Proliferation Financing Risk Assessment 2021

PROLIFERATION
FINANCING
RISK
ASSESSMENT
NCC | National Coordination Committee to Counter Money Laundering

PFRA | Proliferation Financing Risk Assessment CONTENTS Background | page 2 SCOPE & METHODOLOGY | PAGE 5 Example of modus operandi of proliferation of wmd and pf activities | page 6 Findings | page 3, 4, 7 & 8 RECOMMENDATIONS | page 4 & 9

PFRA | Proliferation Financing Risk Assessment Background 1) The objectives of PFRA are to:
a) provide base line assessment to enhance understanding of Malaysia’s risk exposure to proliferation financing (PF1 ); b) identify and address key vulnerabilities in the financial and designated non-financial businesses and professions (DNFBPs) sectors that may be exploited by proliferators to finance activities relating to proliferation of weapons of mass destruction (WMD) or to evade United Nations Security Council sanctions; and c) support development of appropriate strategies and recommend measures in mitigating the risks and vulnerabilities identified to strengthen country’s overall countering PF (CPF) framework.
2) The assessment is timely given the latest update from the Financial Action Task Force
(FATF) in October 2020, which introduces a new obligation for country to identify and assess the risk of potential breaches, non-implementation or evasion of the targeted financial sanctions related to PF2 .

• The PFRA will serve as a key step to ensure effective implementation of the remaining
  recommendation on private sector and enable country’s full compliance to the amended Recommendations.
• These ongoing developments will be assessed (changes to the international standards
  and anticipated FATF guidance on CPF) for possible recommendations or amendments to existing policy documents or issuance of guidance, if necessary.

3. Please turn to page 5 for summary of the scope and methodology used for the risk
   assessment. Consistent with the revised FATF Recommendation 1, which requires countries to identify, assess and understand the PF risks for the country, the PFRA focuses on the exposure of the key sectors to PF risks from dealings with persons from countries of proliferation concern based on 3 years datasets between 2016 and 2018. The assessment methodology is founded on 2 main pillars as follow,

• threats, vulnerabilities and likelihood; and
• control measures.

4. The PFRA demonstrates the interconnectedness between the sources, movement of
   assembled parts, intermediaries and the proliferators, with linkages to the financing aspect. Please turn to page 6 for the illustration of a common modus operandi of proliferation of WMD and PF. 1 Proliferation financing refers to the act of providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both technologies and dual use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations. [FATF Report, Combating Proliferation Financing: A Status Report on Policy Development and Consultation, February 2010] 2 FATF has adopted amendments to Recommendation 1 and 2 and their Interpretative Notes that require countries and the private sector to identify and assess PF risks, and to take action to mitigate these risks.

PFRA | Proliferation Financing Risk Assessment Findings Malaysia’s net risk for PF is determined to be at medium low3 level taking into account medium low level of overall inherent risks (threats, vulnerabilities and likelihood of occurrences) and acceptable level of control measures. Overall Inherent Risks [Medium Low]

1. Malaysia has several structural/ enabling factors that contributed to the high level of WMD
   threats, which include:

• high level of accessibility by person from countries of proliferation concern;
• high integration level into global shipping network and potential access to world
  markets, high global trade connectivity and manufacturing sector competitiveness;
• relative speed and ease for formation of legal persons and businesses; and
• residual risks and threats from potential support network.
  It is observed that despite the positive role some of the indicators mean for the country, the same advantages could be exploited by proliferators in pursuing their WMD proliferation activity.

2. Vulnerabilities in the financial and DNFBPs sectors are assessed to be low risk due to the
   following:

• general exposure to customers from countries of proliferation concern in terms
  of number and value; higher risk financial products and services, i.e. trade finance, cross-border remittance and marine insurance; and customer from higher risk sectors i.e. trading, manufacturing, transport or shipping sectors, are relatively low;
• there is some form (minimal) exposure to PF risk from indirect correspondent
  relationship with a country of proliferation concern; and
• none of the sectors have on-boarded nor provided financial services to PF￾designated persons4
  .
  From a sectoral risk exposure perspective, banks, including Labuan offshore banks and money services businesses are the most vulnerable sectors to proliferation financing risk. The risk is largely contributed by the size of customer base, transactions value and type of product or services offered, i.e. deposit, remittance and money changing.

3. Likelihood of occurrences of PF is assessed to be at medium low level in comparison to
   crimes from the National Risk Assessment on ML/TF conducted in 2016 (slightly below terrorism and terrorism financing) based on observation of cases reported in suspicious transaction reports, financial intelligence disclosed and cases investigated by the Royal Malaysia Police. 3 The risk ranking used in the assessment ranged from Low, Medium Low, Medium High and High. PF-designated persons refer to individuals and entities designated by the United Nations Security Council. The list is accessible at https://scsanctions.un.org/.

PFRA | Proliferation Financing Risk Assessment Recommendations Overall Control Measures [Acceptable]
4) The country’s overall control measures against threats, vulnerabilities and likelihood of
proliferation of WMD or PF is assessed to be acceptable mainly due to comprehensive legal framework to combat P and PF supported by acceptable level of domestic and international cooperation as well as adequate financial and DNFBPs sector oversight. Please turn to page 7 and 8 for the summary of findings.

1. The recommendations cover four broad areas i.e. legislative, policy and coordination
   framework; implementation and compliance by the financial, DNFBPs and export sector; heightened regulatory and supervisory initiatives; and intensified monitoring efforts and enforcement actions. Please turn to page 9 for the detailed recommendations.
2. Future works on the recommendations will be driven and carried out by existing domestic
   coordination platforms such as the National Coordination Committee to Counter Money Laundering (NCC) (led by Bank Negara Malaysia) and Strategic Trade Action Committee (STAC) (led by Ministry of International Trade and Industry).

PFRA | Proliferation Financing Risk Assessment

cope

he assessment ill cover
Malaysia s exposure to prolifera on of M ac vi es ith speci c focus on the exposure to prolifera on nancing risks

he assessment ill focus on
Malaysia s exposure to prolifera on nancing risks arising from dealings ith or exposure to persons from selected countries of prolifera on concern only and ill not include other N anc oned countries that are listed in the rder

he assessment ill include key repor ng ins tu ons licensed by NM, C and onshore and abuan banks and s, M and selected capital market service providers N s

tructural actors upport
Net ork

tructural actors upport
Net ork

he assessment ill be based on

year datasets from to , to ensure comparability ith N hich as based on datasets from to f necessary, to use datasets from other period as part of ualita ve assessment

Methodology

PFRA | Proliferation Financing Risk Assessment

rolifera on of M rolifera on inancing inancing roliferator ntermediary upplier elivery a Material uppliers art Manufacturers Component ssemblers torage arehouse anks inancial ins tu ons ront Companies hipments ransshipments nd users ransporters rokers gents ource, manufacture and assemble tore, shipment and divert eploy, and disguise inance and evade ayment and se lement ngage and operate eploy and disguise eploy and disguise Countries of prolifera on concern

PFRA | Proliferation Financing Risk Assessment

o Medium igh igh trong Marginal eak

PFRA | Proliferation Financing Risk Assessment

igh overall risk for M prolifera on mainly due to risks and threats emana ng from the poten al support net ork , compounded by several structural factors that are assessed as medium to high risks

o overall vulnerabili es risk mainly due to no nancial services provided to any N C designated person, lo exposure to high risk customers, services and sectors

ikelihood of risk is assessed in comparison ith crimes assessed under the N

Country

s overall control measures against threats
, vulnerabili es and likelihood of

is assessed to be acceptable mainly due to comprehensive legal frame ork to combat and supported by acceptable level of domes c and interna onal coopera on as ell as ade uate nancial sector oversight

PFRA | Proliferation Financing Risk Assessment

alient recommenda ons include

stablishment of na onal targeted nancial sanc ons for domes c designa on of

related persons en es and ssessment on the necessity to criminali e as a dis nct o ence in Malaysia

alient recommenda ons include

e uirement to iden fy, assess and mi gate risk at ins tu onal level and trengthen sanc ons screening program to enable detec on of designated persons and related par es

alient recommenda ons include

trengthen market entry control for both nancial and non

nancial sector and ncrease supervisory examina on for en es ith link to country of concern nancial non nancial sector

alient recommenda ons include

nhance enforcement capabili es to inves gate prosecute

o ence and ntensify surveillance monitoring to detect anks and M s poten ally facilita ng sanc oned person ac vity