TREASURY DEPARTMENT ENGAGES MALAYSIANS ON IRAN AND

C O N F I D E N T I A L SECTION 01 OF 02 KUALA LUMPUR 000273 SIPDIS SIPDIS TREASURY FOR DFERNANDEZ E.O. 12958: DECL: 04/11/2018 TAGS: KTFN EFIN ETTC PTER PGOV KNNP MNUC PARM UNSC IR, MY SUBJECT: TREASURY DEPARTMENT ENGAGES MALAYSIANS ON IRAN AND COUNTERTERRORISM FINANCE ISSUES REF: KUALA LUMPUR 213 Classified By: Ambassador Keith for reasons 1.4 (b) and (d) ¶1. (C) Summary: During meetings on March 31 and April 1, Treasury Assistant Secretary for Terrorist Financing and Financial Crimes Patrick O'Brien impressed upon his Malaysian counterparts at the Central Bank, the Ministries of Finance and Foreign Affairs, charities regulators, and private banks that there was a clear need for enhanced vigilance of all financial relationships with Iran following three UN Security Council Resolutions (UNSCRs)-- 1737, 1747, and 1803 -- and two statements from the FATF highlighting deficiencies in Iran,s (anti-money laundering/counter-financing) AML/CFT controls. Malaysian counterparts were generally receptive to U.S. messages on the need for enhanced vigilance with regard to Iranian financial relationships, especially given the recent actions of the UN Security Council and the Financial Action Task Force (FATF). The Malaysians also welcomed additional cooperation, training, and information on suspicious Iranian financial activity. Malaysian bankers reported receiving prompt notice of, and on-going communication about UN Security Council designations and the two FATF advisories highlighting deficiencies in Iran's AML/CFT regime from the Financial Intelligence Unit (FIU), and expressed the desire to avoid reputational risks of association with Iranian banks. The regulation of Malaysia's charities sector to guard against money laundering and terrorist finance appears strong at the point of establishment of organizations and initial licensing, but less vigilant in exercising on-going oversight. End Summary. U.S. message: "Don't risk your good reputation" -------------- -- ¶2. (C) A/S O'Brien commented that banks in Europe and around the world were re-evaluating their relationships with Iranian banks because of Iran,s use of deceptive practices to circumvent due diligence systems. He noted that Malaysia has longstanding trading ties with Iran but that they undertook substantial reputational risk when dealing with Iranian banks. O'Brien highlighted that with Iran's willingness to use front companies and strip identifying information from SWIFT messages, Malaysian banks needed to closely scrutinize transactions and take into consideration the additional risk of doing business with these Iranian firms. ¶3. (C) Ministry of Foreign Affairs Deputy Secretary Hanniff told A/S O'Brien the Government of Malaysia (GOM) was committed to meeting its obligations under the UNSCRs. He understood the fact that some firms would use deception to evade sanctions and said the GOM appreciated any information Treasury could provide on such cases. He added that interpretation of the UNSCRs was broad and that there were some grey areas. Both sides, he said, would benefit from ongoing discussions. Hanniff acknowledged that the GOM had not finished the reports that are due under the three UNSCRs but said they were working on them. He added that the GOM had signed 9 of the 12 counterterrorism international instruments and were working on adopting the rest. In closing, Hanniff said the GOM understood it had an obligation to make sure things did not get into the wrong hands. A/S O'Brien told Hanniff the USG would try when possible to help others understand the techniques Iran was using to circumvent controls. He reiterated to everyone he spoke to that the message from the UNSCRs and FATF recommendations was that risks were now higher and Malaysia, like other countries, needed to recalibrate its supervisory and compliance efforts accordingly. ¶4. (C) Jeremy Lee, the head of the Central Bank's Financial Intelligence Unit, reported that the FIU had used its on-line system to issue electronic advisories covering the UNSCR resolutions and the two FATF statements to all Malaysian financial institutions, calling on them to carry out enhanced due diligence with respect to all Iranian financial institutions, especially Bank Melli and Bank Saderat. Lee said the FIU had excellent cooperation from compliance officers at Malaysian banks and the FIU worked closely with Bank Negara to integrate AML/CFT compliance into regular supervision and inspection work. Lee also said the FIU maintained close contact with the special branch of the police. He added that he appreciated the general information which A/S O'Brien passed over but noted that while typologies were helpful, actionable specifics would be appreciated. O'Brien took the opportunity to share some pre-approved KUALA LUMP 00000273 002 OF 002 material with the FIU on Bank Melli,s deceptive practices as well as particular information about a sensitive transaction moving through a Malaysian bank. ¶5. (C) A/S O'Brien also gave due credit to the FIU and the private sector banks for their efforts to implement obligations under the FATF 40 Recommendations and 9 Special Recommendations on Terrorist Financing and UNSCR 1267. O'Brien also suggested that Malaysia's FIU expand its efforts and share its expertise with counterparts in other countries in the region. Charities supervision challenging -------------- ¶6. (SBU) Noting that implementation of the FATF's Special Recommendation VIII on charities posed difficult concerns for many countries, O'Brien thanked Lee for inviting two charity supervisors from the Registrar of Societies and Companies Commission to provide an overview of their efforts to ensure the bona fides of applicants who sought to establish charities. The charities regulators reported working very closely with law enforcement at the point of establishment to ensure the managers and directors of new charities were "fit and proper." For example, the Malaysian Police Special Branch vets the names of new applicants for charities and foundations. In terms of supervision of on-going operations, however, the picture was mixed. Larger charities appeared to be under more frequent supervision, but small-scale charities operated with little to no ongoing oversight. The supervisors generally only intervened if charges of fraud or misuse of funds were made against the managers, particularly in the case of small operations. Private Sector Outreach -------------- ¶7. (C) A/S O,Brien also met with two of Malaysia,s largest banks, Malayan Banking Berhad (Maybank) and CIMB Bank to discuss the risks of doing business with Iran. Both Maybank and CIMB made presentations to A/S O'Brien on their compliance systems and confirmed that they had received advisories from the FIU on the UNSCRs as well as the FATF statements calling for enhanced vigilance due to the higher risks created by the deceptive practices of Iran's banks. Malaysian banks do not open accounts for entities included on the OFAC list and they have an anti-fraud/AML system in place to identify suspicious transactions. CIMB mentioned a bad business experience with Bank Melli dating from before the Asian financial crisis and indicated they would not do business with the bank in the future. Maybank said that maintaining its reputation was key and that it had a close working relationship with the FIU, so it complied with all FIU requirements. Maybank was particularly interested in A/S O,Brien,s discussion on Iran,s use of front companies and the ability of entities in Iran to work in concert to frustrate due diligence efforts. Maybank acknowledged that it did not have adequate systems for dealing with such activities and requested whatever additional information on typologies the U.S could provide. Comment -------------- ¶8. (C) Malaysian counterparts were much less defensive than in previous meetings with high level Treasury officials. Working through the central bank's FIU and emphasizing multilateral endorsements of our AML/CFT concerns was an effective strategy to gain counterparts' confidence and cooperation. ¶9. (U) A/S O'Brien has cleared this cable. KEITH