ROLES OF THE ISLAMIC FINANCIAL INSTITUTION IN COMBATING
MONEY LAUNDERING: LEGAL AND SHARIAH PERSPECTIVES
Zulkifli Hasan
Faculty of Syariah and Law
Islamic Science University of Malaysia
Tel: 06-7988483 Fax: 06-7988530 E-mail: [email protected]
ABSTRACT
Money laundering is not a new phenomenon in Malaysia. It creates a negative impact on
the economic growth as it facilitates crime and stimulates illegal activities. Money
laundering also perpetuates crimes as they encourage the underlying criminal activity
from which illicit proceeds are generated. It could not be denied that money launderers
commonly use Islamic financial institution as a place to legitimate their ill-gotten gains
through utilization of various financial instruments. It is really important to ensure that
Islamic financial institution is protected from any potential abuse by money launderers to
ensure that the public at large has confidence on the credibility of the Islamic financial
institution. Government then introduced a few measures for the prevention of money
laundering and one of it is Anti Money Laundering Act 2001 (the AMLA). The AMLA
provides that financial institution has statutory duty towards the authority to report any
suspicious transaction relating with money laundering. This paper therefore tries to
explore the duty of Islamic financial institution1 in combating money laundering with
reference to the AMLA, Islamic perspective, relevant authorities and reported cases.
1.0 INTRODUCTION
Money laundering is the process by which criminals create the illusion that the money
they are spending is actually theirs to spend2. Section 3 of the AMLA defines money
laundering as the act of a person who engages, directly or indirectly in a transaction that
involves proceeds of an unlawful activity, and who enquires, receives, possesses,
disguises, transfers, converts exchanges, carries, disposes, uses, remove from or brings
into Malaysia proceeds of any unlawful activity. In short, the term of money laundering
involves three main activities namely the conversion of illegal cash into another asset, the
concealment source of the illegally acquired proceeds and with the creation of the
perception of legitimacy of source and ownership.
1
Section 3 of the AMLA defines financial institution as an institution licensed under the Islamic Banking
Act 1983, the Takaful Act 1984, The Banking and Financial Institutions Act 1989, The Insurance Act 1996
and the Money-Changing act 1998 or a person licensed under the Securities Industry Act 1983, the
Securities Commission Act 1996 and the Futures Industry Act 1993 or an offshore financial institution
(Labuan Offshore Financial Services Authority) Act 1996.
2
Guy Stessens. (2000). Money Laundering a New International Law Enforcement Model. United
Kingdom: Cambridge University Press. p. 82.
1
Money laundering process comprises of three main stages. The first stage is placement,
which means illegal gains which introduce into the financial system. The illegal profits
may derive from drug trafficking, prostitution rings, smuggling, illegal arms sale,
kidnapping for ransom, bribery, computer-fraud schemes and smuggling of human beings
and organs. Secondly, “layering” is the process of transfering illegitimate funds among
various accounts so as to disguise the money trail such as purchase and sales of
investment instruments or through multiple transfers of funds from different accounts
around the world disguised as payments for goods or services. The last stage is
integration ie to integrate the illegal proceeds back into the economy as legitimate funds
through legitimate transactions such as business ventures, luxury assets, lending,
financing and investing3.
It is a matter of vital important for every country as well as Malaysia to combat money
laundering in preventing the criminals from utilising the existing financial instrument for
their benefits. It could not be denied that money launderers may also use Islamic financial
instrument to legitimate their illegal proceeds. Here, Islamic Financial Institution (IFI)
has a duty to report any suspicious transaction to competent authority. If there is no
effective mechanism in handling money laundering activities especially within the
framework of IFI, we believe that it may affect the development of Islamic banking and
also negate the public confidence. Hence, the aim of this paper is to provide an overview
on the roles of IFI in combating money laundering through legal and shariah
perspectives.
2.0 PREVENTIVE MEASURES OF MONEY LAUNDERING AND ITS
RELATION WITH IFI
In International community, the Financial Action Task Force on Money Laundering
(FATF) is an important inter-governmental body that develops and promotes policies to
combat money laundering. The G-7 industrial group established the FATF as a global
money-laundering watchdog, as a response over money laundering. In Malaysia, there are
3
Goerge J Kriz. International Cooperation to Combat Money Laundering: The Nature and Role of Mutual
Legal Assistance Treaties (1993) 1 CLJ xxvi
2
certain preventive measures that have been taken by the authorities and these include
inter alia:-
2.1 Guidelines on Money Laundering and Know You Customer Policy
Central Bank of Malaysia (CBM) has issued a directive known as “Guidelines on Money
Laundering and Know You Customer Policy”. This guideline derived from one of the
FATF forty recommendations. These “Forty Recommendations” are viewed as the
leading framework of measures for combating money laundering and terrorist financing.
All reporting institutions including IFI must comply with this CBM’s directive.
2.2 Asia Pacific Group on Money Laundering and NCC
Malaysia joined the Asia Pacific Group on Money Laundering (APG) in 2000. Beside,
there is also a committee at national level to combat money laundering consists of 13
ministries and government agencies known as NCC which has been set up in April 2000.
The objective of this committee is to develop strategies, policies to prevent money
laundering activities.
2.3 The Anti-Money Laundering Act 2001 (the AMLA)
The Malaysian government took a step in combating money laundering by introducing
the AMLA. The AMLA gives certain agencies authority to trace, seize and ultimately
confiscate criminally derived wealth and enabling inter government exchange of
information with counterparts in other countries. The amendments to the AMLA have
been passed by the Parliament on 20th November 2003 and gazetted as law on 25th
December 2003. This is the first amendment since the enforcement of the AMLA in
2001. The purpose of the amendment is to cover the element of terrorist financing in
combating terrorism activities in Malaysia.
3
Before the amendment, the AMLA consisted only 92 sections with 2 schedules. The
amendment inserted new provision in Part VIA which covers suppression of terrorism
financing offences and freezing, seizure and forfeiture of terrorist property. Anti Money
Laundering (Amendment) of Second Schedule Order 2003 provides the insertion of new
predicate offences in Banking and Financial Institutions Act 1989, Betting Act 1953,
Customs Act 1967, Explosives Act 1957, Futures Industry Act 1993, Kidnapping Act
1961, Penal Code and Securities Industry Act 19834. This is to provide a comprehensive
and integrated approach from various institutions in preventing money laundering
activities.
2.3.1 Reporting Institutions
CBM has set up the Financial Intelligence Unit (FIU) to carry out its functions as the
competent authority5. The FIU conducts regular briefing sessions for reporting
institutions’ compliance officers to clarify issues and resolve problems relating to the
AMLA compliance.
Reporting institutions refer to financial Institution as an institution licensed under the
Islamic Banking Act 1983, the Takaful Act 1984, The Banking and Financial Institutions
Act 1989, The Insurance Act 1996 and the Money-Changing act 1998 or a person
licensed under the Securities Industry Act 1983, the Securities Commission Act 1996 and
the Futures Industry Act 1993 or an offshore financial institution (Labuan Offshore
Financial Services Authority) Act 1996 including Lembaga Tabung Haji, Development
financial institutions, postal financial services and gaming houses.
2.3.2 Roles of Reporting Institutions vis a vis IFI
(a) Reporting of Suspicious Transactions
4
Section 2 (a) until (h) of the Anti Money Laundering (Amendment) of Second Schedule Order 2003.
5
Section 7(1) of the AMLA.
4
According to section 14 of the AMLA, banks or financial institutions have responsibility
to report for any suspicious transactions to CBM. It provides for the FIU to collaborate
with the relevant domestic regulatory, supervisory and enforcement agencies in
intelligence gathering, analysis and dissemination. Within the enforcement framework,
the FIU provides investigation support with more effective information sharing and
intelligence analysis. The process of reporting, receiving, analyzing and disseminating
financial intelligence on any suspicious transaction may be summarized as follow:
Diagram 1: The process of Suspicious Transaction Reports6
Relevant
Information Provider Agencies
Reporting institutions
(hardcopy or online Analyis Tool
submission via the
financial intelligence
System (FINS) Report/
Database
Foreign FIU – exchange
Feedback Provide additional Information
Analysed Information
Public
Investigating
Agencies Information and Evidence for prosecution
(b) Internal Policy
The AMLA requires a reporting institutions to adopt, develop and implement internal
programs, policies, procedures and controls to guard against and detect an offence.
Therefore, the reporting institution as well as its branches and subsidiaries shall
implement compliance programs in and outside Malaysia. This internal policy should be
comprehensive, credible and action-oriented aimed at enhancing CBM’s measures to
combat money laundering.
For instance Bank Muamalat Malaysia Berhad, established some infrastructure focussed
on the prevention and detection of illegal and laundering activities within the Bank.
Therefore, the policy and procedures have been formalized and documented to guide all
6
Financial Intelligence Unit (FIU) of Central Bank of Malaysia
5
employees and to inculcate awareness on money laundering. This policy includes inter
alia, purpose of Anti Money Laundering policy and employees’s responsibility either at
branches level or head office of financial institutions.
(b) Know Your Customer.
IFI shall make reasonable efforts to determine the identity of all customers. There must
be a standard operational procedure to enable IFI in identifying customers such as
verifying by reliable means the identity, legal capacity, occupation or business purpose
through the use of documents such as identity card, passport, birth certificate and driver’s
licence7.
(c) Compliance officer
IFI is required to establish and adopt clear anti-money laundering reporting lines. As
such, IFI shall appoint an officer at management level who will be in charge of the
internal procedures regarding anti money laundering8. An officer who in charge this
internal procedures and reporting of suspicious transactions to FIU is known as a
Compliance Officer9. The Compliance Officer will deal with the FIU of any matter
pertaining to suspicious transactions as well as inculcating awareness to employees on the
essence of anti money laundering programme.
(d) Continuous Training
IFI shall inculcate staff awareness on anti money laundering. Guidelines on Money
Laundering and Know You Customer Policy issued by CBM requires financial institution
to conduct continuous training to its employees either at branch or management level.
Training module shall emphasize on procedures in facilitating the recognition, treatment
7
Section 16 (2) of the AMLA.
8
Section 19 of the AMLA.
9
At branch level, branch manager is a compliance officer and at head office, Senior Assistant Vice
President of Operations Department is a compliance officer. See n.a. (2004). Suara Muamalat. 11th Edition.
p. 19.
6
and reporting of suspected money laundering activities10.
(e) Record Keeping
Section 17 of the AMLA requires reporting institution to maintain record for not less than
6 years. Reporting institution has to keep the records of all transactions involving both
local and foreign customers. These include identity and address of both remitter and
beneficiary, accounts affected, transaction type, identity of reporting bank, date, time,
amount and treatment of multiple transfers.
(f) Production of Documents
Public Prosecutor if he is satisfied may authorize in writing an investigating officer in
relation to any financial institution to inspect, take copies of books, record, reports
belonging to the bank and to scrutinize share transactions or related affairs. The officer of
any financial institution in charge shall furnish a copy of all the accounts, books, records,
documents, relating to the person to whom a notice is issued11.
(g) Freezing Orders
Section 44 (1) states that where an enforcement agency having the power to enforce the
law under which a serious crime is committed or about to be committed, it may issue an
order freezing any property of that person, wherever his property may be or in his
possession , under his control or due from any source to him. In the context of financial
institutions, they shall then freeze the accounts based on the order issued by the
enforcement agency.
10
Section 19 (2) of the AMLA.
11
Section 44 and 49 of the AMLA.
7
3.0 SHARIAH PERSPECTIVE
Islam prohibits us to involve in any economic activities and services which are
contradicted with the teaching of Islam such as money laundering activities. As Allah
Subhanahu Wataala (SWT) says in al-Quran surah al-Baqarah verse 188: “And do not
eat up your property among yourselves unjustly and do not use it as bribe for the judges,
with intent that you may eat up wrongfully and knowingly (even) a little of other people’s
property. The word unjustly in this verse refers to property incurred through illegal ways
such as stealing, deceiving, smuggling, cheating and so on and so forth12. Money
laundering involves proceeds of illegal activities and Islam does not recognize any
property derived from such sources.
(a) Duty to Promote Good and to Forbid Wrong
Basically, IFI has a duty not only required by statutory law such as the AMLA but as well
as the decree of religion of Islam. Islam promotes its followers not only to do good things
but also to forbid wrong such as criminal activities. This duty is put in the shoulder of an
individual as well as institution or corporate body as Allah SWT says in al-Quran surah
al-Imran verse 104:- Let there arise from you a group of people inviting to all that is
good, bringing together what is right and forbidding what is wrong, they are the ones to
reach ultimate felicity13. As such, IFI has responsibility to prevent or to combat money
laundering activities which are clearly contradicted with the teachings of Islam.
Islamic banking principles prohibit the production of goods and services that contrary to
the value of Islam and to avoid any illegal economic activities. The definition of Islamic
banking business as banking business whose aims and operations do not involve any
element which is not approved by the religion of Islam in section 2 of the Islamic
Banking Act 1983 clearly provides that IFI should not involve in any financial activities
which is forbidden.
12
Muhammad Taqiuddin Al Hilali and Muhammad Muhsin Khan. (1996). The Noble Quran A
summarized Version of At-Tabari, Al-Qurtubi, and Ibn Kathir with comments from Sahih Al-Bukhari.
Riyadh: Darussalam. p.49.
13
Syed Vickar Ahameed. (1999). Interpretation of the Meaning of the Glorious al-Quran. English (trans).
Kuala Lumpur: TR Group of Companies. p. 72.
8
(b) Privacy Right
In Islam, any person includes IFI shall observe secrecy principles ie to keep the
customer’s data and identity as confidential. In contrast section 14 of the AMLA requires
IFI to report for any suspicious transactions to competent authority and this may lead to
the disclosure of customers’ identity to third party without consent. In fact, section 20
states that the secrecy obligations overridden, which gives the power to CBM to
investigate any information in customer’s account. The issue is whether IFI is permitted
in the eyes of shariah to do so?
Islam respects privacy rights and considers privacy right as essential. Any information
received must be kept as a trust and no person is allowed to disclose it without the
owner’s consent14. Islam guarantees privacy right to every individual as Allah says in al-
Quran surah al-Hujurat verse 12: O yo who believe! avoid suspicion as much (as
possible), for suspicion in some cases is a sin, and do not spy on each other, do not speak
ill of each other behind their backs, would any of you like to eat the flesh of his dead
brother? No! You would hate it but fear Allah, for Allah is often-returning, most
Merciful15.
However, the above principle of privacy right is not absolute and there is an exception.
For instance we may refer to the permissibility of disclosing information by witness in
the court. This exception is laid down in al-Quran surah al-Baqarah verse 283 as Allah
SWT says: ..do not conceal testimony, for whoever conceals it, his heart is stained with
sin, and Allah knows all that you do16.
In addition, there is a job of its nature which require of exposing information such as
doctor, judges, police, investigator and religious enforcement officer17. Here, IFI’s officer
14
Syarif bin Adwal bin Idris. (1997). Khitman Al-Sir wa Ifshauhu fi Fiqh Islami. Jordan: Darul Nafais.
p.15-16.
15
Supra note 13. p. 655.
16
Supra note 13. p. 55.
17
The meaning for suspicion in some cases is a sin in this verse verifies that not all suspicion is prohibited.
See Muhammad Ali al-Sabuni. (1980) Safwatu al-Tafasir. Dar al-Kitab al-Islamiah. p. 230
9
especially its compliance officer is also allowed to disclose information and report to
competent authority of any suspicious transaction involving money laundering. The
nature of its job scope requires him to suspect, investigate and disclose of information on
any suspicious transaction. It is his duty to prevent any suspicious criminal to legitimate
his illegal proceeds through utilization of Islamic financial instrument. Moreover,
principle of maslahah or public interest may also be invoked in permitting such
disclosure made by any IFI’s personnel.
4.0 CASES
In Malaysia, there are several prosecutions for the offence of money laundering under
section 4 (1) of the AMLA and all of these cases involve financial institutions as a mean
to legitimate illegal money. From facts of the cases below, it is observed that financial
institution may identify any suspicious transaction of its customer and further assists the
competent authority in preventing money laundering activities. This paper briefly
explains four selected cases as follows:-
(a) Public Prosecutor v Dr. Hamimah18
This is the first case where the accused has been charged with section 4 (1) of the AMLA
and if upon conviction he may be fined not exceeding RM5 million or jailed term not
exceeding five years or both. Dr Hamimah, 55 years is a former director of Safire
Pharmaceutical (Malaysia) Sdn. Bhd. She was charged under the AMLA involving a sum
of RM37.062 million at Kuala Lumpur Sessions Court. She faces seven charges of
receiving money being proceeds from unlawful activities overseas. Dr Hamimah is
accused of receiving RM2.2 million through her daughter’s account with RHB Bank on
June 9 2002. She is also alleged to have received RM6.7 million through account of
Azam Rahmat Sdn. Bhd. where the accused is a director, also at the same bank between
June 3 and 9 2003. She also faced a charge of receiving RM4.7 million through the
account of One Oscar Sdn. Bhd. at Bank Bumiputra Commerce Bank Berhad. Dr
18
n.a. (24 April 2004). ”Doktor Di Tuduh Terima RM37 juta hasil Aktiviti Haram”. Utusan Malaysia.
http//www.utusan.com.my/utusan/archive.
10
Hamimah is also alleged to receive a total of RM4.7 million via the accounts of
Megbridge Sdn. Bhd., D’Oscar Builders Sdn. Bhd. and Meridien Tenggara Sdn. Bhd.
between 4 and 6 June 2003 and RM9 million through the account of Desa Ikhlas Sdn.
Bhd. at the same bank between 6 and 10 June 2003. The case is still pending.
(b) Public Prosecutor v Gan Kiat Bend19
This case involves a land broker in Kuala Lumpur. Gan Kiat Bend was charged in Kuala
Lumpur Sessions Court for accepting illegal money in a sum of RM2 million from Syed
Ahmad Faudzi Syed Abu Bakar a land broker through Standard Chartered Bank in
January 2004. He was charged under section 4(1) of the AMLA and the case is still
pending.
(c) Public Prosecutor v Ismail Husin20
This case involves a land broker age 53 from Perlis. Ismail Hussin was charged in Kuala
Lumpur Sessions Court on 3 May 2005 for accepting and using illegal money in a sum of
RM2.85 million through 11 cheques of Standard Chartered Bank and a telegraphic
transfer from the bank to his wife’s Bank Bumiputra Commerce account. The accused
received the money which is derived from illegal activities of fraud and forgery of land
certificate. The judge fixed bail at RM150,000 in one surety and directed that all his
travel documents be kept with the court. The case is still pending.
(d) Public Prosecutor v Abdul Khalid Hamid21
19
Rokiah Abdullah. (5 February 2005). “Broker Tanah Dituduh Ubah Wang RM2 juta”. Utusan Malaysia.
http:// www.utusan.com/utusan/archive.
20
Rokiah Abdullah. (3 Mei 2005). “Broker Hadapi 12 tuduhan pengubahan Wang Haram”. Utusan
Malaysia. http:// www.utusan.com/utusan/archive.
21
Suwarni Mokhtar. (19 December 2005). “'Peragut Mewah' Guna Wang Haram Dihukum Penjara Tiga
Tahun”. Utusan Malaysia. http://www.utusan.com/utusan/archive. see also Amizul Ahmad Tarmizi. (10
November 2005). “Peragut Mewah Dituduh Guna Wang Haram”. Utusan Malaysia.
http://www.utusan.com/utusan/archive.
11
Abdul Khalid Hamid was found guilty under section 4(1) of the AMLA. He was charged
of using illegal money in a sum of RM65,761.09 between July 2002 to July 2004. The
money which is derived from various illegal activites is used for installment and deposit
for buying a house in Bukit Rimau, Shah Alam, Proton Perdana V6 and Mercedes Benz.
Judge Suraya Othman. This is the first conviction under the AMLA since its enforcement
on 15 January 2001.
5.0 CONCLUSION
Malaysia has taken serious efforts in combating money laundering by introducing the
AMLA and issuing the Guidelines on Money Laundering and Know Your Customer
Policy issued by Central Bank of Malaysia. The need for an effective legal mechanism
especially within the financial institution’s framework through an integrated approach to
prevent money laundering is the very essence in ensuring the public confidence on the
economic and political stability.
Reporting institution as defined under the AMLA plays very important roles in term of
reporting, internal policy, compliance officer, record keeping, freezing orders and know
your customer policy. These functions are statutory requirements to all reporting
institutions including IFI. In fact, IFI has further duty to prevent money laundering
activities as promoted by religion of Islam. Shariah views that statutory duty under the
AMLA upon reporting institutions as commendable and in line with the spirit of Islam.
12
REFERENCE
Amizul Ahmad Tarmizi. (10 November 2005). “Peragut Mewah Dituduh Guna Wang
Haram”. Utusan Malaysia. http://www.utusan.com/utusan/archive.
Guy Stessens. (2000). Money Laundering a New International Law Enforcement Model.
United Kingdom: Cambridge University Press. p. 82.
Goerge J Kriz. International Cooperation to Combat Money Laundering: The Nature and
Role of Mutual Legal Assistance Treaties (1993) 1 CLJ xxvi
Muhammad Ali al-Sabuni. (1980. Safwatu al-Tafasir. Dar al-Kitab al-Islamiah.
Muhammad Taqiuddin Al Hilali and Muhammad Muhsin Khan. (1996). The Noble
Quran A summarized Version of At-Tabari, Al-Qurtubi, and Ibn Kathir with
comments from Sahih Al-Bukhari. Riyadh: Darussalam. p.49.
n.a. (2004). Suara Muamalat. 11th Edition. p. 19.
n.a. (24 April 2004). ”Doktor Di Tuduh Terima RM37 juta hasil Aktiviti Haram”. Utusan
Malaysia. http//www.utusan.com.my/utusan/archive.
Rokiah Abdullah. (5 February 2005). “Broker Tanah Dituduh Ubah Wang RM2 juta”.
Utusan Malaysia. http:// www.utusan.com/utusan/archive.
Rokiah Abdullah. (3 Mei 2005). “Broker Hadapi 12 tuduhan pengubahan Wang
Haram”. Utusan Malaysia. http:// www.utusan.com/utusan/archive.
Syarif bin Adwal bin Idris. (1997). Khitman Al-Sir wa Ifshauhu fi Fiqh Islami. Jordan:
Darul Nafais. p.15-16.
Syed Vickar Ahameed. (1999). Interpretation of the Meaning of the Glorious al-Quran.
English (trans). Kuala Lumpur: TR Group of Companies. p. 55.
Suwarni Mokhtar. (19 December 2005). “'Peragut Mewah' Guna Wang Haram Dihukum
Penjara Tiga Tahun”. Utusan Malaysia. http://www.utusan.com/utusan/archive.
Statutes
The Islamic Banking Act 1983
The Takaful Act 1984
The Banking and Financial Institutions Act 1989
The Insurance Act 1996
The Money-Changing act 1998
The Securities Industry Act 1983
The Securities Commission Act 1996
The Offshore financial institution (Labuan Offshore Financial Services Authority) Act
1996
The Anti Money Laundering (Amendment) of Second Schedule Order 2003
Cases
Public Prosecutor v Dr. Hamimah
Public Prosecutor v Gan Kiat Bend
Public Prosecutor v Ismail Husin
Public Prosecutor v Abdul Khalid Hamid
13
