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Gaps found in Malaysia’s terror finance policies

September 22, 2015

Malaysia has made progress in countering the financing of terrorism, but still has a long way to go according to a new report from the international financial watchdog FATF. Shortcomings include a derth of prosecutions, a failure to identify specific offenses under Malaysian law such as fundraising for terrorist causes, and extreme slowness in enforcing sanctions against UN-designated terrorists. From FATF’s “Mutual Evaluation Report” (h/t El Grillo):

Malaysia has undertaken over 40 TF investigations of which 22 are ongoing, however no prosecutions have been taken forward. Malaysia successfully uses other criminal justice and administrative measures to disrupt terrorist and TF activities when a prosecution for TF is not practicable. These include various domestic terrorist plots, terror groups and foreign terrorists. Malaysia also uses these other measures to address the most relevant emerging TF risk – individuals travelling to conflict zones to participate in or advocate terrorist activity. Malaysian authorities identify and investigate different types of TF in each counter-terrorism investigation, and counter-terrorism strategies have successfully enabled Malaysia to identify and designate terrorists, terrorist organisations and terrorist support networks. In the absence of TF prosecutions, Malaysia has not demonstrated that it has sanctioned different types of TF offences, such as the collection of funds for TF, or the financing of terrorist acts or individual terrorists.

Malaysia demonstrates many of the characteristics of an effective system for targeted financial sanctions (TFS). A key area of effectiveness is in the direct implementation of TFS against UN designated persons and entities. Malaysia has also domestically listed individuals and entities pursuant to UNSCR 1373 representing a range of domestic and international terror threats. Many of the elements of the legal system and processes for implementing TFS related to UNSCRs represent a best practice for other countries. Effectiveness of TFS is supported by supervision of the FI and some DNFBP sectors, outreach and awareness raising, and government agencies checking their own databases. In absolute terms the amounts frozen under TFS are relatively small, reflecting to some extent the cash economy nature of TF in the SE Asian region and the detention of a number of Malaysian designees. Recently more freezing actions have taken place outside of the banking sector and covering property indirectly owned or controlled by designated entities.

Malaysia’s approach to preventive measures, oversight and outreach to the NPO sector has improved significantly in recent years and demonstrates many of the characteristics of an effective system. Outputs reflect targeted approaches to TF risk mitigation, with outcomes achieved to a large extent. This includes RoS and other regulators as well as the RMP.

Despite good inter-agency cooperation on PF (policy and operational), Malaysia’s technical gaps in relation to R7 are significant and major improvements are required to make the process more effective. The long delays in transposing designations made by the UN into Malaysian law undermine effectiveness. RIs have increasingly good awareness of obligations, particularly in Labuan and the major FIs. Supervision of obligations is taking place, but implementation could be deepened and further supported with additional guidance. Two Malaysian banks have frozen over USD29 million of assets related to the one Labuan domiciled Iranian bank designated under UNSCR 1737. No entities or assets related to UNSCR 1718 have been detected. Vigilance measures adopted by Malaysia add to effectiveness.

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