Malaysia National Risk Assessment 2023 Executive Summary

MALAYSIA
NATIONAL RISK
ASSESSMENT
On Money Laundering and Terrorism Financing 2023 (NRA 2023)

Overview
The National Risk Assessment (NRA) is conducted periodically by the National Coordination Committee to Counter Money Laundering (NCC). It represents the country’s collective understanding of the money laundering (ML) and terrorism financing (TF) risks in Malaysia. The NRA 2023 is Malaysia’s fifth assessment. It includes a more detailed assessment of transnational aspects of crimes and flow of illegal proceeds. These assessments help drive and strategise national and institutional AML/CFT policies and measures in a more effective and targeted manner. This NRA should be read together with the NRA 2020 for a better understanding of the evolution of Malaysia’s ML and TF risks. 2 Malaysia National Risk Assessment 2023 Executive Summary

Table of Content
Malaysia National Risk Assessment 3 Executive Summary 2A. Scope and Methodology The NRA 2023 consists of two risk assessments:
2B. Key Findings
While there are shifts to the sectoral ratings, threat findings remain largely unchanged despite the COVID-19 pandemic. LEAs have undertaken a more coordinated and effective response to counter ML/TF amidst a changing environment. Sectoral Risk Assessment Analysis of the extent of various financial and non-financial sectors which can be abused to launder illicit proceeds Threat Risk Assessment Analysis of serious crimes that generate illicit proceeds, as well as terrorism and TF This assessment is based on quantitative and qualitative data sources obtained from:

• ML prosecutions
• Serious crimes and ML investigation papers
• Financial intelligence
• Perception / expert survey
• Literature review (i.e. international reports, news and
  articles)
• Focus group discussions with relevant stakeholders
  (e.g. retired judges, law enforcement agencies (LEAs) and private sector) High-Risk 5 Crimes 7 Other Notable Crimes Fraud Corruption Smuggling Illicit Drug Trafficking Organised Crime DNFBPs: Designated Non-Financial Businesses and Professions are referred to as the ‘non-financial sectors’, including casinos, gaming outlets, registered estate agents, DPMS, and gatekeeping service providers DPMS: Dealers in Precious Metals or Precious Stones (e.g. jewellers, luxury jewellery/watch retailers, bullion dealers, jewellery manufacturers/wholesalers, etc.) DPI Issuers: Non-Bank Issuers of Designated Payment Instruments MSBs: Money Services Businesses 1 Refer to sectors that are most vulnerable due to high exposure to ML/TF risks, given the size of the sector, its nature of business and the likelihood of ML/TF occurrences. 2 Refer to sectors that criminals frequently exploit for high-risk crimes and TF, given the size of the sector, the breadth of products and services offered and/or the range of customers served. Environmental Crime Human Trafficking/ Migrant Smuggling Tax Crimes Sexual Exploitation Forgery Illicit Arms Trafficking Illicit Trafficking in Stolen & Other Goods Financial Institutions:
  DNFBPs:
  Financial Institutions:
  Banks
  DPI Issuers
  MSBs
  DNFBPs:
  Lawyers
  Company Secretaries
  DPMS
  High-Risk
  3
  Sectors1
  Sectors Vulnerable of Being
  6
  Abused2 for High-Risk
  Crimes and TF
  Banks
  Lawyers
  DPMS
  Malaysia National Risk Assessment 2023 3

4 Malaysia National Risk Assessment 2023 Executive Summary 3A. Threat Risk Assessment: Key Highlights Risk Rating Risk Definition High Current information* and assessment of risk and control factors indicate that the crimes pose a substantially high ML threat. There is a high probability that the crimes will generate potential illegal funds. Medium-High Current information and assessment of risk and control factors indicate that the crimes pose a substantial ML threat. There is an above-average probability that the crimes will generate potential illegal funds. Medium Current information and assessment of risk and control factors indicate that the crimes pose a moderate ML threat. There is an average probability that the crimes will generate potential illegal funds. Low Current information and assessment of risk and control factors indicate that the crimes pose a low ML threat. There is a low probability that the crimes will generate potential illegal funds. INCREASING INHERENT RISK Medium High Risk High Risk Fraud Corruption Smuggling Illicit Drug Trafficking Organised Crime Forgery Tax Crimes Human Trafficking/ Migrant Smuggling Sexual Exploitation Environmental Crime Robbery/Theft Extortion Illegal Remittance Insider Trading Illicit Trafficking in Stolen and Other Goods Illicit Arms Trafficking Terrorism and Terrorism Financing Counterfeiting and Piracy of Products Kidnapping Counterfeiting Currency Sea Robbery Murder, Grievous Bodily Injury Medium Risk Low Risk CONTROL MEASURES (GAP) Effectiveness Ineffectiveness Fraud, corruption, illicit drug trafficking, organised crime and smuggling remained the most prevalent crimes that pose high ML risk. Illicit trafficking in stolen and other goods recorded a higher level of ML risk due to higher number of cases and lack of ML investigations. A higher level of ML risk is also observed for illicit arms trafficking due to challenges in detecting arms trafficking activities. Lower risk is observed for terrorism and TF due to the fall of Islamic State (IS), intensified military campaigns against IS-affiliated groups in the region and the absence or death of prominent IS leaders domestically. In addition, TF risk is mitigated by strong international cooperation and robust regulatory measures. *NRA 2023 utilises data from 2020 to 2022.

Malaysia National Risk Assessment 2023 5 3B. Highlights on Key Crimes

• Cheating is a major contributor to fraud
  risk, with money mules playing a key role in these activities. Due to the current broad digital adoption, most fraud cases are cyber-enabled, i.e. online scams.
• Continuous strengthening of control
  measures is crucial in addressing the heightened inherent risk.
• The National Scam Response Centre
  (NSRC) was established in 2022 through a public-private partnership between LEAs and the financial and communication sectors. This boosted the capability to detect mule accounts (including those being used as transit accounts for international scams) and respond to scams.
• The risk of corruption remains elevated as
  reflected in the high number of investigations over the assessment period.
• Despite the successes in some
  high-profile cases, the overall low conviction rates suggest insufficient effectiveness of the control measures in addressing corruption.
• Implementing targeted preventive
  measures among the youth to raise awareness and drive a cultural shift towards transparency and integrity is key in preventing corruption. Fraud Corruption Smuggling Illicit Drug Trafficking Organised Crime Terrorism and TF 3C. Other Notable Crimes Tax Crimes Human Trafficking/ Migrant Smuggling Environmental Crime Sexual Exploitation Forgery Illicit Trafficking in Stolen and Other Goods
• Malaysia’s strategic location in the region,
  exacerbated by its long coastline and numerous entry points, poses vulnerabilities to smuggling activities.
• Syndicates and perpetrators utilise
  innovative ways to circumvent restrictions posed by the authorities during the COVID-19 pandemic.
• Joint enforcement measures on the
  country’s border are crucial to combat smuggling activities.
• Malaysia remains an attractive destination
  for drug syndicates as a transit route for the distribution of drugs to other foreign markets, as well as a destination for illicit drugs.
• Despite ongoing law enforcement efforts,
  drug syndicates have demonstrated their ability to circumvent law enforcement interventions.
• Strengthening international collaboration
  is important amidst challenging global and regional drug situations.
• Appears to be connected to fraud,
  corruption and organised crime.
• Greater focus on ML investigation and
  prosecution is required to deter tax crimes.
• Sexual exploitation is often underreported
  due to the lack of willingness of the victims to come forward.
• In addition, some foreign workers are
  being exploited by human traffickers to work in the sex industry.
• Enhance cooperation with foreign LEAs
  to exchange information and conduct joint operations are essential to strengthen response to sexual exploitation.
• Appears to be connected to corruption,
  smuggling, fraud and human trafficking.
• The public and private sectors stand to
  benefit from applying verification technology solutions to better detect forgery by validating unique features of documents.
• Illicit trafficking in stolen goods is usually
  syndicated and often associated with vehicle theft syndicates.
• Increased focus on ML investigation and
  prosecution is required to combat the crime.
• Many human trafficking/ migrant
  smuggling cases are associated with labour exploitation involving the hiring of illegal foreign workers.
• Continuous strong commitment from the
  Government is essential to ensure effective implementation of the National Action Plan on Anti-Trafficking in Persons (2021-2025). Illicit Arms Trafficking
• Majority of the investigations were conducted on illicit possession of firearms, suggesting potential undetected arms trafficking activities in the
  country.
• Effective combative actions require greater focus on ML investigations and prosecutions, as well as stronger agencies collaboration in areas such
  as information sharing and joint investigation.
• Malaysia remains a source and transit hub
  for wildlife trafficking.
• Most cases are syndicated and linked to
  other high-risk offences.
• Better ML investigations and
  collaborations with relevant agencies, ministries and NPOs could improve effectiveness, focusing on addressing crimes, i.e. waste trafficking and illegal logging.
• Illegal gambling/illegal betting and
  unlicensed moneylending have moved to the cyberspace.
• Gambling/lottery draw is offered via the
  online platform, while illegal gambling/illegal betting websites/loans are advertised via social media.
• Joint enforcement between LEAs is
  necessary given the connection to other crimes.
• Terrorism and TF have dwindled due to
  the fall of IS and the absence/death of prominent IS leaders domestically.
• Effective preventive and enforcement
  measures such as deradicalisation strategy to prevent, disrupt and neutralise terrorist activities have helped reduce the risk of terrorism and TF.
• TF cases in Malaysia are often
  self-financed or perpetrated by sympathisers or supporters. Executive Summary NPO: Non-profit Organisation

6 Malaysia National Risk Assessment 2023 3D. Transnational Elements of High-Risk Crimes Malaysia’s primary sources of ML risks emanate from illegal activities perpetrated domestically, while transnational laundering occurrences are less prevalent. Malaysia is being used as a transit point for some illegal goods, such as drug smuggling from the Golden Triangle. 3E. Key Risk Drivers for Crimes The NRA 2023 noted several key risk drivers that have accelerated financial crimes, particularly ML, to become more complex and sophisticated. These key drivers have not only facilitated the commissioning of crimes but also posed challenges to LEAs to combat these crimes. Higher-risk crimes continue to be facilitated by corrupt officials, while the use of mule accounts to obscure the source of funds remains prevalent. Nonetheless, the national anti-corruption strategy and the amendments to the Penal Code and Criminal Procedure Code to target money mules, as well as a standardised industry approach to streamline the identification, assessment and monitoring of mules, are expected to strengthen efforts to combat these crimes. Executive Summary Corruption Corruption continued to facilitate higher-risk crimes such as illicit drug trafficking, organised crime, smuggling and environmental crime. Money Mule Money mule facilitates various crimes, particularly fraud. 3F. Risk Outlook

• High-risk crimes are expected to remain the same for the next three years. Malaysia’s likelihood of being
  a transit and/or destination of money laundering from foreign predicate offences may increase due to increased global interdependencies and the openness of Malaysia’s economy.
• Besides the five high-risk crimes, LEAs, financial intelligence unit (FIU) and reporting institutions should
  continue to be on alert for some of the emerging crimes, especially human trafficking and environmental crime.
• Despite the lower terrorism and TF risk during the period under review, the outlook for terrorism remains
  cautious as the threat of terrorism is far from static due to terrorist groups’ ability to adapt to the changing environment in which they operate. Moreover, prolonged international conflicts may potentially trigger a spillover of terrorism and TF to the region. As such, the LEAs, FIU and reporting institutions should remain vigilant to terrorism and TF risks.

Malaysia National Risk Assessment 2023 7 4A. Sectoral Risk Assessment for Financial Sector Overall, changes to the net ML/TF risks of the financial sector, as compared to NRA 2020, were mainly driven by changes to the sectors’ size and nature of business, risk likelihood and control measures. Changes to control measures were driven by improvements observed in the supervisory function and activities conducted in the sectors. Executive Summary Banking Institutions1 High CMIs Medium High

• Labuan Money Brokers
  •
• MSBs
• DPI Issuers
• Labuan Banking Institutions
• NBFIs
• Insurers and Takaful
  Operators
• Moneylenders
  Medium
  •
• Insurance Intermediaries
• Banking Intermediaries
• Leasing
• Factoring
• Labuan CMIs
• Pawnbrokers
• Labuan Insurance
  Low High
• Banking Institutions
• DPI Issuers
• MSBs
  Medium
  High
• CMIs Labuan Money Brokers
• Insurers and Takaful
  Operators
  Medium
  •
• Insurance Intermediaries
• Banking Intermediaries
• Leasing
• Factoring
• Labuan CMIs
• Pawnbrokers
• NBFIs
• Labuan Banking Institutions
• Labuan Insurance
• Moneylenders
  Low
  Control Measures
  ML Strong Acceptable Marginal Weak TF Inherent Risk Abbreviations CMIs: Capital Market Intermediaries (including Digital Asset Exchanges (DAX)) MSBs: Money Service Businesses NBFIs: Non-Bank Financial Institutions DPI Issuers: Designated Payment Instrument Issuers 1 Banking institutions high net risk is driven by its size as the largest financial sector, widest coverage with branches located throughout the country, as well as the nature of business providing key financial products.

8 Malaysia National Risk Assessment 2023 4B. Sectoral Risk Assessment for Designated Non-Financial Businesses and Professions (DNFBPs) Executive Summary Dealers in Precious Metals or Precious Stones (DPMS) Casino Lawyers •

• Company Secretaries
• Registered Estate
  Agents
• Accountants
  Labuan Trust
  Companies
  •
  •
• Trust Companies
• Licensed Gaming
  Outlet
  Casino
  Dealers in Precious
  Metals or Precious
  Stones (DPMS)
• •
• Company Secretaries
• Lawyers
• Registered Estate
  Agents
• Accountants
  •
• Trust Companies
• Licensed Gaming
  Outlet
• Labuan Trust
  Companies
  ML Strong Acceptable Marginal Weak TF Inherent Risk High Medium High Medium Low High Medium High Medium High Control Measures Definition of Net ML/TF Sectoral Risk Ratings for the Financial Sector and DNFBPs Medium Low Most vulnerable due to high exposure to ML/TF risks. RIs in the sector require intensive AML/CFT regulatory and supervisory scrutiny to serve as effective mitigants, with a focus on sub-sectors with higher net risk scores. Significantly vulnerable due to substantial exposure to ML/TF risk. RIs in the sector require regular AML/CFT regulatory and supervisory scrutiny to serve as effective mitigants, with a focus on sub-sectors with higher net risk scores. Moderately vulnerable due to some exposure to ML/TF risk. RIs in the sector require ongoing AML/CFT regulatory and supervisory scrutiny to serve as effective mitigants, with a focus on sub-sectors with higher net risk scores. Least vulnerable due to low exposure to ML/TF risks. RIs in the sector require ongoing AML/CFT regulatory and supervisory engagement to ensure residual risks are effectively mitigated, with a focus on sub-sectors with higher net risk scores. High Medium High Meanwhile, changes observed in the net ML/TF risks of DNFBPs were mainly driven by changes to the DNFBPs’ size and nature of business. Some improvements were also observed in certain DNFBPs’ compliance with their AML/CFT obligations.

Malaysia National Risk Assessment 2023 9 Executive Summary 4C. Key Changes from NRA 2020 and Key Risk Drivers

• The net TF risk of the sector decreased
  from High to Medium High.
• This is driven by the decrease of
  customers from higher TF risk countries, e.g. conflict zones, as well as lower TF investigations and intelligence involving the sector.
• An established Public-Private Partnership
  (PPP) -TF platform enables sharing of information with LEAs and higher quality/quantity of TF Suspicious Transaction Reports (STRs).
• The net ML risk of the sector decreased
  from Medium High to Medium.
• This is driven by the decrease in the
  sector’s transaction volume and value, which were heavily impacted by the travel restrictions imposed during COVID-19. These numbers are expected to return to pre-COVID levels. Please refer to the Future Outlook section. Banking Institutions (TF) MSBs (ML) DPI Issuers (ML/TF) Labuan Banking Institutions (ML) Labuan Money Brokers (ML/TF) Insurance Intermediaries (ML/TF) DNFBPs Financial Sector DPMS (TF) Company Secretaries (TF)
• The net ML risk of the sector decreased
  from Medium High to Medium, while the net TF risk from High to Medium High.
• This is contributed by improvements to
  the sector’s overall control measures driven by the sharing of supervisory capabilities with the MSBs sector, which resulted in more intensified supervisory activities.
• The net ML risk of the sector increased
  from Low to Medium.
• This is driven by an increase in the
  sector’s higher ML risk customers, e.g. politically exposed persons (PEPs) and high net worth individuals.
• The net TF risk of the sector decreased from High to Medium High.
• This is driven by lower exposure towards higher TF risk customers
  and the general decrease observed in TF activities during the review period.
• The net TF risk of the sector decreased from Medium High to
  Medium.
• This is driven by lower exposure towards customers from higher TF
  risk countries.
  Registered Estate Agents (ML)
  Licensed Gaming Outlet (ML)
• The net ML risk of the sector decreased from Medium to Low.
• This is driven by a decrease in its local network and presence in
  higher ML risk locations, due to the closure of branches nationwide.
• The net ML risk of the sector increased from Medium to Medium
  High.
• This is driven by an increase in exposure towards higher ML risk
  customers and the higher likelihood of ML observed, i.e., intelligence on the sector.
• The net ML and TF risk of the sector
  increased from Medium to Medium High.
• This is driven by the sector’s increase in
  transaction volume and value, as well as higher ML and TF risk customers.
• The net ML and TF risk of the sector
  decreased from Medium High to Medium.
• This is contributed by improvements to
  the supervisory activities conducted on the sector.
• The net TF risk of the sector decreased
  from Medium to Low.
• This is driven by the lower likelihood of TF
  activities involving the sector, i.e., the absence of cases during the review period. Pawnbrokers (TF)

10 Malaysia National Risk Assessment 2023 Executive Summary 4D. Interlinkages with Threat DNFBPs Increasing use of professional enablers to facilitate and structure ML activities. Financial Sector DNFBPs Banks Company Secretaries DPI Issuers Financial Sector With the lifting of COVID-19 travel restrictions, the MSBs’ transaction volume and value are expected to increase and return to pre-pandemic levels. As at end-2023, remittance transactions have exceeded the pre-pandemic value by 43%, while money-changing transactions are at 79% of the pre-pandemic value. The uptake of e-payments in Malaysia (e-money transactions increased by 26% in 2023) is projected to keep growing, driven by consumer spending and collaboration between public and private sectors to enhance its availability, involving banking institutions, DPI issuers and CMIs. Expected lower cash intensity for moneylenders due to the adoption of electronic fund transfers for loan disbursement and the emergence of digital moneylending. Banking institutions, by virtue of their offering, network and integral role in the financial system, continue to be the sector most linked to crimes. Crimes which require services beyond this sector, such as fraud, corruption and organised crime, appear to also misuse other sectors allowing transfer services, such as DPI issuers, MSBs and, to a certain extent, digital asset exchanges. Professional enablers such as lawyers and company secretaries remain as sectors which may include facilitation of legal persons being abused for crimes, while DPMS is misused to store value of illegal proceeds. MSBs Lawyers DPMS DNFBPs Increasing use of professional enablers to facilitate and structure ML activities. Financial Sector DNFBPs Banks Company Secretaries DPI Issuers Financial Sector With the lifting of COVID-19 travel restrictions, the MSBs’ transaction volume and value are expected to increase and return to pre-pandemic levels. As at end-2023, remittance transactions have exceeded the pre-pandemic value by 43%, while money-changing transactions are at 79% of the pre-pandemic value. The uptake of e-payments in Malaysia (e-money transactions increased by 26% in 2023) is projected to keep growing, driven by consumer spending and collaboration between public and private sectors to enhance its availability, involving banking institutions, DPI issuers and CMIs. Expected lower cash intensity for moneylenders due to the adoption of electronic fund transfers for loan disbursement and the emergence of digital moneylending. Banking institutions, by virtue of their offering, network and integral role in the financial system, continue to be the sector most linked to crimes. Crimes which require services beyond this sector, such as fraud, corruption and organised crime, appear to also misuse other sectors allowing transfer services, such as DPI issuers, MSBs and, to a certain extent, digital asset exchanges. Professional enablers such as lawyers and company secretaries remain as
sectors which may include facilitation of legal persons being abused for crimes, while DPMS is misused to store value of illegal proceeds. MSBs Lawyers DPMS 4E. Future Outlook

Malaysia National Risk Assessment 2023 11 Executive Summary
5. Key Recommendations
The NRA 2023 proposed 16 recommendations to further strengthen responses to prevailing crimes and ML/TF vulnerabilities. These recommendations aim to address gaps identified and expand implementation successes through the replication or continuation of effective measures. The recommendations are structured into five strategic focus areas under the NCC Roadmap 2024-2026 as follows:
Capacity Building and
Awareness
Risk
Legal, Regulatory and
Coordination
16
Recommendations
Risk Preventive
Capacity Building and
Awareness
Enforcement
Legal, Regulatory and
Coordination
Promoting dialogue between LEAs in areas such as challenges faced in investigations, given the increasing use of technologies by criminals to perpetrate crimes and proactively seek solutions to overcome these challenges. In addition, industry-led initiatives will continue to improve the implementation of AML/CFT measures. Strengthening the capacity of LEAs, prosecutors, FIU, supervisors and reporting institutions through training and workshops. The focus will be centred on deepening the understanding of emerging risks and the modus operandi of ML. In addition, public awareness and education initiatives on mule accounts targeting vulnerable groups will be prioritised to ensure public vigilance. Preventive Enforcement Enhance risk-based enforcement action on non-compliance with regulatory requirements to further improve the reporting institutions’ compliance culture. Identify emerging risks and challenges through collaboration with civil societies to enhance understanding of the modus operandi of crimes and support analysis. This will also include communication between LEAs, prosecutors and judges to discuss case-specific challenges while promoting mutual awareness and trust. Identify emerging risks and challenges through collaboration with civil societies to enhance understanding of the modus operandi of crimes and support analysis. This will also include communication between LEAs, prosecutors and judges to discuss case-specific challenges while promoting mutual awareness and trust. Strengthening preventive measures through cross-sectoral joint supervision guided by information sharing from LEAs and intervention strategies to address enablers that facilitate crimes. Strengthening preventive measures through cross-sectoral joint supervision guided by information sharing from LEAs and intervention strategies to address enablers that facilitate crimes. Recommendations 16 Promoting dialogue between LEAs in areas such as challenges faced in investigations, given the increasing use of technologies by criminals to perpetrate crimes and proactively seek solutions to overcome these challenges. In addition, industry-led initiatives will continue to improve the implementation of AML/CFT measures. Enhance risk-based enforcement action on non-compliance with regulatory requirements to further improve the reporting institutions’ compliance culture. Strengthening the capacity of LEAs, prosecutors, FIU, supervisors and reporting institutions through training and workshops. The focus will be centred on deepening the understanding of emerging risks and the modus operandi of ML. In addition, public awareness and education initiatives on mule accounts targeting vulnerable groups will be prioritised to ensure public vigilance.