This article provides a brief overview of Malaysia's Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (Act 613), otherwise known as AMLATFA. In particular, it focuses on the latest additions to the list of predicate offenses under the AMLATFA, namely a number of offenses relating to tax reporting and payment and the operation of illegal Kootu schemes.
Overview of the AMLATFA
Malaysia's Anti-Money Laundering Act 2001 (AMLA) was enacted in January 2002. The AMLA has been renamed and revised as Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (Act 613) which came into force on March 6, 2007 that incorporated relevant requirements in the area of terrorism financing. The AMLATFA criminalizes money laundering and lifts bank secrecy provisions for criminal investigations involving 248 predicate offenses.
All reporting institutions are subject to the same review by the Financial Intelligence Unit, which is overseen by the Central Bank of Malaysia and enforcement agencies. They also must file suspicious transaction reports under the AMLATFA. Reporting institutions include: commercial banks, merchant banks, finance companies, Islamic banks, money changers, discount houses, insurance brokers, Islamic insurance (Takaful) operators, offshore banks, offshore insurers, offshore trusts, the Pilgrims Fund, Malaysia's Postal Service, development banks such as Malaysia's National Savings Bank, the People's Cooperation Bank and licensed casinos. Money laundering controls have not been extended to some nonbanking financial institutions, including exchange houses and stock brokerages or to intermediaries such as lawyers, accountants and brokers.
Latest Changes to AMLATFA
The two latest additions, in addition to the existing list of 248 predicate offenses, are as follows:
Taxation related offenses
- Failure to furnish, return or give notice of chargeability to the Inland Revenue Board (IRB)
- Furnishing incorrect returns
- Willful evasion
Prohibition of carrying on the business of promoting Kootu funds. The official definition of Kootu funds is defined in Section 2 of Act 28 Kootu funds (Prohibition) Act 1971. They are a "scheme or arrangement variously known as a kootu, cheetu, chit fund, hwei, tontine or otherwise whereby the participants subscribe periodically to a common fund and such common fund is put up for sale or payment to the participants by auction, tender, bid, ballot. In non-legal terms, a Kootu fund can be loosely defined as a group of individuals agreeing to contribute to a pool of funds at regular intervals, consisting of a previously-agreed amount of money at either in monthly or weekly intervals. The funds are withdrawn from the pool by the individual through a lottery mechanism. For example, a group of 20 individuals agree to participate in a Kootu fund, and the terms involve each individual contributing a fixed amount of RM100 (US$35) per month for 20 months. Using a lottery mechanism on a monthly basis, the person who is randomly selected first thus receives RM2,000 in value equivalent to 20 months of contribution of RM100, despite having contributed merely RM100 in their first month. The lottery is conducted on a monthly basis until all 20 individuals receive their RM2,000. The fund structure is not intended to be profit-driven, but rather to provide increased leverage for a small group of individuals financially bound together on the basis of trust. Clearly, a Kootu fund benefits the individuals who can withdraw the fund at the early end of the cycle, and thus the potential abuse of such a scheme is the reliance on trust and integrity of the individuals in the early cycle who have received their funds to continue to contribute to the fund in order for later members to receive theirs.
The introduction of the tax related predicate offenses was enacted into law in October 2010. The inclusion of these tax predicate offenses has widened the powers of the IRB. Many taxpayers are still unaware of these changes to the AMLATFA list of predicate offenses. A few cases already are being investigated under this section and will be charged in due time.
It is likely that the introduction of the tax related predicate offenses was influenced by the success of the U.S.'s Internal Revenue Service in obtaining approximately 4,550 names from UBS AG, where the bank paid US$780 million in fines and disbursements.
It was only around June 2010 that I first heard of Kootu funds and later, the Kootu Funds (Prohibition) Act 1971. From the 1960s to the 1970s, kootu funds were used specifically by family members, amongst friends or within a small village. Many found it to be quite user friendly as it was like a micro-financing scheme. The kootu fund or tontine fund was essentially a free credit line built on mutual trust; it maintained close relationships and even strengthened networks between professional women, amongst family members and friends. How it works is that all involved subscribe periodically or otherwise to a common fund. When a participant borrows from the fund, each member will keep the borrower accountable on the repayment. The nature of these funds is not profit in nature but as a means to help the borrower through financial difficulties or for other use.
Features of a Kootu Scheme
- Easy investment, over a short period of time
- Low advance investment rate but good return
- No product sales involved
- No hard work necessary
- Profit earned based on the contribution of other participants
- Additional profit is obtained when an investor introduces new players
- Adopt similar modus operandi used in direct sales scheme
Source: Ministry of Domestic Trade, Co-operatives and Consumerism
Such funds still exist today among low-income groups and in remote villages where access to financing from a financial institution is almost impossible. The kootu fund can be likened to a traditional micro-financing scheme, whereby small loans of typically less than US$100 are extended to the rural poor, mainly at the village level.
As an informal way to borrow small amounts of money, kootu funds were susceptible to abuse. This led to passage of the Kootu Funds (Prohibition) Act 1971. Since then, any kootu or tontine profiteering schemes have been proscribed, and any registered business running anything resembling a kootu fund is liable to penalty of up to RM5,000 and/or a jail term of up to three years.
With many other regulated investments in the market today, why do people invest in kootu schemes? Why invest in a high-risk investment which is subject to fraud? A kootu or ontine fund may make profits through ways ranging from simple drawing of lots to auctions to members. In cases where the scheme is as large as World Heritage Resources, a business that was incorporated under the Registration of Business Act 1956 (Act 197),which had more than 300,000 members and a total fund size of RM30 million accumulated over two years, the financial risks to participants is high. The high likelihood of funds disappearing with or without a trace is very real, irrespective of whether the scheme is operated by a registered business. To add salt to the wound, the returns in this case were paid using postal orders, which are under the radar of financial institutions' sophisticated money-laundering systems.
The national postal system, Pos Malaysia Berhad, is a reporting institution to the FIU of the Central Bank of Malaysia. The APG Mutual Evaluation Report on Malaysia issued in July 2007 recommended that Pos Malaysia "apply more dynamic and less rigid criteria for detecting suspicion." However, the directors of World Heritage Resources still managed to purchase hundreds of thousands worth of postal orders without alerting any suspicion. The report also stated that though Pos Malaysia's STR filings had increased tenfold, from 73 in 2005 to 703 in 2006, the filings were "rules-based indicators that generated STRs irrespective of any underlying suspicion." Pos Malaysia therefore needs to reduce false positives and greatly improve the quality of its STR filings.
From 2009 to 2010 alone, nine cases have been brought to court for violations of the act. In February 2011, amendments were made to the Kootu Funds (Prohibition) Act 1971 to increase the penalty from RM5,000 to RM500,000 and to increase the jail term from three years to 10 years.
In May 2011, after hindsight charges to directors and operators of kootu schemes using postal orders of Kristal Karisma Enterprise, World Heritage Resources and Al Falah Global Resources, businesses that were all incorporated under the Registration of Business Act 1956 (Act 197), such illegal schemes have been included as predicate offenses under the AMLATFA. This will give the regulators the ability to freeze all ill-gotten monies from the schemes.
At the end of the day, many questions still remain regarding kootu funds that operate in the villages and rural areas. Who will monitor these operated funds, as they are not under the direct supervision of the Central Bank of Malaysia or the Securities Commission? How large can the fund grow without official regulation? Why not just convert all the kootu funds to a financial organization akin to Grameen Bank in Bangladesh? As long as there is money involved, there will always be abusers even if the participants are of good character, trustworthy and creditworthy. The likes of Bernie Madoff have surfaced in the United States. Why not in Malaysia? Including operation of illegal kootu schemes as a predicate offense of AMLATFA just makes sense.
The recent changes in the AMLATFA are a bold move by the Malaysian government and also show its seriousness in trying to combat money laundering activities.