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

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 000213 SIPDIS C O R R E C T E D COPY - ADDED CAPTION TREASURY FOR OBRIEN, FERNANDEZ AND POLITZER STATE FOR USTR - WEISEL AND BRYAN STATE FOR FEDERAL RESERVE AND EXIMBANK STATE FOR FEDERAL RESERVE SAN FRANCISCO TCURRAN USDOC FOR 4430/MAC/EAP/BOYD GENEVA FOR USTR SIPDIS SENSITIVE 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 KUALA LUMP 00000213 001.2 OF 003 ¶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 KUALA LUMP 00000213 002.2 OF 003 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 KUALA LUMP 00000213 003.2 OF 003 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.