service providers govern the offshore sector. LOFSA
licenses offshore banks, banking companies, trusts and insurance companies, and
performs stringent background checks before granting an offshore license. The financial
institutions operating in Labuan are generally among the largest international banks
and insurers. Nominee (anonymous) directors are not permitted for offshore banks,
trusts or insurance companies. Offshore companies must be established through a trust
company. Trust companies (as are required of offshore banks and insurance companies)
have to establish true beneficial owners and submit suspicious transaction reports as
necessary, under the countrys AML law. Bearer instruments likewise are prohibited in
Labuan, but there is no requirement to reveal the true identity of the beneficial owner of
international corporations. LOFSA officials may require any organization operating in
Labuan to disclose information on its beneficial owner or owners.
LOFSA works closely with 12 government enforcement agencies in order
to 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 and
non trading) in Labuan, including 53 offshore banks and investment banks, 101
offshore insurance and insurance-related companies, 30 trust companies, 15 fund
management groups, 3 money banking companies and 59 leasing companies. All these
institutions have been informed of the need to report money laundering activities.
Many of the companies established in Labuan are Japanese firms established primarily
to service Japanese companies in Malaysia. Malaysia prohibits offshore casinos and
Internet gaming sites.
Islamic finance
Malaysias fledgling Islamic finance sector, accounting for approximately 10 percent of
total deposits, is subject to the same strict supervision to combat financial crime as the
commercial banks. A combination of legacy exchange controls imposed after the
1997-1998 Asian financial crisis and robust regulation and supervision by BNM makes
the Islamic financial sector as unattractive to financial criminals as the conventional
financial sector.
The free trade zones (FTZ)
The Free Zone Act of 1990 is the enabling legislation for FTZs in Malaysia. The zones
are divided into free industrial zones (FIZ), where manufacturing and assembly takes
place, and free commercial zones (FCZ), generally for warehousing commercial stock.
The Minister of Finance may designate any suitable area as an FIZ or FCZ. Currently
there are 13 FIZs and 14 FCZs in Malaysia. The Minister of Finance may appoint any
federal, 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. The
time needed to obtain such licenses from the administrative authority for the given
FTZ 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 FCZs
are being used for trade-based money laundering schemes or by the financiers of
terrorism. However, the Malaysian government considers these zones as areas outside
the country and receive more lenient tax and customs treatment relative to the rest
of the country. As such, the FTZs are vulnerable to money laundering.
International cooperation
Malaysia cooperates with regional, multilateral, and international partners to combat
financial crimes and permits foreign countries to check the operations of their banks
branches. Despite the absence of legislation criminalizing terrorist financing, the
Malaysian government has cooperated closely with US law enforcement agencies in
investigating terrorist-related cases since the signing of a joint declaration to combat
international terrorism with the USA in May 2002. The Malaysian government
currently has the authority to identify, freeze terrorist or terrorist-related assets and
has issued orders to all licensed financial institutions, both onshore and offshore, to
freeze the assets of individuals and entities listed by the UN Security Council
Resolution 1267. As evidence of its willingness to cooperate internationally in the
global effort to thwart terrorism, the Ministry of Foreign Affairs, in conjunction with
Malaysias AML unit within BNM, opened the Southeast Asia Regional Centre for
Counter-Terrorism (SEARCCT) in August 2003.

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The KPMG survey

While these initiatives may be regarded as commendable, a consulting firm, KPMG
International in a 2004 survey maintained that Malaysia still has some way to go in
achieving 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 challenge
for policymakers and law enforcement agencies was to engage the banking industry
more effectively, give banks evidence that their efforts are leading to higher detection
rates and prevent the industry from being used by criminals.
The same KPMG Survey also observed that most banks were expecting spending
relating to money laundering controls, to rise by more than 40 percent over the next
three years. This does indicate that much remains to be done to enhance AML systems
and controls, and the Malaysian banking system needs to buck up.
The KPMG Survey also shows that banks across the world are putting more money
into AML systems and meeting compliance requirements more than ever before. Of the
209 financial services institutions interviewed about their spending over the last three
years, 83 percent have stated they have invested, on average by 61 percent more in
AML systems in the last three years since September 11, 2001.
The KPMG Survey further adds that the main driver behind the past and projected
increase in spending is transaction monitoring. Banks are steadily increasing the
sophistication of their monitoring methodology, with over 40 percent of respondents
having already implemented externally developed automated monitoring software.
While many banks continue to rely on staff vigilance and exception reports, majority
are planning to implement more sophisticated IT systems.
Training in AML detection is the second biggest contributing factor to increased
spending, with banks showing a strong preference for face-to-face training rather than
computer-based training. No doubt the KPMG Survey says increased regulation and
fears over financing of terrorist groups have undoubtedly boosted investment in AML
measures. In this regard, the banks have rightly identified transaction monitoring and
training as key areas for investment.
As reported by Zamani (Business Times, 2004a,b,c, September), Deputy Governor of
BNM, the NCC in line with the KPMG Surveys findings has continued to play a significant
role in ensuring continuous enhancement of the national AML and counter financing of
terrorism (CFT) programme, within an effective regulatory and supervisory framework.
Case studies
The AMLA was finally tested in April 2004 when the Malaysian Sessions Court
allowed an application by the prosecution to jointly prosecute a woman doctor on
eight charges of money laundering. Dr Hamimah Idruss, 55 made history to become the
first 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 through
the account of Megabridge Sdn. Bhd. at an OCBC Bank branch in Damansara Utama
on June 10, 2003. The offence, under Section 4(1) of the AMLA 2001, is punishable by a
fine of up to RM5 million, or up to five years imprisonment or both.
In December last year, Dr Hamimah was again slapped with ten new
charges of abetment at the Sessions Court, bringing the total number of charges to
18 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 of
Safire Pharmaceuticals (M) Sdn. Bhd. worth RM45.6 million. The offences were alleged
to 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 together
with Section 468 of the same Act, she is liable to a maximum of seven years
imprisonment or a fine or both, upon conviction.
Apart from Dr Hamimah, the second person charged under AMLA 2001 was in
February this year. According to the facts of the case, a former freelance land broker
was charged in the Sessions Court with money laundering involving RM2 million.
Gan Kiat Bend, 47 of Sungai Jeram in Jenjarom, Selangor, pleaded not guilty to
receiving the money, allegedly proceeds from illegal activities, in a Standard Chartered
Bank cheque from an account belonging to one Syed Ahmad Faudzi Syed Abu Bakar,
35. The offence was allegedly committed at Standard Chartered Bank Malaysia Bhd
at 2, Jalan Ampang on January 9, 2004. The Malaysian government is currently
prosecuting 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 legislation
that provides for information exchange and is a party to a number of arrangements to
enhance cooperation in AML and CFT. Some of the measures undertaken include:
Terrorist financing
The Malaysian banking system operates under a strict regulatory and supervisory
framework to make sure the system is not open to abuse by terrorists and not used as a
centre for terrorist financing. On that note, the LOFSA has issued circulars in line with
the United Nations Security Council Resolution and the Controller of Foreign Exchange
(Controller) under Section 44(1) of the Exchange Control Act 1953, directing all licensed
financial institutions to freeze the funds and financial resources belonging to Osama
bin Laden, the Al-Qaida and the Taliban and individuals associated with them.
Anti-terrorist laws
In order for Malaysia to accede to the 1999 United Nations Convention for the
Suppression of the Financing of Terrorism, new legislative provisions were proposed
for 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 the
Courts of Judicature Act in November 2003. The Criminal Procedure code is the last
major piece of domestic legislation that needs an amendment before it can be
incorporated into domestic law.
The changes to the AMLA incorporated new definitions of terrorist property and
terrorist financing offence. These provisions provide the mechanism to report
suspicious activities, including suspected terrorism financing activities, measures for

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the detection and prevention of terrorism financing and the freezing, seizing and
forfeiting of terrorist property, as a new part of Part IVA of the AMLA 2001. The
amendments to the AMLA will make the financing of terrorism one of the 168 predicate
offences for which money laundering can be charged as a crime but additional review
mandated by Parliament has delayed the amendments entry into force.
A Select Committee is currently reviewing proposed changes to The Criminal
Procedure Code. When implemented, the amendments will increase penalties for
terrorist acts, allow for the forfeiture of terrorist-related assets, allow for the prosecution
of individuals who provide material support for terrorists, expand the use of wiretaps
and other surveillance of terrorist suspects, and permit video testimony in terrorist
cases. Enactment of the amendment will enable the Malaysian government to accede to
the 1999 UN Convention for the Suppression of the Financing of Terrorism. In addition,
the Cabinet has approved, as policy, the ratification of all remaining counterterrorist
conventions. In this respect, Malaysia is also a party to the 1988 UN Drug Convention.
Suspicious transaction reporting
In fact Section 14(b) of the AMLA specifically sets the statutory obligations for
financial and non-financial institutional officers and employees to report any
suspicious transactions. This section of AMLA states that should there be reason to
suspect any transaction as being related directly or indirectly to any serious offence or
foreign serious offence the reporting institution has to file a suspicious transaction
report with the FIU at BNM. As mentioned earlier, there are more than 150 predicate
offences listed under the Second Schedule of the AMLA.
What constitutes suspicious transaction is a matter of judgement for the reporting
institution. In order to find out transactions that may involve proceeds of illegal
activities, the reporting institutions must know their clients or customers well.
Knowing the customer or client involves verification of identity, keeping records and
ongoing monitoring of the transactions. Usually, the suspicion can arise when the
transaction conducted does not match the customer profile, is of unusually large value
or does not make economic sense.
In adopting a best practices approach, the AMLA requires all reporting institutions
to conduct customer due diligence to ensure that there should not be any fictitious nor
anonymous accounts/transactions being conducted with any persons. Therefore, the
reporting institution has to establish an appropriate Know Your Customer Policy
(KYC). Essentially, KYC includes:
.
Obtaining proper identification of customers and beneficial owners via
identification cards, passports or incorporation documents.
.
Ascertaining basic background of the customers such as occupation,
employment history, intended business of the company or ownership and
control structure of the company.
.
For customers who are politically exposed persons, the AMLA requires financial
institutions to obtain senior management approval to establish customer
relationship and the source of wealth.
All transactions regardless of their size are recorded, and such records need to be kept
for a minimum of six years. Failing this KYC acid test, financial institutions should
not 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 indicate
that they receive regular reports from institutions, but cannot divulge the volume or
frequency of such reports. Reporting individuals and their institutions are protected by
statute with respect to their cooperation with law enforcement agencies. While
Malaysias bank secrecy laws prevent general access of financial information, those
secrecy provisions are waived in the case of money laundering investigations under
the AMLA.
Training initiatives
As mentioned earlier in this paper, Malaysia recognises the importance of making sure
the personnel involved in the fight against money laundering in financial institutions
are equipped with the necessary skill and expertise. To this end, continual training
programmes are conducted, which include AML/CFT awareness, policy formulation,
investigative skills, forensic accounting, analysis of suspicious transactions, mutual
legal assistance for criminal matters and asset forfeiture.
Conclusion
Malaysia is not a regional centre for money laundering. However, its formal and
informal financial sectors are vulnerable to abuse by narcotic traffickers, financiers of
terrorism and criminal elements in general. Malaysias relatively relaxed customs
inspection at ports of entry and FTZs, its uneven enforcement of intellectual property
rights, and its offshore financial services centre serve to increase its vulnerability.
To circumvent this, Malaysia has been progressively constructing a comprehensive
AML regime, beginning with the establishment of the NCC in 2000. The NCC in turn
oversaw the drafting of the AMLA, which came into effect in January 2002 along with
the establishment of the FIU. Malaysias FIU was admitted as a member of the Egmont
Group of FIUs in July 2003, and it has MOUs with several other countries. The Mutual
Assistance 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 of
Judicature Act. The SEARCCT was in turn opened in August 2003.
Transactions are not processed if the KYC guidelines set by the AMLA reveal
irregularities, and a report needs to be lodged. By virtue of the due diligence or
banker negligence laws, individual bankers are held responsible if their institutions
are involved in money laundering. Professional societies for lawyers and accountants
have added suspicious transaction reporting requirements to their bylaws. Likewise, in
consultation with the SC, stockbrokers and brokerage houses are now required to
submit suspicious transaction reports. Meanwhile, the LOFSA ensures that the
integrity of the IOFC is not compromised. Thus, far, there has been no information
implicating the 27 FTZs, in money laundering activities or terrorism financing.
The Malaysian government has a well-developed regulatory framework, including
licensing and background checks, to oversee all financial institutions. These robust
regulations and the supervisory framework, within which they operate, have thus far
made both the conventional and Islamic financial sectors unattractive to financial
criminals. BNMs stringent guidelines require customer identification and verification,
financial record keeping, and suspicious activity reporting. These guidelines are
intended to require banking institutions to determine the true identities of customers
opening 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 supervisory

framework has been implemented to audit financial institutions compliance with the
AMLA. Currently, there are 300 examiners who are responsible for money laundering
inspections for both onshore and offshore banks.
It comes as no surprise then, that Malaysia has been praised for its concerted efforts in
reducing money laundering. International bodies such as the Asia/Pacific Group on
Money Laundering and the International Monetary Fund have viewed Malaysias AML
initiatives as positive and proactive (MIA, 2004, October). The detailed regulations for
examining money laundering are however, still in the development stages for all segments
of the financial industry. By using a consultative approach, BNMs FIU continues to
expand the scope of institutions which must report suspicious transactions. This approach
has encouraged Malaysias professional societies for lawyers and accountants to add
suspicious transaction reporting requirements to their bylaws. Likewise, in consultation
with the SC, stockbrokers and brokerage houses are now required to submit suspicious
transaction 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 to
combat money laundering and terrorist financing flows within its borders. For all
entities such as trust companies and International Business Companies (IBCs),
Malaysia should insist on fit and proper tests for all management, and identification
of all beneficial owners. Malaysia should also insist on the registration of trusts and of
the beneficial owners of the 4,000 IBCs. There should be stringent auditing and
examination requirements of its offshore financial centre, to prevent the misuse of the
offshore financial centre by organized crime and terrorist organizations. Customs
regulations and inspections should be strengthened, particularly in the FTZs. Malaysia
is a signatory to the UN Convention against Transnational Organized Crime, which
came into force in September 2003. Malaysia should ratify that Convention in order to
give it any effect. The Malaysian Parliament has enacted terrorist financing legislation
in 2005 and in keeping with this the Malaysian government should accede to and ratify
the UN International Convention for the Suppression of the Financing of Terrorism and
all other terrorist-related UN Conventions.
Note
1. 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 the
Penal 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 of
Money 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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