VZCZCXRO1892
RR RUEHBC RUEHCHI RUEHDA RUEHDE RUEHDT RUEHGI RUEHHM RUEHJS RUEHKUK
RUEHLH RUEHNH RUEHPW RUEHROV
DE RUEHKL #0213/01 0862356
ZNR UUUUU ZZH
R 262356Z MAR 08 ZDS
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 0751
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1562
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCNISL/ISLAMIC COLLECTIVE

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 000213 
 
SIPDIS 
 
C O R R E C T E D COPY - ADDED CAPTION 
 
TREASURY FOR OBRIEN, FERNANDEZ AND POLITZER 
STATE FOR USTR - WEISEL AND BRYAN 
STATE FOR FEDERAL RESERVE AND EXIMBANK 
STATE FOR FEDERAL RESERVE SAN FRANCISCO TCURRAN 
USDOC FOR 4430/MAC/EAP/BOYD 
GENEVA FOR USTR 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETTC ECON EFIN KNNP MNUC PARM UNSC IR MY
SUBJECT:  Malaysia Scenesetter for A/S O'Brien: Financial Controls 
 
KUALA LUMP 00000213  001.2 OF 003 
 
 
 
¶1.  SUMMARY:  Prime Minister Abdullah's ruling Barisan Nasional (BN) 
coalition retained power in the March 8 election, but suffered a 
major setback in the face of unprecedented opposition gains. 
Malaysia remains an important partner for the U.S. with strong trade 
and investment ties and close military-to-military cooperation.  The 
Government of Malaysia (GOM) respects decisions by the UN Security 
Council, but Malaysia otherwise opposes use of sanctions as a means 
of diplomacy.  The GOM maintains friendly relations with Iran 
including a burgeoning commercial relationship.  In February 2007, a 
Mutual Evaluation of Malaysia by the Financial Action Task Force 
Asia Pacific Group identified one area of non-compliance with its 40 
Plus 9 recommendations:  cash smuggling.  The GOM has established a 
task force to improve its cash smuggling detection and interdiction 
framework. Charities are regulated by the Registrar of Societies and 
the Companies Commission of Malaysia.  Islamic charitable 
contributions ("zakat") are tax deductible if paid into a 
government-operated clearinghouse, which helps guard against 
charities abuse. END SUMMARY. 
 
POLITICAL SCENE 
 
¶2.  National elections were held on March 8, 2008.  Despite winning 
the election and forming the new government, the Barisan Nasional 
(BN) coalition, which in various forms has ruled Malaysia since the 
country's independence from Great Britain in 1957, suffered from its 
worst performance since the 1969 elections.  In an unprecedented 
swing of support for the opposition, Barisan Nasional lost control 
of four state governments (five are now in opposition hands) and 
lost nearly 30% of its seats in Parliament.  Malaysia's new 
political landscape features a strong opposition in Parliament, 
significant opposition influence in the states on the Peninsula, and 
a resurgence of influence by the nation's hereditary rulers.  Prime 
Minister Abdullah faces a ground swell of dissatisfaction even 
within his own party and, should he hope to weather the storm, will 
be expected to exercise leadership in areas of judicial reform, 
public safety, improved racial relations, good governance, and 
anti-corruption, as well as address core economic issues such as 
inflation and job creation. 
 
A STRONG SECURITY PARTNER 
 
¶3.  Malaysian leaders have taken a strong stance against terrorism 
within its borders and the U.S. is working closely with the 
Government of Malaysia (GOM) to fight this global scourge.  Malaysia 
is a signatory to the International Atomic Energy Agency Additional 
Protocol and has sent observers to Proliferation Security Initiative 
exercises.  The U.S. and Malaysia also share a strong 
military-to-military relationship with numerous exchanges, training, 
joint exercises, and visits.  Although we are not treaty allies, the 
U.S. and Malaysia collaborate closely in the areas of mil-to-mil 
relations and counterterrorism. 
 
MALAYSIA - IRAN RELATIONS 
 
¶4.  Malaysia maintains friendly relations with Iran, including a 
burgeoning commercial relationship.  Malaysia has lent rhetorical 
support to Iran's right to develop "peaceful" nuclear technology but 
also maintains that it will respect UN decisions on Iran, including 
sanctions regimes.    Nevertheless, Malaysia has not yet submitted 
its report to the UN on implementation of UNSC 1737 and 1747 
sanctions.  The U.S. sanctioned one Malaysian freight forwarder 
under the Iran Non-Proliferation Act for its role in shipping 
proscribed materials to Iran.  Another Malaysian company reportedly 
has signed an agreement for a multi-billion dollar investment to 
develop two large natural gas fields in Iran and has inked a joint 
venture to build an oil refinery in Malaysia with 30 percent 
financing from the National Iranian Oil Company.  Iran is expected 
to be the primary supplier of crude for this refinery as well as a 
buyer of refined products. 
 
ECONOMIC TIES 
 
¶5.  The Malaysian and U.S. economies are closely linked with strong 
trade and investment ties, with large U.S. investments in Malaysia's 
energy, electrical and electronic, and manufacturing sectors.  The 
U.S. launched free trade negotiations with Malaysia in mid-2006. 
 
 
FATF/APG MUTUAL EVALUATION OF MALAYSIA 
 
¶6.  The Government of Malaysia (GOM) has a well-developed Anti-Money 
 
KUALA LUMP 00000213  002.2 OF 003 
 
 
Laundering/Counter Terrorist Financing (AML/CTF) framework.  AML/CTF 
is governed by the Anti-Money Laundering Act (AMLA), adopted in 2001 
and amended in March 2007.  In February 2007, the Financial Action 
Task Force Asia Pacific Group (FATF/APG) conducted its second Mutual 
Evaluation on Malaysia.  Malaysia received ratings of "compliant" or 
"largely compliant" on 33 of the 49 FATF Recommendations, 15 ratings 
of "partially compliant;" and one rating of "non-compliant" with 
Special Recommendation on Terrorist Financing IX on cash couriers. 
This largely successful outcome can be attributed to the hard work 
of the Financial Intelligence Unit (FIU) under the leadership of 
Jeremy Lee who became its head in September 2006. 
 
NEXT STEPS ON CASH COURIERS 
 
¶7.  Subsequent to the mutual evaluation, the GOM established a task 
force to formulate action plans to achieve full compliance with 
Special Recommendation IX.  Malaysia's relatively lax customs 
inspection at ports of entry and its extensive coastlines, 
particularly along the east coast of Sabah in Borneo, serve to 
increase its vulnerability to smuggling, including cash smuggling. 
The Task Force is chaired by the FIU and includes the Royal 
Malaysian Customs, Immigration Department, and Ministry of Internal 
Security.  In April the U.S. and Australia will co-sponsor ten 
Malaysian officials to participate in training to combat bulk cash 
smuggling.  Participants will come from the central bank, the 
police, and customs. 
 
 
REPORTING THRESHOLDS AND "KNOW YOUR CUSTOMER" RULES 
 
¶8.  Malaysia's financial institutions have strict "know your 
customer" rules under the AMLA. Every transaction, regardless of its 
size, is recorded.  Cash transactions over RM 50,000 (approx. USD 
14,900) are reported to the FIU. Reporting institutions must 
maintain records for at least six years and report any suspicious 
transactions, regardless of size, to the FIU.  While Malaysia's bank 
secrecy laws prevent general access to financial information, those 
secrecy provisions are overridden in the case of reporting of 
suspicious transactions or criminal investigations.  Malaysia is a 
party to the UN International Convention for the Suppression of the 
Financing of Terrorism, which came into force on June 29, 2007. 
 
 
OFFSHORE AND ISLAMIC FINANCE:  SUBJECT TO THE SAME REGS 
 
¶9.  Labuan, and island off the coast of Borneo, is an offshore 
financial center.  While financial institutions and other companies 
operating out of Labuan enjoy tax and other benefits, they are 
subject to the same AML/CTF provisions as onshore companies. 
Islamic financial service providers also are subject to the same 
AML/CTF provisions. 
 
FREEZING ASSETS 
 
¶10.  The GOM has cooperated closely with U.S. law enforcement in 
investigating terrorist-related cases since the signing of a joint 
declaration to combat international terrorism with the United States 
in May 2002.  The Ministry of Home Affairs and Internal Security has 
the authority to identify and freeze the assets of terrorists and 
terrorist organizations listed on the UN 1267 Sanctions Committee's 
consolidated list and, whenever a new designee is added, the FIU 
issues immediate orders to all licensed financial institutions, both 
onshore and offshore, to do so.  At the same time, the FIU also 
disseminates information on persons and entities designated 
unilaterally by other countries, including the United States, to 
these institutions.  The Malaysian FIU has no authority to order 
financial institutions to freeze assets based on U.S. domestic 
designations; in fact, the GOM has adopted a firm inter-agency 
policy that no individual or entity should be designated 
unilaterally and that only an intergovernmental body such as the UN 
should have the authority to do so. 
 
REGULATING CHARITIES 
 
¶11.  The GOM has rules regulating charities and other nonprofit 
entities.  The Registrar of Societies is the principal government 
official who supervises and controls charitable organizations, with 
input from the Inland Revenue Board (IRB) and occasionally the 
Companies Commission of Malaysia (CCM).  The Registrar mandates that 
every registered society of a charitable nature submits its annual 
returns, including its financial statements.  Should activities 
deemed suspicious be found, the Registrar may revoke the nonprofit 
 
KUALA LUMP 00000213  003.2 OF 003 
 
 
organization's (NPO) registration or file a suspicious transaction 
report.  Registering as a NPO can be bureaucratic and 
time-consuming.  One organization reported that getting registered 
took nine months and required multiple personal interviews to answer 
questions about its mission and its methods.  Some NPOs reportedly 
register as "companies" instead, a quick and inexpensive process 
requiring capital of approximately 60 cents and annual financial 
statements. 
 
¶12.  In March 2006 the FIU completed a review of the non-profit 
sector with the Registrar, the IRB, and the CCM, in an effort to 
ensure that the laws and regulations were adequate to mitigate the 
risks of nonprofit organizations as conduits for terrorist 
financing.  BNM reports that the review did not show any significant 
regulatory weaknesses; however, the GOM is considering measures to 
enhance the monitoring of fundraising, including increased 
disclosure requirements of how funds are spent. 
 
¶13.  Malaysia's tax law allows a tax credit, which encourages the 
reporting of contributions, for Zakat (alms) to mosques or 
registered Islamic charitable organizations.  Islamic Zakat 
contributions can be taken as payroll deductions, which helps 
prevent the abuse of charitable giving. 
 
SUGGESTED THEMES AND TALKING POINTS: 
 
¶14.  (SBU) During the visit, we should highlight the strong 
cooperation between the U.S. and Malaysia in combating terrorism and 
terrorist finance and emphasize that your purpose is to share 
intelligence with a strong partner.  While there are issues to be 
addressed, the visit will go more smoothly if we can note that 
Malaysia's anti-money laundering/counter-terrorist finance framework 
is a success story and that Bank Negara's FIU has emerged as a 
leader in Southeast Asia.  Giving Bank Negara credit for providing 
technical assistance to a number of countries in the region over the 
past few years and pointing to Malaysia's strong performance in the 
2007 FATF Mutual Evaluation would be a plus as well.  On a separate 
note, Malaysian government officials and private sector bankers are 
likely to ask about the U.S. financial sector and whether the U.S. 
economy is going into a recession.