Thematic Review on Legal Arrangements 2023

1 Thematic Review on Legal Arrangements 2023 Intermediary Supervision Department Securities Commission Malaysia Thematic Review on Legal Arrangements 2023 Background Scope In response to money laundering and terrorism financing (“ML/TF”) risks associated with legal arrangements, pursuant to Recommendation 25 and Immediate Outcome 5 of the Financial Action Task Force’s Standards on 'Transparency and Beneficial Ownership of Legal Arrangement’, the SC has in 2023 conducted a study to better understand the efforts taken by intermediaries to enable compliance and mitigate ML/TF risks associated with legal arrangements. The review conducted on Legal Arrangements (“LAs”) encompasses express trusts such as private trusts, charitable trusts and foundations, and other similar LAs, including implied trusts and commercial trusts. The scope of the review was designed to look at the key areas relating to:

• onboarding of LA customers
• business-based risk assessment
  (“BbRA”) and
• customer risk profiling.
  We undertook a review across 129 intermediaries. 30 5 94 Stockbroking Companies (SBC) Derivatives Broking Companies (DBC) Fund Management/Unit Trust Management Companies (FMC/UTMC)

2 Thematic Review on Legal Arrangements 2023 Intermediary Supervision Department Securities Commission Malaysia Landscape Within the stockbroking, derivatives broking, and unit trust/fund management (collectively known as “reporting institutions”) sector, LA customers represent a minimal share, accounting for about 2,140 customers or less than 0.1% of total customers as at end 2022. Lower Risk LA Higher Risk LA Cumulatively, inward (injection/deposit) and outward (redemption/withdrawal) transactions contributed less than 6% of the total transactions of RM8.97 trillion from 2020 to 2022.

84%
16%
SBCs
64%
36%
DBCs
66%
34%
FMC/UTMCs
0
1
2
3
4
2020 2021 2022
Transactions by LA Customers Transactions by Others Transactions by LA Low proportion of higher risk LAs Small proportion of transactions by LAs relative to total transactions from 2020 to 2022

3 Thematic Review on Legal Arrangements 2023 Intermediary Supervision Department Securities Commission Malaysia The SC’s findings The thematic review highlights the stockbroking, derivatives broking, and unit trust/ fund management sector's encouraging commitment to addressing ML/TF risks associated with LAs. While the exposure to LA customers remains minimal, the sector has diligently incorporated the ML/TF risks from LA customers into its customer and/or institutional risk assessment and relevant control mechanisms, revealing a robust, comprehensive approach to risk management. As the sector evolves and adapts to emerging challenges, continued vigilance in addressing LA￾related risks remains essential to maintain the sector's resilience against ML/TF threats. The SC remains dedicated to upholding the highest standards of compliance and promoting a secure financial environment. Examples of good practices

Diagram 1: The risk considerations by the RIs as part of its onboarding and ongoing monitoring of LA customers Reporting Institutions (“RI”) have considered ML/TF risks associated with LAs as part of their BbRA. This demonstrates a comprehensive approach to risk management, ensuring that potential risks tied to LAs are accounted for within the broader context of client risks. Comprehensive Risk Assessment:
The RIs maintain databases within their systems, containing information on their LA customers' beneficial owners (BOs). This practice enhances transparency and due diligence efforts, ensuring that BO information is readily accessible for compliance purposes. Database:
RIs utilize multiple risk criteria when assessing LA customers' ML/TF risks during onboarding and ongoing monitoring. This practice underscores the industry's recognition of the multi-faceted nature of LA-related risks and the need for a nuanced evaluation approach. See diagram 1. Diverse Risk Criteria:
There is no disparity in the set of parameters or criteria used for ongoing monitoring compared to other client types or segments. All RIs apply RBA for ongoing due diligence in line with the customers’ risk profiles. See diagram 1. Risk-Based Approach (RBA):
Understanding primary purpose or objective behind the creation of the trust, as different trust objectives may carry varying levels of ML/TF risk. Identifying the individual / entity (the settlor) who established the trust and assessing their backgrounds and intentions. Scrutinizing the source of wealth or funds used to establish and maintain the trust, to ensure it is legitimate and not derived from illicit activities. Evaluating the structure of the trust, including its complexity and the roles of various parties involved, i.e. the settlor, trustee(s) and beneficiaries. Identifying the trustee(s) responsible for managing and administering the trust's assets. Assessing the various methods / types of investments employed within the trust. Determining the type of trust, as each type (private trust, charitable trust, foundation, implied trust, etc.) may have distinct ML/TF risk profile. Identifying the beneficiary(ies) who stand to benefit from the trust and assessing their legitimacy. Determining the jurisdiction in which the trust is established and assessing any ML/TF risks associated with said jurisdiction.