Islamic Banks and Money Laundering in Malaysia: A Legal Compliance Perspective

• Pages: 145-170
• Published date: 26 August 2019
• DOI: https://doi.org/10.1108/978-1-78973-545-120191015
• Date: 26 August 2019
• Author: Norhashimah Mohd Yasin,Nik Nuun Asma Nik Sulaiman,Mohd Yazid Zul Kepli

Chapter 9

Islamic Banks and Money Laundering in

Malaysia: A Legal Compliance Perspective

Norhashimah Mohd Yasin, Nik Nuun Asma Nik Sulaiman and

Mohd Yazid Zul Kepli

Abstract

The Anti-Money Laundering and Counter Financing of Terrorism (AML/

CFT) Thematic Review of Banking & Insurance sectors conducted by

Bank Negara Malaysia (BNM) in 2013 indicated that oversight functions

are still inadequate in the areas of compliance, internal audit, board of

directors and senior management. The oversight functions refer to the

AML/CFT compliance programme, which nancial institutions, includ-

ing Islamic banks, are obliged to execute as a part of mitigating activities

against money laundering and terrorist nancing. The main purpose of

this chapter is to analyse whether there is any improvement in the oversight

functions at the Islamic banks in Malaysia since the release of the thematic

review report by BNM on 17 September 2014. This research is important

as penalty for non-compliance under Section 22 of the Anti-Money Laun-

dering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act

2001 (AMLATFPUAA) is severe. Section 22 of AMLATFPUAA entails

personal responsibility on the compliance ofcer of an Islamic bank and

not the reporting institution as a whole. Qualitative research method via

interview is employed to gauge the extent of Islamic banks’ adherence to

AML/CFT compliance programme. This chapter is signicant as it pro-

vides Islamic banks and future researchers with the details of the compli-

ance study as well as the current status of AML/CFT compliance pro-

gramme within the Islamic banks in Malaysia.

Keywords: Islamic banks; money laundering; compliance programme;

oversight functions; reporting institutions; nancial institutions

Emerging Issues in Islamic Finance Law and Practice in Malaysia, 145–170

Copyright © 2019 by Emerald Publishing Limited

All rights of reproduction in any form reserved

doi:10.1108/978-1-78973-545-120191015

146 Norhashimah Mohd Yasin et al.

Introduction

Money laundering does not only pose major threats to the economies of all coun-

tries, but also threatens their political stability. At the global level, the International

Monetary Fund has estimated the extent of money laundering to be between

2% and 5% of the global gross domestic product (GDP) (Money-Laundering

and Globalization, n.d.). According to the United Nations Ofce on Drugs and

Crime, this translates into 800 billion to 2 trillion US dollars in GDP (Yahaya,

2014). This underlines the seriousness of the problem and the devastating impact

it could bring to any country. For the years from 2011 to 2012, Malaysian enforce-

ment agencies investigated serious crimes to the tune of RM13.1 billion (Yahaya,

2014). This is the amount of money that has the potential of being laundered

through the Malaysian nancial system. It is also internationally recognised that

for every 10 cases, only one case gets reported (Yahaya, 2014). This arises where

crimes such as corruption are not reported as in the situation where both giver

and receiver are willing parties.

As per the Central Bank of Malaysia’s Assistant Governor’s speech at the

International Conference on Financial Crime and Terrorist Financing on

8 October 2014, the sectors that are most vulnerable and attractive to money

laundering and terrorist nancing (ML/TF) risks are the banking and money

services business in the nancial sector and casino in the non-nancial sector

(Yahaya, 2014). The factors that contribute to the vulnerabilities of these sec-

tors are the size of the institutions, high volume of transactions, high exposures

to cash-based transactions, high geographical coverage, multiple channels of

deliveries and high exposures to cross-border transactions. Besides the sectors’

vulnerabilities, the country’s economic and geographical elements also contrib-

ute to the attractiveness of money laundering risk. Integration with international

markets, cash-based economy, existence of non-bank remittance transfer, expo-

sure to international trade, high percentage of informal economy and large vol-

ume of physical movement of currency provide a means for criminals to launder

their illegal proceeds. Geographical closeness to the ‘Golden Triangle’ and within

the route of ‘Afghanistan Opium’ makes Malaysia vulnerable to drug trafcking

from these nearby countries.

Money laundering is the process whereby criminals attempt to hide and dis-

guise the true origin and ownership of the proceeds of their criminal activities.

It is a method by which the proceeds of crime are made to appear legitimate.

The launderers go all out to disguise the origins of illegally obtained money in

order to avoid prosecution, conviction and conscation of the illegally obtained

funds. Money laundering covers all methods and activities to change the identity

of illegally obtained money so that it appears to have originated from legitimate

sources. According to the case of Pendakwa Raya v. Ong Seh Seng [2010] 7 CLJ

233, the judge denes money laundering as:

[…] relatively a new form of commercial crime that had just been

codied as criminal offence. It can be categorised as a form of

white collar crime. Although apparently no physical violence