Uncovering illegal financial flows in corporate Malaysia

Filepic/The Star

Global Financial Integrity, an American think-tank, released its eighth report on “Illicit Financial Flows” in January 2019. The report ranked Malaysia among countries with large outflows of illicit money alongside nations like Brazil, South Africa and Vietnam.

The flow of illicit funds is the illegal movement of money or capital from one country to another that is often associated with money laundering and financing of terrorism. Such conduct is facilitated by the manipulation of corporate vehicles, which include either “legal persons” (eg, companies) or “legal arrangements” (eg, trusts), to hide the identity of "natural persons” (eg, individuals) who ultimately own, control or benefit from the actions undertaken.

Significant concern was also echoed by the Financial Action Task Force, the global money laundering and terrorist financing watchdog, which released its “Best Practices on Beneficial Ownership of Legal Persons” report in October 2019 proposing measures which should be undertaken by reporting institutions across the globe to identify, verify and keep up to date information on “beneficial owners” of corporate vehicles. Beneficial owner means a person who ultimately owns, controls or benefits from a company or trust fund and the income it generates without being on record as the owner. This could be those who name nominees or proxies as owners on record or have indirect ownerships via layers of other corporate entities to disguise the ultimate beneficiary.

With Malaysia rocked by financial scandals involving senior government officials, high-ranking officers, business owners using such corporate vehicles for their own benefit, local authorities began to work towards greater transparency and enforcement in this area in step with the rest of the world.

The idea is simple: We need greater transparency of the beneficial ownership of corporate vehicles to deter misuse and manipulation of any sort. We need to have a clear picture of who are the beneficial owners and a clear process to encourage timely disclosure, identification, verification and continuous updates of information recorded.

In 2020, the Companies Commission of Malaysia issued guidelines for the “Reporting Framework for Beneficial Ownership of Legal Persons” pursuant to Section 20C of the Companies Commission of Malaysia Act 2001. The enforcement of the guidelines that was scheduled for late last year has been postponed due to the current Covid-19 pandemic and delays in passing the Amendment Bill to be enacted upon the Companies Act 2016.

The rationale of enforcing the guidelines is fairly simple, which is to impose a duty on directors, partners and company secretaries to reveal and self-declare beneficial ownership of a corporate entity, failing which actions will be taken. Such declarations will in turn result in the formation of a beneficial ownership registry that would be accessible to law enforcement agencies and other relevant authorities.

This was followed by the issuance of guidelines for beneficial ownership by Bank Negara Malaysia in September 2020, which instructs all reporting institutions (under the Anti-Money Laundering Act 2001) to identify any “natural persons” who are the beneficial owner of a bank’s customer, obtain information of said ownership, verify the information gathered, conduct customer risk profiling and perform further regulatory obligations based on the risk category of the beneficial ownership. All this must be done before taking on a customer and during the course of a business relationship as and when the need arises.

Bank Negara Malaysia also laid out requirements for reporting institutions to gather information on beneficial owners of “legal persons” or “legal arrangements” to a reasonable level of decisiveness, without neglecting the reporting institutions’ primary regulatory obligations.

If all stakeholders involved work together, we can unmask the corrupt and criminals at large before the illegal gains leave the country in untraceable form due to the nature and structure of corporate vehicles. The first steps are already in motion, now it is up to all stakeholders to ensure consistency and continuance.


Certified Fraud Examiner

Petaling Jaya

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