Malaysia has boosted its defences against illicit finance over the past 10 years, notably by enhancing its legal framework and supervising its financial and non-financial sectors, the Financial Action Task Force ( FATF ) says.

But in a report released in Paris on December 11, the FATF says the Southeast Asian country still faces “significant challenges in translating money-laundering investigations into prosecutions and convictions”.

The findings are based on a visit by an international team to Malaysia in February to assess its anti-money laundering, countering terrorist financing, and proliferation financing ( AML/CFT/CPF ) efforts – and their compliance with FATF standards. 

Assessors found that Malaysia has “undertaken initiatives to update and deepen its understanding of illicit finance risks, as well as to strengthen domestic cooperation and coordination mechanisms”, the report says. 

Better prepared for major cases

“Malaysia was one of the first countries to be assessed in the new round of evaluations,” notes FATF president Elisa de Anda Madrazo, who is also a director general in Mexico’s ministry of finance and public credit.

She says Malaysia has shown “notable progress in strengthening its AML/CFT regime, resulting in stronger supervisory frameworks for financial institutions, robust risk understanding, and effective coordination among agencies”.   

FATF president Elisa de Anda Madrazo

De Anda notes that “substantial reforms and a strengthened legal framework have put Malaysia on a stronger footing to deal with major cases” such as the scandal over sovereign wealth fund 1 Malaysia Development Bhd ( 1MDB ) that erupted in 2015.

“Malaysia must sustain and build on these reforms and it must strengthen international cooperation, improve its sanction framework, and work at pace to demonstrate a sustained increase in money laundering prosecutions and convictions in the next three years,” she says. 

“By implementing the FATF’s standards and recommendations, countries not only safeguard the integrity of their financial system, but make people and communities safer by stemming the flows of illicit finance that sustain harmful crimes such as human trafficking, drug trafficking, corruption, and organized crime.”

According to the task force, the mutual evaluation report took more than 16 months and involved over 70 meetings with public authorities and 45 private-sector entities. These included financial institutions, virtual-asset service providers, designated non-financial businesses and professions, and non-profit organizations.

Range of risk factors

“Malaysia’s money-laundering risks stem from a range of factors, including corruption and fraud, the presence of an informal economy, rapid growth of digital finance, and the country’s strategic location as a transit hub for smuggling, human trafficking, organized crime and piracy,” the task force says.

"The country is also exposed to terrorist financing risks due to its geographic proximity to terrorist groups in neighbouring jurisdictions ...

“Malaysia has a sound understanding of its risks, with regular risk assessments, but needs to enrich its understanding in certain areas, including cross-border crimes, third-party money laundering, and trade-based money laundering.”

1MDB: ‘a significant case study’

The 1MDB scandal – which found that high-profile figures, including the country’s former prime minister Najib Razak, had misappropriated billions of dollars – was “a significant case study”.

"Malaysia has undertaken significant reforms in response to structural issues uncovered through this case,” the task force says. These include amended laws, new anti-corruption policies, laws on mutual assistance in criminal matters, and transparency in public finances and expenditure, enhancing supervision and prevention, and setting up a national centre to combat financial crime.

Efforts to trace complex flows across many jurisdictions led to the recovery of some €8 billion ( US$9.35 billion ) during the period under review – mostly 1MDB-related assets. "Malaysia reallocated resources from other money-laundering investigations to focus on the significant 1MDB case, as well as associated cases,” the task force says. “While this prioritization was critical for the investigation of this complex case and restoring public confidence, it has affected law enforcement agencies’ capacity to pursue other money laundering matters”.

Low conviction rate

Between 2019 and February this year, Malaysia convicted 67 people for money laundering, and seven for terrorist financing. While the number of terrorist financing convictions has risen since the last evaluation, Malaysia’s overall conviction rate “remains relatively low” given its risk profile.

But the assessment finds that Malaysia has a “strong understanding” of risks related to misusing corporate structures and is seeking to mitigate the misuse of legal arrangements. 

“A multi-pronged approach is used to obtain accurate and up-to-date beneficial ownership information in a timely manner,” it says. “However, further improvements are needed to ensure authorities have timely access to the critical information they need for criminal investigations.”

The assessment finds “robust domestic coordination and cooperation at the policy and operational levels, bringing together a broad range of stakeholders, including government agencies, regulatory bodies and competent authorities”.

At the same time, Malaysia has strengthened its international cooperation with a new case-management system. It has also increased its use of mutual legal assistance. “However, improvements are still needed for it to be fully utilized in investigations and prosecutions – particularly related to high-risk predicate offences such as fraud, drugs trafficking, smuggling and organized crime.”

Financial supervision

The task force finds a "robust framework” for supervising financial institutions, virtual-asset service providers, and designated non-financial businesses and professions – like lawyers, real estate agents, and accountants. 

Risk understanding is “generally sophisticated” for larger financial institutions, but less so for smaller ones as well as other businesses and professions. “While Malaysia has achieved a substantial level of effectiveness in the financial sector, major improvements are required … in other designated sectors,” it says.

According to Mitsutoshi Kajikawa, co-chair of the Asia-Pacific Group on Money Laundering – which joined the task force on its mission to Malaysia earlier this year – the report reflects much of the region’s risks. “It recognizes the scale of our challenge but also the successes we can be assured of achieving with the continuous improvement mindset exemplified by Malaysian authorities,” says Kajikawa, who is also Japan’s deputy vice minister of finance for international affairs. “We look forward to working with Malaysia to share the insights gained regarding its strengths with regional partners, build on the findings, and implement the report’s astute recommendations.”

Malaysia has received a roadmap outlining key actions to be implemented over the next three years. These include strengthening international cooperation, improving the country’s sanctions framework, and increasing prosecutions and convictions related to money laundering, the task force says.