This update is most relevant to financial institutions, reporting institutions, and businesses involved in international trade and finance, especially those dealing with compliance and risk management.
On 7 June 2024, the Malaysian Ministry of Investment, Trade, and Industry (MITI) issued a new Directive on Targeted Financial Sanctions related to Proliferation Financing (TFS-PF). This Directive aims to bolster Malaysia’s efforts in preventing the misuse of financial systems by those involved in the proliferation of weapons of mass destruction, aligning with United Nations Security Council Resolutions (UNSCRs).
Legal Framework in Malaysia
In Malaysia, several key regulations address the issue of TFS-PF, including:
- Strategic Trade Act 2010 (STA);
- Strategic Trade (United Nations Security Council Resolutions) Regulations 2010; and
- Strategic Trade (Restricted End-Users and Prohibited End-Users) Order 2010
These laws provide a framework for freezing assets and prohibiting the availability of funds or other resources to sanctioned entities and individuals. The objective is to ensure that financial institutions and other reporting bodies do not unintentionally support or become part of proliferation financing networks.
Key Aspects of MITI’s Directive
The Directive was issued under Section 6 of the STA and clarifies specific obligations that must be met by reporting institutions. Here are the key actions required:
- Conduct Institutional Risk Assessments: Reporting institutions must assess risks related to proliferation financing within their operations.
- Implement Targeted Financial Sanctions: Institutions are required to impose financial sanctions that prevent funds from being used for proliferation activities.
- Maintain Sanctions Lists: Reporting institutions must maintain updated sanctions lists and screen their customers against these lists.
- Freeze Customer Funds: If a customer is found on a sanctions list, institutions may need to freeze their funds and report accordingly.
Compliance with International Standards
The amendments to the Directive are driven by recent actions from the Financial Action Task Force (FATF), which aim to strengthen responses to the growing threat of proliferation financing. FATF mandates that institutions implement appropriate risk management measures and comply with targeted financial sanctions.
Reporting Institutions and Regulatory Oversight
The list of reporting institutions subject to this Directive has been updated. Institutions under the supervision of these regulators must comply, (i) Central Bank of Malaysia (BNM), (ii) Labuan Financial Services Authority (LFSA), and (iii) Securities Commission (SC).
These institutions must integrate the Directive’s requirements into their operations, ensuring that they do not inadvertently support or become part of proliferation financing networks.
Final Thoughts
MITI’s new Directive on Targeted Financial Sanctions is a crucial step in Malaysia’s ongoing commitment to combatting proliferation financing. By ensuring that reporting institutions maintain strict compliance with both local and international standards, Malaysia strengthens its financial systems against abuse by individuals and entities involved in the proliferation of weapons of mass destruction.
Businesses, especially financial institutions and companies involved in international trade, should re-evaluate and update their current customer and export screening processes to ensure compliance with MITI’s Directive on Targeted Financial Sanctions. They should also strengthen their tracking and reporting procedures to identify any dealings with designated entities or individuals, in line with UNSCRs, and ensure all staff are trained on these new compliance obligations.
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This article was written by George Teng (Associate) from Donovan & Ho’s corporate and commercial practice group.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
