By Lalitha Kunaratnam

KUALA LUMPUR, Malaysia--The 1Malaysia Development Berhad (1MDB) scandal which blew up during Prime Minister Najib Razak’s administration revealed that political corruption is a deep-seated, systemic problem in Malaysia. 

Recently, we are reminded again about how opaque the financial manoeuvrings of the super-rich are when the FinCEN (Financial Crimes Enforcement Network) files and, subsequently, the Pandora Papers exposed massive funds that had been passed through secret jurisdictions and invested in a succession of complex assets.

The sheer scale of illicit funds in circulation in the financial sector, mainly due to a lack of transparency and complex ownership declarations, enable transnational organised criminals to exploit legal loopholes and take advantage of weak anti-money laundering regimes across the globe.

It reveals a broken and unjust system, where regulatory and enforcement agencies are barely uncovering the tip of the iceberg in the fight against financial crime.

Some well-known examples include fugitive Malaysian businessman Nicky Liow Soon Hee and ex-Macau crime boss Wan Kuok-koi, also known as Broken Tooth. 
Liow has been accused of money laundering, involvement with scam syndicates in Macau, and commercial crime. An Interpol Red Notice has been filed for his arrest for organised crime charges after he reportedly evaded capture in March, fleeing the town of Puchong, with eight bags of cash in tow.

Meanwhile, Wan, whose business interests spanned Cambodia, Palau, and Myanmar, is also the subject of an Interpol Red Notice filed in February 2021 by Malaysian police. 
They are seeking his arrest for commercial crime related to his time as non-executive chairman of Inix Technologies Holdings Berhad from June to December last year. 
It was reported by Reuters that Wan is blacklisted by the US due to his involvement in drug trafficking, illegal gambling, racketeering, and human trafficking.

Where are the illegal proceeds coming from?

In most cases, the source of the illegal proceeds was generated from the embezzlement of public funds, crimes related to corruption and abuse of power, fraud in the financial sector, and drug trafficking.

What happens to this money?

Illegal proceeds need to be laundered, i.e., to enter the financial system without the stigma of illegality. Whilst money laundering schemes vary in their complexity and methods, the three common stages are: placement, layering and integration.

“Placement” is the term given to the process of moving illegal proceeds into the legitimate economy and further away from its illegal source. “Layering” involves making the money as hard to detect as possible, by passing it through several hands. “Integration” is where the cash comes back into the legitimate economy.

Having successfully processed criminal profits through the first two phases, the launderer might choose to invest the funds into real estate, luxury assets, or business ventures.

The methods most commonly used to launder these illegal proceeds include: using front or shell companies or other non-resident legal persons and arrangements; trade-based money laundering through fictitious economic activity abroad; and misuse of electronic payments and virtual currencies.

Why isn’t money detected at the source?

While financial institutions have a significant role to play in detecting illicit activity, criminals have sought to diversify their operations. An emerging threat is the rise of cryptocurrency, which, in its largely unregulated state, is creating a breeding ground for criminals.

At the same time, corruption may facilitate money laundering: corrupt officials may influence the process by which proceeds are laundered, and enable launderers to escape all controls and sanctions.

As perceived in the case of the infamous Macau Scam suspect, Alvin Goh, and his partner Dato Addy Kana, both allegedly acted as agents or coordinators in providing facilities for the money-laundering syndicate. 
They were believed to be supported by a network of senior police officers, celebrities, and successful entrepreneurs, to launder the defrauded money. Alvin Goh allegedly “spent” between RM2 million and RM4 million a month on various parties to cover up his purported crimes.

To-date, 730 bank accounts involving RM80 million have been frozen and approximately RM5 million in cash as well as 28 luxury vehicles have been seized.

What are the weaknesses that need to be addressed?

The FinCEN files and Pandora Papers highlighted several recurring, common elements that need to be addressed to mitigate this threat of money laundering which supports criminal activities. Among these are:

1. The use of shell companies formed in jurisdictions that do not require the identification of the beneficial owners of the companies or their assets. Examples of such schemes include the use of companies formed in the British Virgin Islands to open bank accounts in Cyprus.

2. Lax anti-money laundering and counter financing of terrorism (AML/CFT) compliance by financial institutions and money changers, as well as the inability of such institutions to detect transactions involving illegal proceeds.

3. The lack of cross-border cooperation by some countries in response to mutual legal assistance requests from countries where money laundering has taken place.

4. Corruption and the failure of bank regulators in some countries that open the door to the use of domestic financial institutions by foreign actors to launder the proceeds of foreign crime.

5. The facilitators involved in the property deals – law firms, real estate, accountants, professional services firms – are not subject to the same regulatory scrutiny as financial institutions when it comes to AML/CFT compliance. They are effectively unregulated and don’t have processes in place to prevent financial criminals, such as the prominent figures named in the Pandora Papers, from exploiting the loopholes.

6. The inability of some governments to investigate and prosecute money launderers and to recover criminal proceeds using existing tools as the process requires strict and meticulous tracing and linking of assets to criminal activity.

Research has shown that countries with a low level of control over corruption tend to have lower levels of compliance with the AML/CFT standards. 

Malaysia dropped six places in the Transparency International Corruption Perception Index 2020, placing it 57th out of 180 countries as ranked by their perceived level of public sector corruption. 
In addition, Malaysia’s money laundering risk score increased from 5.25 to 5.47 out of 10 (highest risk score), according to the Basel Institute on Governance.

While authorities and regulators have undeniably been making efforts to close the net around individuals and firms involved in financial crimes, the currently reactive approach presents solutions that form barely a drop in the ocean compared to the scale of the problem, doing little to prevent financial crime.

If we are to learn anything from the FinCEN files and Pandora papers, it is that governments, law enforcement agencies, businesses, and financial institutions must act fast and openly collaborate while sharing timely information to help intercept crime at the source, to prevent financial crime and crucially, also to protect public resources.

*Lalitha Kunaratnam is an anti-corruption activist who believes policymakers need to step up their game and make plans for serious reforms*