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

Pages145-170
Publication Date26 Aug 2019
DOIhttps://doi.org/10.1108/978-1-78973-545-120191015
AuthorNorhashimah 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

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