Money Laundering and Terrorism Financing in Malaysian Banking

Report
MONEY LAUNDERING AND TERRORISM FINANCING IN
MALAYSIAN BANKING SECTOR:
CONTROLLING MECHANISMS AND FRAUD
OCCURRENCE
Assoc.Prof Dr Zuraidah Mohd Sanusi
Wan Nur Shawatul Aswal binti Zulkefle
Prof. Dr Normah Omar
Dr Norazida Mohamed
Accounting Research Institute & Faculty of Accountancy
Universiti Teknologi MARA
Dr Hendi Prabowo
Faculty of Economics
Universitas Islam Indonesia
Introduction
• Money laundering and terrorism financing has a stand out effect on the economy and
financial market.
• The emerging markets attract money launderers and terrorism financer because it has loose
regulations with respect to anti-money laundering (McDowell & Novis, 2001).
• Money laundering and terrorism financing activities are expected to occur in any countries.
However, developing countries with relatively small, fragile financial systems or weak
economies may have more significant impact due to such activities (McDowell and Novis,
2001).
• Like any other country, Malaysia has come to realize that financial institutions, particularly
banks are the most vulnerable to money laundering and terrorism financing activities.
• He (2010) argues that banking institutions are the most frequently used mechanism by
money launderer. This is due to several factors including multiple services provided by
financial institutions including deposits, loans, discounts, foreign exchange, etc. Thus, in
many countries, banks have become the focus of AML/CFT efforts due to the significant roles
they play in the economy. It is still unclear to what extent the compliance programs and
controlling mechanism can deter the occurrences of money laundering and terrorism
financing to improve banks’ performance in the banking sector.
• Hence, this study hopes to assess the effectiveness of the controlling mechanism, as well as
the perceived effectiveness of AML/CFT regulations toward money laundering and terrorism
financing incidents/occurrences in the context of Malaysian banking system.
Objectives
The main objective of this study is to identify the elements of controlling mechanisms that
might be influenced to reduce the level of money laundering and terrorism financing
occurrence in Malaysian banking sector. Thus this study proposes the following hypothesis :
H1: There is a significant relationship between client due diligence practice and
money laundering and terrorism financing occurrences in Malaysian banking sector.
H2: There is a significant relationship between internal control procedures and
money laundering and terrorism financing occurrences in Malaysian banking sector.
H3: There is a significant relationship between AML/CFT training and awareness
programs toward money laundering and terrorism financing occurrences in
Malaysian banking sector.
H4: There is a significant relationship between corporate governance and money
laundering and terrorism financing occurrences in Malaysian banking sector.
H5: There is a significant relationship between perceived effectiveness of AML/CFT
regulations and money laundering and terrorism financing occurrences in Malaysian
banking sector.
LITERATURE REVIEW
1. Money Laundering and Terrorism Financing - (Morais, 2002), (FATF, 2008),
(Beare & Schneider, 2007)
2. Customer Due Diligence (CDD)-
3. Internal Control Procedures –(Cunninghan, 2004), (Kaplan, 2008; Cunninghan,
2004), (Treba, 2003), (Philippsohn, 2001, and (Vargas & Backhouse, 2003)
4. AML/CFT Training and Awareness Program -
5. Corporate Governance – (Shaikh &Talha, 2003)
6. Perceived Effectiveness of AML/CFT Regulations- (Chong &Lopez-de-Silanes,
2007), (Coase, 1960) and Stigler, 1964)
Methodology
 The survey instrument was customized to determine the effectiveness of the
mechanism towards bank performances in the Malaysian banking sector to deter
money laundering and terrorism financing occurrences.
 Thirteen-page questionnaire instrument was designed with seven sections.
 The dependent variable of this study is the money laundering and terrorism financing
occurrences.
 The independent variables refer to the controlling mechanisms that influence money
laundering and terrorism financing incidents/occurrences in the banking sector.
 The sample for the study was drawn from Malaysian banks’ branches, focusing on
Branch Managers, Assistant Branch Managers and Branch Executives. A sample of
150 branches was randomly selected among the banks in Malaysia.
 101 usable responses were received.
 The data were analysed using descriptive analysis, correlation analysis and regression
analysis
RESULT / DATA ANALYSIS
Descriptive Analysis of the Respondent’s Demographic Factors
Type
Gender
Age
Qualification
Position
Type of Loan
Description
Male
Female
20-30 years
31-40 years
41-50 years
50 and above
Master
Degree
Diploma
Other
Manager
Assistant manager
Executive
Other
Mortgage loan
Hire purchase
Mortgage & Hire
Purchase Loan
Other
Frequency
40
61
38
37
22
4
9
52
23
17
28
35
36
2
46
19
Percent (%)
39.6
60.4
37.6
36.6
21.8
4.0
8.9
51.5
22.8
16.8
27.7
34.7
35.6
2.0
45.5
18.8
31
30.7
5
5.0
Descriptive Statistics for Variables
Money Laundering and Terrorism
Financing Occurrences
Customer has numerous accounts
and deposits cash into each of
them, with the total credits being a
large amount
Customer makes one or more cash
deposits to general account of
foreign correspondent bank (i.e.,
flow-through account)
Customer
gives
unrealistic,
confusing
or
inconsistent
explanation for transaction or
account activity
Customer deposits bank notes
with a suspicious appearance
(very old notes, notes covered in
powder, etc)
Customer attempts to convince
employee not to complete any
documentation required for the
transaction
Representatives of the business
avoid contact with the branch as
much as possible, even when it
would be more convenient for
them to have such contact
Establishment
of
multiple
accounts, some of which appear to
remain dormant for extended
periods of time
Account that was reactivated from
inactive
or
dormant
status
suddenly sees significant activities
Rank
Mean
Std Dev
1
5.20
1.510
3
5.13
1.454
2
5.14
1.510
8
4.22
1.901
4
4.82
1.802
6
4.79
1.577
5
4.80
1.510
7
4.76
1.686
Correlation Analysis
CDD
CDD
IC
AMLT
CG
PR
1
.518**
.505**
.365**
.468**
1
.644**
.623**
.623**
1
.651**
.689**
1
.679**
IC
AMLT
CG
PR
MLTF_
occurences
1
.353**
.446**
.341**
.387**
.400**
Multiple Regressions
Variables
Constant
CDD
IC
AMLT
CG
PR
Standardize
d
Coefficients
R
R2 (Adjusted R2)
F-statistic (p-value)
0.218
0.282
-0.143
0.139
0.096
=
=
=
Std. Error
1.154
0.149
0.161
0.171
0.141
0.169
t-stat
2.050
1.991
2.166
-1.044
1.071
0.706
p-value
0.043
0.047**
0.033**
0.299
0.287
0.482
0.514 a
0.264 (0.226)
6.825 (0.000 b )
Coefficient for each variable is shown with t-statistics in parentheses (1-tailed
test)
*Significant at 10% level (1-tailed test); **Significant at 5% level (1-tailed test);
***Significant at 1% level
Conclusion
• The study focuses on controlling mechanisms to draw conclusions on money
laundering and terrorism financing occurrences. This study only focused on the five
elements of the controlling mechanism. Thus, future studies should look at other factors
that may influence the occurrence of money laundering and terrorism financing, such
as the advanced technology used in the banking sector
• The results of this study have several potential practical implications. Firstly, it helps to
create awareness and better understanding regarding the effects and usefulness of
controlling mechanisms in the banking sector, particularly by providing such important
information to help the management to be endowed with a guideline in planning and
reviewing relevant policies and activities in the future.
• Besides, this study provides insights to bank branches regarding the level of
implementation of controlling mechanisms and internal control procedures as perceived
by its members in the organization

similar documents