The impact of reporting suspicious transactions regime on banks: Malaysian experience

Author:Aspalella A. Rahman
Position:School of Law, Universiti Utara Malaysia, Alor Star, Malaysia
SUMMARY

Purpose – Reporting suspicious transactions under anti-money laundering (AML) laws creates a major dilemma for banks. On the one hand, failure to report suspicious transactions is an offence under the laws. On the other hand, if they report the transaction, they may breach their duty of confidentiality to their customer or could be liable for tipping off the suspected customer. More importantly, it can also undermine... (see full summary)

 
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Introduction

Money laundering may be defined as a process of cleaning “dirty money” which is normally derived from criminal activities, so that it appears to have originated from a legitimate source. In Pendakwa Raya v. Ong Seh Sen1, Abang Iskandar bin Abang Hashim JC noted at p. 244:

Money laundering is indeed a relatively new form of commercial crime that had just been codified as criminal offence. It can be categorised as a form of white collar crime. Although apparently no physical violence would be normally associated with the perpetration of this crime, nevertheless its impact, if left unchecked could lead to economic ruins to any country.

As such, the underlying rationale behind anti-money laundering (AML) laws is that prosecution would distance criminals from the criminal activities. Likewise confiscation of the proceeds of crime would reduce the motivation for criminals to reinvest the profits in future criminal activities or legitimate business. Malaysia passed AML and Anti-Terrorism Financing Act (AMLATFA) in 2001 ( AMLATFA, 2001 ). AMLATFA requires banks to establish a number of counter-measures such as customer identification and due diligence, reporting suspicious transactions, record keeping, appointment of compliance officers and AML training.

For law enforcement agencies, banks are considered to be an important source of valuable information for the detection of money laundering. However, from the banks' perspective, the main reason for their existence is to make as much profits as possible. Hence, their cultural and commercial interests are totally distinct from that of the law enforcement authorities. Undoubtedly, AML laws create a major dilemma for banks as they produce a significant shift in the way banks interact with their customers. Furthermore, the implementation of the laws not only creates significant compliance problems for banks, but also has the potential to adversely affect the operations of banks.

It is undeniable that compliance with AML laws would protect banks' reputation and integrity. However, it is legitimate to ask whether these laws are effective in preventing money launderers from using banks, or whether they simply put an unreasonable burden on the banks and their customers? This paper will focus on the impact of suspicious transaction regime on banks. It will examine how compliance with the regime can affect banks operations and their relationship with customers. As such, it will be necessary to examine not just the provisions of AMLATFA, but also the Standard Guidelines and Sectoral Guidelines2 in detail as these are the most important legislation for the purpose of this paper.

Suspicious transactions reporting under AMLATFA

Suspicious transactions reporting (STR) regime is a fundamental element of AML measures. It refers to a piece of information which alerts law enforcement that certain activity is in some way suspicious and might indicate money laundering or terrorism financing ( Fleming, 2005 ). STR obligation arises regardless of the amount of money involved, the nature and seriousness of the criminal offence, or whether the reporting entity accepts the business or transactions of the customers ( Chaikin, 2009b ).

In Malaysia, the obligation to report suspicious transaction was introduced in 2002. Section 14(b) of the AMLATFA requires banks to make a STR where the identity of the persons involved in the transaction, or the transaction itself, or any other circumstances concerning that transaction gives reason to suspect that the transaction involves proceeds of unlawful activity. Notably, the AML and Anti-Terrorism Financing Regulations extend the scope of the reporting obligations to attempted transactions3.

Section 3 of AMLATFA defines “unlawful activity” as any activity which is related directly or indirectly to any serious offence or any foreign serious offence. Furthermore, serious offence includes, inter alia, any of the offences specified in the Second Schedule of the AMLATFA4. A “foreign serious offence” means one that is against the law of a foreign state as certified by that state and that consists of or includes an act or activity which, if it had occurred in Malaysia, would have constituted a “serious offence”5. The amendments to AMLATFA in March 2007 has made terrorist financing a predicate offence for reporting purposes ( AMLATFA, 2007 ). As such, it can be said that banks are also required to report transactions suspected of being linked to terrorism financing. Parts 8 and 9 of the Standard Guidelines clearly indicate that terrorist financing is a basis for filing STR.

It must be noted that unclear reasons for suspicion is among the main problems faced by banks in implementing the STR. According to Gold and Levi (1994, p. 88) , suspicion is usually aroused by the sheer size of the transactions in relation to the known financial circumstances of the customer. The word “suspicion” is not explicitly defined under the AMLATFA. As such it is fruitful to refer to two decisions of the UK Court of Appeal which considered the meaning of “suspicion”. In R v. Da Silva [2006] EWCA Crim 1654, the appellant appealed against her conviction for facilitating her husband's retention or control of proceeds of his criminal conduct, knowing or suspecting that her husband was or had been engaged in criminal conduct or had benefited from it. In dismissing the appeal, the court held that the essential element in suspicion was that the defendant had to think that there was a possibility, which was more than fanciful that the relevant facts existed. Therefore, a vague feeling of unease would not suffice. But the statute does not require the suspicion to be “clear” or “firmly grounded and targeted on specific facts”, or based upon “reasonable grounds”.

In K Ltd v. Natwest Bank [2006] EWCA Civ 1039, the appellant (K Ltd) appealed against the refusal of its application for an interim injunction requiring the respondent bank to comply with payment instructions given by K Ltd The respondent bank declined to make the payment because it made a suspicious activity report to the NCIS (the UK Financial Intelligence Unit (FIU)) that the money in K Ltd's account was criminal property. In the meantime, the respondent bank sought consent from the authorities to permit transactions on the account to proceed. However, consent was denied by the authorities. In dismissing the appeal, the court held that since the law made it a criminal offence to honour K Ltd's mandate in the circumstances, there could be no breach of contract for the respondent bank to refuse to honour its mandate. In its decision, the court applied the test set out in Da Silva's case and affirmed that the person must think there is a possibility, more than merely fanciful, that the relevant facts exist, and this suspicion must be of a settled nature.

It has been suggested that a suspicious transaction refers to conduct which because of the circumstances, have reached a level of suspicion sufficient to identify a criminal offence ( Gold and Levi, 1994, p. 89 ). As such, in considering a transaction to be suspicious, a banker cannot be expected to know the exact nature of the criminal offence or that the particular funds were definitely those arising from a crime.

For Malaysian banks, FIU in Bank Negara Malaysia (BNM, 2005 )6 provides a wide range of examples of suspicious transactions in Appendix III of the Sectoral Guidelines. This can be divided into seven sub-headings, i.e. cash transactions; accounts; international banking and trade finance; employees and agents; private banking and trust services; secured and unsecured lending; and credit cards7. It appears that these examples provide some guidance for a basis of suspicion. However, since a suspicion is a subjective fact, it can be said that identifying suspicious transaction is not an easy task. Even if more examples were given, it is doubtful whether they can cover the entire range of suspicious transactions.

Furthermore, a high level of caution must be in place when there is money laundering or terrorism financing risk. However, the level of such caution must not be so restrictive as to impede day to day financial dealing. The Standard Guidelines provide that banks must consider submitting a STR when it is unable to complete the customer due diligence process on any new or existing customer that is unreasonable evasive or uncooperative. In this respect, banks must decide based on normal commercial criteria and its internal policy8.

It must be borne in mind that an ineffective STR regime will lead to mistaken reporting and defensive reporting. This would result in a...

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