Malaysia Scenesetter for A/S O'Brien: Financial Controls

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TREASURY FOR OBRIEN, FERNANDEZ AND POLITZER
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STATE FOR FEDERAL RESERVE AND EXIMBANK
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E.O. 12958: N/A
TAGS: ETTC ECON EFIN KNNP MNUC PARM UNSC IR MY
SUBJECT: Malaysia Scenesetter for A/S O'Brien: Financial Controls

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1. SUMMARY: Prime Minister Abdullah's ruling Barisan Nasional (BN)
coalition retained power in the March 8 election, but suffered a
major setback in the face of unprecedented opposition gains.
Malaysia remains an important partner for the U.S. with strong trade
and investment ties and close military-to-military cooperation. The
Government of Malaysia (GOM) respects decisions by the UN Security
Council, but Malaysia otherwise opposes use of sanctions as a means
of diplomacy. The GOM maintains friendly relations with Iran
including a burgeoning commercial relationship. In February 2007, a
Mutual Evaluation of Malaysia by the Financial Action Task Force
Asia Pacific Group identified one area of non-compliance with its 40
Plus 9 recommendations: cash smuggling. The GOM has established a
task force to improve its cash smuggling detection and interdiction
framework. Charities are regulated by the Registrar of Societies and
the Companies Commission of Malaysia. Islamic charitable
contributions ("zakat") are tax deductible if paid into a
government-operated clearinghouse, which helps guard against
charities abuse. END SUMMARY.

POLITICAL SCENE


2. National elections were held on March 8, 2008. Despite winning
the election and forming the new government, the Barisan Nasional
(BN) coalition, which in various forms has ruled Malaysia since the
country's independence from Great Britain in 1957, suffered from its
worst performance since the 1969 elections. In an unprecedented
swing of support for the opposition, Barisan Nasional lost control
of four state governments (five are now in opposition hands) and
lost nearly 30% of its seats in Parliament. Malaysia's new
political landscape features a strong opposition in Parliament,
significant opposition influence in the states on the Peninsula, and
a resurgence of influence by the nation's hereditary rulers. Prime
Minister Abdullah faces a ground swell of dissatisfaction even
within his own party and, should he hope to weather the storm, will
be expected to exercise leadership in areas of judicial reform,
public safety, improved racial relations, good governance, and
anti-corruption, as well as address core economic issues such as
inflation and job creation.

A STRONG SECURITY PARTNER


3. Malaysian leaders have taken a strong stance against terrorism
within its borders and the U.S. is working closely with the
Government of Malaysia (GOM) to fight this global scourge. Malaysia
is a signatory to the International Atomic Energy Agency Additional
Protocol and has sent observers to Proliferation Security Initiative
exercises. The U.S. and Malaysia also share a strong
military-to-military relationship with numerous exchanges, training,
joint exercises, and visits. Although we are not treaty allies, the
U.S. and Malaysia collaborate closely in the areas of mil-to-mil
relations and counterterrorism.

MALAYSIA - IRAN RELATIONS


4. Malaysia maintains friendly relations with Iran, including a
burgeoning commercial relationship. Malaysia has lent rhetorical
support to Iran's right to develop "peaceful" nuclear technology but
also maintains that it will respect UN decisions on Iran, including
sanctions regimes. Nevertheless, Malaysia has not yet submitted
its report to the UN on implementation of UNSC 1737 and 1747
sanctions. The U.S. sanctioned one Malaysian freight forwarder
under the Iran Non-Proliferation Act for its role in shipping
proscribed materials to Iran. Another Malaysian company reportedly
has signed an agreement for a multi-billion dollar investment to
develop two large natural gas fields in Iran and has inked a joint
venture to build an oil refinery in Malaysia with 30 percent
financing from the National Iranian Oil Company. Iran is expected
to be the primary supplier of crude for this refinery as well as a
buyer of refined products.

ECONOMIC TIES


5. The Malaysian and U.S. economies are closely linked with strong
trade and investment ties, with large U.S. investments in Malaysia's
energy, electrical and electronic, and manufacturing sectors. The
U.S. launched free trade negotiations with Malaysia in mid-2006.


FATF/APG MUTUAL EVALUATION OF MALAYSIA


6. The Government of Malaysia (GOM) has a well-developed Anti-Money

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Laundering/Counter Terrorist Financing (AML/CTF) framework. AML/CTF
is governed by the Anti-Money Laundering Act (AMLA),adopted in 2001
and amended in March 2007. In February 2007, the Financial Action
Task Force Asia Pacific Group (FATF/APG) conducted its second Mutual
Evaluation on Malaysia. Malaysia received ratings of "compliant" or
"largely compliant" on 33 of the 49 FATF Recommendations, 15 ratings
of "partially compliant;" and one rating of "non-compliant" with
Special Recommendation on Terrorist Financing IX on cash couriers.
This largely successful outcome can be attributed to the hard work
of the Financial Intelligence Unit (FIU) under the leadership of
Jeremy Lee who became its head in September 2006.

NEXT STEPS ON CASH COURIERS


7. Subsequent to the mutual evaluation, the GOM established a task
force to formulate action plans to achieve full compliance with
Special Recommendation IX. Malaysia's relatively lax customs
inspection at ports of entry and its extensive coastlines,
particularly along the east coast of Sabah in Borneo, serve to
increase its vulnerability to smuggling, including cash smuggling.
The Task Force is chaired by the FIU and includes the Royal
Malaysian Customs, Immigration Department, and Ministry of Internal
Security. In April the U.S. and Australia will co-sponsor ten
Malaysian officials to participate in training to combat bulk cash
smuggling. Participants will come from the central bank, the
police, and customs.


REPORTING THRESHOLDS AND "KNOW YOUR CUSTOMER" RULES


8. Malaysia's financial institutions have strict "know your
customer" rules under the AMLA. Every transaction, regardless of its
size, is recorded. Cash transactions over RM 50,000 (approx. USD
14,900) are reported to the FIU. Reporting institutions must
maintain records for at least six years and report any suspicious
transactions, regardless of size, to the FIU. While Malaysia's bank
secrecy laws prevent general access to financial information, those
secrecy provisions are overridden in the case of reporting of
suspicious transactions or criminal investigations. Malaysia is a
party to the UN International Convention for the Suppression of the
Financing of Terrorism, which came into force on June 29, 2007.


OFFSHORE AND ISLAMIC FINANCE: SUBJECT TO THE SAME REGS


9. Labuan, and island off the coast of Borneo, is an offshore
financial center. While financial institutions and other companies
operating out of Labuan enjoy tax and other benefits, they are
subject to the same AML/CTF provisions as onshore companies.
Islamic financial service providers also are subject to the same
AML/CTF provisions.

FREEZING ASSETS


10. The GOM has cooperated closely with U.S. law enforcement in
investigating terrorist-related cases since the signing of a joint
declaration to combat international terrorism with the United States
in May 2002. The Ministry of Home Affairs and Internal Security has
the authority to identify and freeze the assets of terrorists and
terrorist organizations listed on the UN 1267 Sanctions Committee's
consolidated list and, whenever a new designee is added, the FIU
issues immediate orders to all licensed financial institutions, both
onshore and offshore, to do so. At the same time, the FIU also
disseminates information on persons and entities designated
unilaterally by other countries, including the United States, to
these institutions. The Malaysian FIU has no authority to order
financial institutions to freeze assets based on U.S. domestic
designations; in fact, the GOM has adopted a firm inter-agency
policy that no individual or entity should be designated
unilaterally and that only an intergovernmental body such as the UN
should have the authority to do so.

REGULATING CHARITIES


11. The GOM has rules regulating charities and other nonprofit
entities. The Registrar of Societies is the principal government
official who supervises and controls charitable organizations, with
input from the Inland Revenue Board (IRB) and occasionally the
Companies Commission of Malaysia (CCM). The Registrar mandates that
every registered society of a charitable nature submits its annual
returns, including its financial statements. Should activities
deemed suspicious be found, the Registrar may revoke the nonprofit

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organization's (NPO) registration or file a suspicious transaction
report. Registering as a NPO can be bureaucratic and
time-consuming. One organization reported that getting registered
took nine months and required multiple personal interviews to answer
questions about its mission and its methods. Some NPOs reportedly
register as "companies" instead, a quick and inexpensive process
requiring capital of approximately 60 cents and annual financial
statements.


12. In March 2006 the FIU completed a review of the non-profit
sector with the Registrar, the IRB, and the CCM, in an effort to
ensure that the laws and regulations were adequate to mitigate the
risks of nonprofit organizations as conduits for terrorist
financing. BNM reports that the review did not show any significant
regulatory weaknesses; however, the GOM is considering measures to
enhance the monitoring of fundraising, including increased
disclosure requirements of how funds are spent.


13. Malaysia's tax law allows a tax credit, which encourages the
reporting of contributions, for Zakat (alms) to mosques or
registered Islamic charitable organizations. Islamic Zakat
contributions can be taken as payroll deductions, which helps
prevent the abuse of charitable giving.

SUGGESTED THEMES AND TALKING POINTS:


14. (SBU) During the visit, we should highlight the strong
cooperation between the U.S. and Malaysia in combating terrorism and
terrorist finance and emphasize that your purpose is to share
intelligence with a strong partner. While there are issues to be
addressed, the visit will go more smoothly if we can note that
Malaysia's anti-money laundering/counter-terrorist finance framework
is a success story and that Bank Negara's FIU has emerged as a
leader in Southeast Asia. Giving Bank Negara credit for providing
technical assistance to a number of countries in the region over the
past few years and pointing to Malaysia's strong performance in the
2007 FATF Mutual Evaluation would be a plus as well. On a separate
note, Malaysian government officials and private sector bankers are
likely to ask about the U.S. financial sector and whether the U.S.
economy is going into a recession.