World Academy of Science, Engineering and Technology

International Journal of Mechanical and Industrial Engineering

Vol:7, No:6, 2013

Combating Money Laundering in the Banking

Industry: Malaysian Experience
Aspalella A. Rahman

due to the complexity and confidentiality of the banking

Abstract—Money laundering has been described by many as the system itself. The Bank of Credit and Commerce International
lifeblood of crime and is a major threat to the economic and social (BCCI) collapse in 1991, the Citibank and Bank of New York
well-being of societies. It has been recognized that the banking scandals in 1999 and the Riggs Bank scandal in 2002 have
system has long been the central element of money laundering. This
exposed the danger posed by money laundering to the banking
is in part due to the complexity and confidentiality of the banking
system itself. It is generally accepted that effective anti-money system. As such, many of the efforts to combat money
laundering (AML) measures adopted by banks will make it tougher laundering have concentrated on the procedures adopted by
for criminals to get their ‘dirty money’ into the financial system. In banks and financial institutions. It is submitted that effective
fact, for law enforcement agencies, banks are considered to be an AML regime within the banking sector can make a significant
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important source of valuable information for the detection of money contribution to the fight against money laundering [2]. More
laundering. However, from the banks’ perspective, the main reason
importantly, combating money laundering is not just a matter
for their existence is to make as much profits as possible. Hence their
cultural and commercial interests are totally distinct from that of the of fighting crime but also preserving the integrity of the
law enforcement authorities. Undoubtedly, AML laws create a major banking industry from being abused by money launderers.
dilemma for banks as they produce a significant shift in the way In recent years many countries have implemented laws to
banks interact with their customers. Furthermore, the implementation fight against money laundering and Malaysia is no exception.
of the laws not only creates significant compliance problems for Malaysia passed the Anti-Money Laundering and Anti-
banks, but also has the potential to adversely affect the operations of Terrorism Financing Act (AMLATFA) in 2001. AMLATFA
banks. As such, it is legitimate to ask whether these laws are effective
in preventing money launderers from using banks, or whether they is implemented by multi-law enforcement authorities led by
simply put an unreasonable burden on banks and their customers. the Central Bank of Malaysia i.e. Bank Negara Malaysia
This paper attempts to address these issues and analyze them against (BNM). As at July 2010, 94 money laundering cases are in
the background of the Malaysian AML laws. It must be said that various stages of prosecution in Malaysia with more than 3000
effective coordination between AML regulator and the banking charges involving proceeds amounting to RM1.2 billion [3].
industry is vital to minimize problems faced by the banks and thereby
AMLATFA criminalizes money laundering and requires
to ensure effective implementation of the laws in combating money
laundering. banks to put in place proper identifying, recording and
reporting procedures; appoint money laundering reporting
Keywords—Banking Industry, Bank Negara Money, Laundering, officer; make staff aware of the AML laws and provide proper
Malaysia. training.
It is generally accepted that banks are considered to be an
I. INTRODUCTION important source of valuable information for the detection of
money laundering. However, from the banks’ perspective, the
M ONEY laundering is not a new phenomenon and has
existed for centuries. It is the process by which
criminals try to disguise the true origins of the proceeds of
main reason for their existence is to make as much profits as
possible. Hence, their cultural and commercial interests are
totally distinct from that of the law enforcement authorities.
crimes. In Malaysia, money laundering is considered a
Undoubtedly, AML laws create a major dilemma for banks as
relatively new form of commercial crime that had just been
they produce a significant shift in the way banks interact with
codified as criminal offence. It can also be categorized as a
their customers. Furthermore, the implementation of the laws
form of white collar crime [1]. Although apparently no
not only creates significant compliance problems for banks,
physical violence would be normally associated with the
but also has the potential to adversely affect the operations of
perpetration of money laundering, if left unchecked, it can
the banks. It appears that failure to comply with the laws
pose devastating economic, social and political consequences
prevents banks from functioning properly. This paper attempts
for countries, especially for the developing countries and those
to address these issues and analyze them against the
countries with fragile financial systems.
background of the Malaysian AML laws.
It has been recognized that the banking system has long
been the central element of money laundering. This is in part
II. REPORTING OBLIGATIONS UNDER AMLATFA
This section will focus on the key reporting obligations
Dr. Aspalella A. Rahman is with the currently a Senior Lecturer at the
School of Law, College of Law, Government and International Studies
imposed by AMLATFA on the banking industry. These
Universiti Utara Malaysia (email: [email protected]). obligations include the obligation to report cash and

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 World Academy of Science, Engineering and Technology
International Journal of Mechanical and Industrial Engineering
Vol:7, No:6, 2013

suspicious transactions, identify and verify customers, keep the person must think there is a possibility, more than merely
records and establish AML compliance program. They have fanciful, that the relevant facts exist, and this suspicion must
been applied to the banking industry since 15 January 2002. In be of a settled nature.
November 2006, BNM as the Malaysian AML regulator, It must be noted that unclear reasons for suspicion is among
issued two sets of guidelines, namely Standard Guidelines on the main problems faced by the banking industry in
Anti-Money Laundering and Counter Financing of Terrorism implementing the STR. FIU provides examples of suspicious
(Standard Guidelines) and Sectoral Guidelines 1 for Banking transactions in the AML Guidelines, for example transactions
and Financial Institutions (Sectoral Guidelines). These conducted are out of character with the usual conduct or
Guidelines are in line with the international anti-money profile of customers carrying out such transactions. However,
laundering standards issued by the Financial Action Task since a suspicion is a subjective fact, it can be said that
Force (FATF). FATF is the global standard-setter for identifying suspicious transaction is not an easy task. Even if
measures to combat money laundering, terrorist financing, and more examples were given, it is doubtful whether they can
the financing of proliferation of weapons of mass destruction. cover the entire range of suspicious transaction.
It is an inter-governmental body with 36 members and with It is critical to have sufficiently clear examples of
the participation of over 180 countries through a global suspicious transactions to enable the banks to comply with the
network of FATF-style regional bodies. STR requirement effectively. It must be borne in mind that an
In fulfilling their obligations under AMLATFA, banks and ineffective STR regime will lead to mistaken reporting and
their officials are protected by various immunities. For defensive reporting. This would result in a flood of reporting
example, section 20 overrides any obligation as to secrecy or and resources spent on irrelevant files may jeopardize the
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other restriction on the disclosure of information imposed by effectiveness of the STR regime.
written law. In addition to this, section 24 confers protection Furthermore, while the STR regime is considered the key to
from civil, criminal and disciplinary proceedings in relation to detecting money laundering, the effectiveness of the system is
the disclosure of information in a suspicious transaction report still uncertain. According to Levi, the STR system could only
or in connection with such report, whether at the time the be targeting the most unsophisticated cases of laundering but
report is made or afterwards, except where the disclosure was failed to lead to the conviction of sophisticated money
done in bad faith. launderers [5]. In the United Kingdom (UK), for example, it
Section 14 of AMLATFA requires the banks to submit two was found that only eleven percent of STRs contributed to a
types of reports. The first type of report is the Cash criminal justice outcome in the UK and therefore, the regime
Transaction Report (CTR). CTR reporting is designed to still need to be improved [6]. Indeed, this may explain why
expose the laundering process at its most vulnerable ‘choke’ there is no significant relationship between the volume of
points, that is, the points when cash enters the financial system STRs and the reduction in criminal activities.
and when it is transferred between financial intermediaries. AMLATFA also imposes obligations on the banks to
Under section 14(a) banks must report to the Financial identify and verify customers. Section 16(1) requires the banks
Intelligence Unit (FIU) any transaction that exceeds the to maintain accounts in the name of accounts holders and
specified threshold amount. FIU is the competent authority prohibits the opening of anonymous accounts or accounts
established by the Central Bank of Malaysia and it also acts as which are in a fictitious, false or incorrect name. Sub-section
the national AML regulator. The FIU set the specified (2) requires the banks to verify the identity of the account
threshold amount at RM50,000 per day. By virtue of section holder, the identity of the person in whose name the
13(4), banks are required to aggregate multiple cash transaction is conducted as well as the identity of the
transactions in a day that exceed the threshold amount as a beneficiary of the transaction, and to include the details in a
single transaction if they are undertaken by, or on behalf of, record.
one person. This is aimed at eradicating ‘smurfing’ or Section 5(1) of the Anti-Money Laundering and Anti-
‘structuring’ activities. ‘Smurfing’ is a typical money Terrorism Financing (Reporting Obligations) Regulations
laundering technique used by criminals to avoid detection and 2007 (AMLATF Regulations) specifies that customer due
it involves breaking large cash transactions into smaller diligence measures must be conducted when there is a
transactions so that they fall below the CTR threshold. suspicion of money laundering or when there is a doubt about
The second type of report that banks have to submit is the the veracity or adequacy of information on the identity of the
Suspicious Transactions Report (STR). STR refers to a piece account holder which it has obtained previously. Furthermore,
of information which alerts law enforcement that certain section 5(2) (b) of the AMLATF Regulations requires the
activity is in some way suspicious and might indicate money banks to identify and verify the identity of the beneficial
laundering [4]. Under section 14(b), a STR should be made owner of its customer. It must be noted that customer
when the identity of the persons involved, the transaction identification and verification requirements provide banks
itself, or any other circumstances concerning the transaction, with important protection against the serious financial costs
gives rise to suspicion. Here, the suspicious transaction does that can follow from imprudent operation [7].
not have to be in form of cash and it applies to any amount of This view has been proven correct when it was reported in
money. ‘Suspicion’ is not defined under AMLATFA. In K Ltd 2006 that failure to identify and verify a customer can result in
v Natwest Bank [2006] EWCA Civ 1039, the Court held that the dismissal of staff by a bank. This can be seen in the

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International Journal of Mechanical and Industrial Engineering
Vol:7, No:6, 2013

Industrial Court case of Southern Bank Berhad v. Yahya Talib Additionally, AMLATFA requires banks to develop audit
(Award No. 1692 of 2006 [Case No: 4/4-626/05] 25 functions to evaluate policies, procedures and controls to test
September 2006). The claimant was dismissed from his compliance with the measures taken by banks and the
service when he failed to comply with the requirement of the effectiveness of the measures in combating money laundering
Know Your Customer Policy introduced by BNM as part of activities. The board of directors is responsible for ensuring
AML obligations. The court held that the claimant has been independent audit of the internal AML measures to determine
careless and acted perfunctory in introducing a prospective their effectiveness and compliance with the AML laws (para
customer. He should have known the responsibilities that were 10.5.1 Standard Guidelines).
attached when one introduces a customer to the bank in It is clear that the AML laws emphasize good corporate
particular the requirement that they had to know the customer governance and senior management accountability. An
and be able to vouch for their integrity. empirical study of factors affecting money laundering in 88
Sections 13 and 17 set out various record keeping developed and developing countries has shown that an
requirements. Section 13(1) of AMLATFA requires banks to efficient AML framework with good governance lower the
keep a record of any transaction involving domestic currency, pervasiveness of money laundering activities [10].
or any foreign currency, exceeding the amount specified by In fact, the failure of AML systems is often symptomatic of
BNM. Under section 17(1), banks are obliged to maintain all overall weaknesses in a bank’s corporate governance
records for a period of not less than six years from the date an framework as such systems cannot be expected to operate in
account has been closed or the transaction has been completed isolation [11]. Clearly, effective AML measures significantly
or terminated. It appears that banks are now required to record impact on the efficiency of a bank’s corporate governance
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more information than they previously had to in order to which is considered a key element in ensuring that the bank is
comply with AMLATFA. Customer records must contain operated in a safe and sound manner. At the end of the day
sufficient information to allow reconstruction of individual this is the duty that the bank’s officials and board of directors
transactions. This might in turn require changes to the banks’ owe to their stakeholders.
existing file management and archiving arrangements. It is submitted that the AML measures imposed on the
To ensure compliance with the reporting obligations under Malaysian banks are subject to continuous change and
AMLATFA, banks have to establish a compliance program. development. As a result of the increased regulatory
The compliance program must: requirements, banks have to adopt new procedures to detect
• Establish procedures to ensure high standards of integrity and deter money laundering which is not only time-consuming
of its employees and a system to evaluate the personal, but also very costly. Although there are no statistics on how
employment and financial history of the employees; much have been spent by Malaysian banks in complying with
• Establish on-going employee training programs and their AML obligations, it appears that the amount could be
instruct employees on their responsibilities; and very significant judging from the amounts spent by banks
• Develop an independent audit function to check and test overseas. For example, a recent study estimated that the UK
the effectiveness of the compliance program (s19(2) and the US banks have spent more than 100 million pounds
AMLATFA). and 600 million pounds respectively for AML compliance
The issue concerning compliance program is the lack of [12].
AML training given to the staff. For example, the empirical It seems that the benefits of the AML laws may not always
evidence suggests that there is a serious deficiency of training be clear to individual institutions because potential AML
programs conducted by the UK and Australian banks. In the benefits tend to benefit a country as a whole rather than to
UK, 13 percent of respondents admitted they had not received individual institutions [13]. The benefits include an improved
any training in money laundering identification or prevention. reputation as a fair and law abiding place to do business and
A further 20 percent had received very poor or unsatisfactory improved competitive conditions arising from the reduction of
training [8]. In Australia, only 32.2 percent of respondents had illegal and fraudulent behavior.
received anti-money laundering training. The survey also
suggested that training sessions typically were short and not III. NON-COMPLIANCE WITH THE AML LAWS
up-to-date [9]. If the experience of the UK and Australian AMLATFA provides various penalties for non-compliance
banks is anything to go by, there is a strong likelihood that with the AML obligations set out under AMLATFA, its
Malaysian banks are no better than their overseas counterparts regulations and the relevant guidelines. Section 22(1) of
in respect of training programs. Given the complex and AMLATFA requires the banks’ management to take all
sophisticated nature of money laundering, this deficiency reasonable steps to ensure compliance with the reporting
needs to be overcome. obligation under Part IV of AMLATFA. Sub-section (2)
Furthermore, AMLATFA also requires banks to designate a empowers FIU to obtain an order from the High Court against
compliance officer, at management level in each branch and any or all of the officers or employees of the banks on terms
subsidiary to report suspicious transactions to FIU (s19(4) that the Court deems necessary to enforce compliance.
AMLATFA). The compliance officer is responsible for taking It is interesting to note that notwithstanding any Court
all reasonable steps to ensure that the banks comply with their order, FIU may direct or enter into an agreement with the
reporting obligations under AMLATFA (s22(1) AMLATFA). banks to implement any action plan to ensure compliance with

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International Journal of Mechanical and Industrial Engineering
Vol:7, No:6, 2013

Part IV of AMLATFA. This may suggest that the Malaysian IV. CONCLUSION
government believes that a coordinated approach between the The past few years have seen a fundamental change in the
law enforcement authorities and the banks will result in legal and regulatory environment relating to anti-money
effective implementation of the AML laws. This is welcome laundering measures in Malaysia. With the implementation of
especially in view of the complex nature of the AML AML laws, Malaysian banks have found themselves having to
measures and the compliance burden faced by the regulated comply with an increasing number of regulations and
institutions. guidelines. More importantly, the laws have put legal and
Section 22 (4) of AMLATFA explicitly provides that failure administrative burdens on banks which are onerous and may
of an officer to take reasonable steps to ensure compliance involve serious legal and other liabilities for deficient
with Part IV of AMLATFA, or failure of the bank to compliance.
implement any urgent action plan to ensure compliance, will It is believed that Malaysian banks have spent considerable
result in the officer or officers being personally liable to a fine sums of money on AML compliance. Given the increased
not exceeding RM100, 000 or to imprisonment for a term not costs incurred by banks, it is likely to see these costs being
exceeding six months or to both. In the case of continuing passed along to the customers. Unfortunately, it is still unclear
offence, a further fine may be imposed on the banks not at this stage whether the benefits of AML compliance
exceeding RM1,000 for each day during which the offence outweigh its cost.
continues after conviction. It is undeniable finding a right balance between the benefits
To make matters worse, section 21(2) of AMLATFA of the AML laws and the costs to the banks and their
provides that upon the recommendation of FIU, BNM may
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customers is not easy. However, it must be borne in mind that

revoke or suspend the bank’s licence if it has been convicted failure to find the right balance will not only create significant
under AMLATFA. Clearly, this is a very serious matter and compliance problems for the banks, but also has the potential
banks cannot turn a blind eye to the AML obligations. to adversely affect the stability, competitive and proper
Section 86 of AMLATFA provides a general penalty for function of the commercial system. Indeed, it is unreasonable
non-compliance with any provisions of AMLATFA or if the toughness of the laws seems to fall on the law abiding
regulations made under AMLATFA, or any specification or and conscientious banks and their customers rather than on the
requirement made, or any order in writing, direction, criminals. As such, effective coordination between AML
instruction, or notice given, or any limit, term, condition or regulator and the banking industry is vital to minimize
restriction imposed, in the exercise of any power conferred problems faced by the banks and thereby to ensure effective
pursuant to any provision of AMLATFA. Upon conviction, a implementation of the laws in combating money laundering.
person shall be liable to a fine not exceeding RM250,000.
Section 92 of AMLATFA further empowers BNM to REFERENCES
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[12] Mark Yeandle et al, Anti-Money Laundering Requrements: Costs,

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