## cr04391 ## Source details **Canonical URL:** [cr04391](https://www.imf.org/-/media/files/publications/ofca/english/cr04391.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr04391.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr04391.pdf.json) --- ### Supervisory Framework — overall assessment and gaps (IMF assessment) - Labuan has the essential elements for a suitable framework for financial supervision; LOFSA has adequate authority to supervise prudentially regulated financial institutions and to oversee trust and company service providers. - LOFSA staff are well trained and experienced, but numbers devoted to examination and compliance should be increased; funding is adequate. - Enforcement powers appear adequate though they have not been tested. - Financial sector performance: - Non-performing loans are relatively high in the banking sector. - Demand for credit has been soft. - Average profitability is low. - A number of banks and insurance companies maintain only a token presence. - Sector-specific observations: - Banking supervision is relatively well developed; on- and off-site supervision is being intensified. - Insurance supervision is still evolving and “falls well short of IAIS standards.” - Securities and capital markets activities are embryonic; supervisory regime will need development as business grows. - Regime for trust and company service providers sets an orderly legal framework; trust companies have an important role in ensuring compliance. - Common weaknesses identified: - Supervisory independence. - Transparency. - Corporate governance. - Supervisory practices (organization and resources). - Limitations in LOFSA’s access to customer-specific information for prudential supervision. - Key legislative and organizational recommendations: - Separate the promotional and supervisory responsibilities of LOFSA. - Develop memoranda of understanding (MOUs) between LOFSA and MoF and between LOFSA and BNM specifying executive and operational arrangements. - Pending development of LOFSA’s own guidelines, consider adopting Bank Negara Malaysia (BNM) guidelines suitably adapted to Labuan. - Require greater corporate and financial disclosure and define roles and responsibilities of corporate directors and management under the Offshore Companies Act. - Continue to upgrade supervisory practices, increase staff resources and skills, reinforce attention to systems and controls, and exploit synergies with BNM. - Remove constraints on LOFSA’s access to customer-specific information. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) (IMF/FATF assessment) - Legislative framework and timing: - Anti-Money Laundering Act 2001 (AMLA) came into force on January 15, 2002. - Part IV of AMLA (preventive measures for regulated entities) was brought into effect in early 2003 (with Section 14 (a) excepted at an earlier stage). - Mutual Assistance in Criminal Matters Act 2002 (MACMA) came into force on May 1, 2003. - At time of IMF assessment an important gap was the lack of specific offence criminalizing financing of terrorism; an inter-agency working group led by the Ministry of Foreign Affairs was working on accession and implementation of the International Convention for the Suppression of the Financing of Terrorism (1999). - Core AMLA provisions: - Criminalization of the offence of money laundering. - Establishment of the financial intelligence unit (FIU). - Reporting obligations for financial institutions (including offshore financial institutions). - Powers for investigation and enforcement. - Criminalization, penalties and confiscation: - “Unlawful activity” includes activity related directly or indirectly to any serious offence or foreign serious offence; “serious offence” includes specification of 150 specific offences. - Mental element under AMLA: “knows or has reasonable grounds to believe.” - Standard of proof under AMLA: questions of fact decided on the balance of probabilities. - Punishment for money laundering under AMLA: a fine not exceeding 5 million ringgit or imprisonment for a term not exceeding five years, or both; punishment for money laundering related to drugs and corruption is much more severe. - AMLA provides powers to freeze, seize and forfeit property; original freezing/seizure/forfeiture provisions did not apply to terrorist financing until later amendments. - FIU and STRs: - Bank Negara Malaysia’s FIU appointed as competent AML authority, including for Labuan. - FIU staff approximately 18; six financial analysts perform analysis and decide dissemination of STRs. - In Labuan, STRs are filed with LOFSA, which relays them to the FIU; assessors recommended direct STR filing to BNM as preferable. - Recommendation to increase number of analysts and add criminal investigative experts; require FIU to publish periodic reports. - Law enforcement, prosecution and techniques: - Agencies authorized to investigate ML and FT include Police (RMP), Anti-Corruption Agency (ACA), Customs service (RMC), and BNM depending on the offence. - Recommendation to extend investigative powers and special investigative techniques to CFT when FT legislation is adopted. - Recommendation to establish unified authority to gather and classify statistics on frozen, seized, and confiscated property. - Preventive measures and supervisory guidance: - All financial institutions operating in Labuan IOFC are subject to AMLA and required to satisfy preventive measures in Part IV. - LOFSA issued STR reporting guidelines to offshore banks and draft guidelines to offshore insurance companies; except for suspicious transaction reporting criteria, no other AML guidelines had been prepared by LOFSA for non-prudentially regulated offshore institutions. - Recommendations: - LOFSA should ensure trust company guidelines fully align with AMLA requirements and enforce them. - Review and update all LOFSA guidelines to incorporate AMLA requirements and international AML/CFT standards, including FATF Special Recommendations on CFT. - Adopt legislation criminalizing financing of terrorism with provisions for freezing and confiscating proceeds or property used to finance terrorism. - Develop AML/CFT guidelines for nonbank sectors and devote additional resources to compliance monitoring. - Modify legislation to permit LOFSA access to customer identity, affairs or account information and to share such information with domestic and overseas regulators, subject to safeguards. ### Cross-Border Information Exchange and Cooperation (IMF assessment) - Legal regime and constraints: - The legal regime for access to and exchange of supervisory information is complex and compartmentalized; confidentiality safeguards inhibit Labuan’s ability to fully satisfy international standards for cross-border supervisor cooperation and complicate consolidated supervision of Malaysian insurance firms. - Specific information access limitations: - LOFSA bank supervisors have routine access to credit information but not customer deposit information; access to deposit information may be gained where fraud or suspicion of fraud exists. - LOFSA’s access to information on offshore companies held by trust companies in Labuan is limited. - LOFSA may share information with home monetary authorities (understood to be the parent banking supervisor) but not with non-monetary home supervisors. - Sharing of information between LOFSA and BNM is restricted if a Labuan company is an affiliate but not a direct subsidiary of a Malaysian insurance company; similar restrictions appear to apply between LOFSA and the Malaysian Securities Commission. - These restrictions are partially mitigated by LOFSA’s ability to appoint other regulatory authorities’ officers as LOFSA’s agent in examination and investigation of such entities. - Mitigation and recommendations: - AMLA overrides confidentiality restrictions to the extent they interfere with reporting requirements of financial institutions. - LOFSA should review current legal impediments comprehensively and seek legislative amendments to allow full access to information held by regulated financial institutions and the exchange of such information with domestic and foreign supervisors, subject to safeguards on confidentiality. - Establish arrangements for exchange of information with home supervisory authorities, with legislative amendment to allow uninhibited flow where adequate protection is assured. ### Key recommendations and sectoral priorities (IMF summary) - Institutional and governance: - Separate LOFSA’s supervisory and promotional functions. - Clarify LOFSA autonomy within the Malaysian government via MOUs with MoF and BNM. - Increase transparency of supervisory practices and corporate governance standards for offshore financial institutions. - Banking: - Revise capital adequacy risk weight rules to conform to Basel standards (remove concessional risk weights). - Expand and upgrade compliance staff to support more on-site examination and verification. - Introduce large exposures reporting. - Strengthen loan classification and provisioning rules to conform with international best practice. - Increase frequency of periodic on-site reviews and provide guidance on interest rate risk monitoring and reporting. - Insurance: - Develop prudential rules for assets, liabilities, technical provisions, and market conduct. - Develop monitoring tools, early warning tests, key indicators, and a range of early intervention tools short of breaches of law. - Issue requirements with respect to reinsurance contracts and the amount of credit taken for reinsurance ceded; modify solvency test where appropriate. - Clarify and adopt acceptable accounting standards (consider MASB pronouncements and BNM guidance) and issue requirements regarding valuation of liabilities. - Securities: - Modify legislation to allow LOFSA access to information related to the identity, affairs or accounts of customers and to share such information with domestic and overseas regulators, subject to safeguards. - Increase staff resources for on-site supervision and elaborate prudential standards as the market develops. - AML/CFT (reiterated): - Adopt legislation criminalizing financing of terrorism with provisions for freezing and confiscating proceeds or property used to finance terrorism. - Develop AML/CFT guidelines for nonbank sectors and devote additional resources to compliance monitoring. - Modify legislation to permit LOFSA access to customer identity, affairs or account information and to share such information with domestic and overseas regulators, subject to appropriate safeguards. - Consider direct STR filing from Labuan reporting institutions to BNM rather than to LOFSA. - Trust and company service providers: - LOFSA should conduct more proactive oversight, including on-site examinations, of trust companies to ensure compliance with AML requirements. ### Financial system and IOFC overview — structure, incentives and key statistics (IMF assessment) - Geographic and administrative: - Labuan island covers an area of 92 sq. km. with an estimated population of 75,000. - Labuan is a Federal Territory directly administered by the government of Malaysia; declared an International Offshore Financial Center (IOFC) in 1990; LOFSA was created in 1996. - Incentives and tax regime: - No bank reserve requirements and foreign exchange controls. - Low annual licensing fees. - No withholding tax on income or dividends earned in Malaysia and remitted out. - Option of a 3 percent annual corporate tax or fixed tax of RM 20,000 (approximately $5,300). - No tax on income from “non-trading” activities such as ownership of securities and real estate. - Absence of stamp duties, value-added taxes, death, inheritance or estate duties. - No restriction on foreign ownership limit on Malaysian companies. - Offshore entities declared as non-residents for exchange control purposes may freely buy, borrow, sell or lend foreign currency with any non-resident. - BNM approval allows certain Malaysian companies to invest up to a limit of $5 million in certain foreign exchange denominated products if listed on the Labuan International Financial Exchange (LFX). - Financial institutions and activity (as of September 2002 unless otherwise noted): - Commercial and investment banks: 49. - Insurance companies and insurance related companies: 105. - Trust companies: 18. - Funds Managers: 12. - Leasing companies: 29. - Auditors: 20. - Liquidators: 19. - Labuan International Financial Exchange (LFX). - Offshore trading and non-trading companies registered and operating in Labuan: 2,026. - Banking sector (data): - Of 49 banks, 11 were incorporated as offshore companies in Labuan and 38 operated as branches. - Total assets of offshore banks at 30 June 2002 were $18.7 billion; loans and advances were $10.5 billion. - Customer deposits at same date: $4.5 billion. - Majority of funding: $12.2 billion coming from banks. - Over 80 percent of loans are to Malaysian residents. - Offshore banks had 498 employees as of the end of 2001. - LOFSA policy requires offshore banks incorporated in Labuan to have a bank as a parent; individuals are not allowed to own banks. - Insurance sector (data): - End-2001: 98 firms licensed to conduct insurance or insurance related business (47 insurers; 36 brokers; 15 managers). - Types of licensed insurers include 2 life, 3 general, 1 composite, 22 reinsurance and 19 captives. - Eight new licenses granted in 2001 (compared to 26 in 2000); 3 ceased operations in 2001. - Ownership: 78 licensees fully owned by non-residents; 17 by Malaysians; 6 jointly owned by Malaysians and non-residents. - At end-2001 total assets of the offshore insurance sector amounted to $513 million; the sector employed 217 individuals. - Foreign-owned insurance firms accounted for 40.6 percent of the paid-in capital of offshore insurance companies at end-2001 compared to 17.6 percent at end-1999. - Total gross premiums in 2001: $230 million ($195 million general; $35 million life). - Net retention ratio of general insurers: 76.9 percent in 2001. - Industry underwriting loss increased from $13.9 million in 2000 to $43.1 million in 2001. - Securities and capital markets: - LFX lists nine issues; only one trade has been effected on the trading system. - Listings include five open-end mutual funds, three Sukuk (Islamic) instruments, and one secondary listing of a floating rate note. - In 2001 a total of 17 mutual funds were approved with a fund size of $815 million. - Trust companies and trusts: - Trust companies are the principal company service providers; they incorporate and administer offshore companies and keep required books and records. - As of September 2002, 70 public trusts were administered in Labuan with an estimated aggregate asset size of $38 million. - Top five client source countries for trusts: Korea, Canada, Australia, Hong Kong and Philippines. - Leasing and offshore companies: - Leasing is a licensed activity; much of the business appears to be large value equipment leasing. - Many of the 2,026 offshore companies appear to act as asset holding vehicles, vehicles for holding international property rights, or corporate structures for small international service providers. ### Islamic banking and Labuan’s niche foreign-currency business (IMF observation) - Islamic banking is well developed in Malaysia and Labuan institutions are developing a niche in providing foreign currency Islamic financial products (banking, insurance, and securities) for both the Malaysian market and the wider international market. - Offshore financial entities in Labuan are not permitted to carry on ringgit business and, in practice, are primarily engaged in providing authorized foreign currency financial services for business involving Malaysian residents. - Banks in Labuan engage primarily in commercial lending. - Tax incentives in Labuan include absence of withholding and stamp tax as well as low income tax, making Labuan an attractive domicile for: - foreign banks extending dollar credits to Malaysian entities or for trade credits to foreign suppliers selling into Malaysia; and - Malaysian banks to book their foreign currency lending to Malaysian firms through Labuan. - Bank Negara Malaysia has granted permission to high net-worth Malaysian residents to purchase investment-linked foreign exchange life insurance products up to RM 100,000 in single or annual premium policies; authorities capped further sales of this product to Malaysian residents in response to capital outflow concerns. ### LOFSA: role, structure, resources and operational issues (IMF assessment) - Legal/statutory basis: - LOFSA established under the Labuan Offshore Financial Services Authority Act 1996 (LOFSAA) with developmental and regulatory objectives including “to promote and develop Labuan as a center for offshore financial services” and “to develop national objectives and priorities for the orderly development and administration of offshore financial services in Labuan, and to make recommendations to the Minister in respect thereof.” - Governance and appointments: - Governing board appointed by the Minister of Finance for terms not exceeding three years (reappointment permitted); Director General is chief executive officer. - At time of assessment, Chairman was the Governor of the Bank Negara Malaysia, Dr. Zeti Akhtar Aziz; board included representatives from the Securities Commission, Companies Commission of Malaysia, Labuan Corporation, Ministry of Finance, and the Director-General, plus private-sector appointees. - LOFSAA provides for Ministerial appointment and revocation of board members; Minister may issue binding directions and require information. - Organization and staffing: - LOFSA has a staff of approximately 55 and is organized into five departments: policy development, operations, legal and administration, corporate affairs, and the Director-General’s office. - Licensing handled by the Operations Department with 13 staff and one director; Legal and Compliance Division has 7 staff reporting to the director, with plans to add 4 additional staff. - Supervision activities and cooperation: - Initiated on-site visits and examinations; on-site examinations carried out on five subsidiary banks and three insurance subsidiaries with assistance from BNM. - No formal arrangements structuring the working relationship between BNM and LOFSA, but BNM stands ready to assist LOFSA as necessary. - Funding and finances: - Funded largely by revenue from incorporation of companies and annual licensing fees; additional interest-free loans from BNM since 1996. - 2001 operations generated a surplus of RM 500,000. - Planning figures for 2002 expenditure show a rise of RM 15.7 million, which would represent an increase of approximately 40 percent over 2001. - LOFSA officials indicated higher 2002 outlays will be fully covered by prior increases in fees and interest income. - Recommendations relating to LOFSA: - Clarify conditions for continuation and removal of board members; consider an MOU to spell out operational relationships between LOFSA and BNM. - Expand publication of guidance and examination manuals; provisionally adopt BNM guidelines suitably adapted to Labuan. - Increase staffing for compliance and supervision; systematize joint examinations with BNM while avoiding over-reliance on BNM. ### Insurance supervision — main findings and recommended actions (IMF/IAIS assessment) - Market size and structure (2001 data, $1 = RM3.80): - Total gross premiums in 2001: $230 million ($195 million general; $35 million life). - Total industry assets at end-2001: $513 million. - Paid up capital in 2001: $298.9 million (59.4 percent held by Malaysians). - Main supervisory strengths: - LOFSA has authority to license, supervise, impose sanctions and recommend revocation of licenses; legal framework covers insolvency intervention powers. - Main supervisory weaknesses and gaps: - Lack of accounting standards and standards for valuation of liabilities, including technical provisions. - LOFSA has not issued guidelines on acceptable accounting standards for insurers; insurers free to adopt any accounting standards. - Only three full on-site examinations had been conducted to date; additional staffing and actuarial expertise required. - Lack of standards on corporate governance and internal controls. - No requirements with respect to reinsurance contracts and amount of credit taken for reinsurance ceded; weakness in solvency test. - LOFSA restricted from accessing customer information under LOFSAA, limiting assessment of market conduct and supervisory effectiveness. - Recommended regulatory and supervisory actions (selected): - Revise legislation to provide LOFSA with unrestricted access to all company information, including customer accounts. - Increase resources and expertise in insurance supervision and actuarial affairs to enhance on-site examinations. - Develop standards on corporate governance and internal controls. - Develop prudential investment limits, safekeeping requirements, asset-liability matching, liquidity and risk management policies. - Issue requirements regarding valuation of liabilities, including technical provisions; consider adopting MASB pronouncements and BNM guidance in the absence of a domestic actuarial association. - Develop monitoring tools such as early warning tests, key indicators and benchmark studies. - Consider requiring audited financial statements and summary company financial data for public availability to enhance market discipline. *Source: IMF assessment of the Labuan International Offshore Financial Centre and the Labuan Offshore Financial Services Authority (LOFSA) (cr04391).* ### Preface................................................................................................................. ### Preface ### Executive Summary - Location: page 6 - Major subsections: - A. Supervisory Framework - B. Anti-Money Laundering Framework - C. Cross-Border Information Exchange and Cooperation ### I. Introduction - Location: page 11 ### II. Financial System and Offshore Overview - Location: page 11 - Major subsections: - A. IOFC Background - B. Financial Services Institutions and Markets - C. Regulatory and Supervisory Framework of the Offshore Financial Center ### III. Strengths and Vulnerabilities in Financial Regulatory and Supervisory Arrangements - Location: page 18 - Major subsections: - A. Supervisory Independence - B. Corporate Governance - C. Supervisory Practices, Organization, and Resources ### IV. Summary of Observance of Financial System Standards and Codes - Location: page 20 - Major subsections: - A. Basel Core Principles for Effective Supervision - B. Summary of the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Assessment - C. Insurance Core Principles and Transparency of Insurance Regulation - D. IOSCO Objectives and Principles of Securities Regulation - E. Good Practices for Company and Trust Service Providers ### Tables and Recommended Action Plans - Table 1. Key Recommendations - Table 2. Recommended Action Plan to Improve Compliance with the Basel Core Principles - Table 3. Recommended Action Plan to Improve Compliance with the FATF Recommendations - Table 4. Other Recommended Actions - Table 5. Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles *International Monetary Fund* ### 6. Recommended Plan of Actions to Improve Implementation of the IOSCO Objectives ### 6. Recommended Plan of Actions to Improve Implementation of the IOSCO Objectives and Principles of Securities Regulation ### Supervisory Framework — overall assessment and gaps - Labuan has the essential elements for a suitable framework for financial supervision; LOFSA has adequate authority to supervise prudentially regulated financial institutions and to oversee trust and company service providers. - LOFSA staff are well trained and experienced, but numbers devoted to examination and compliance should be increased; funding is adequate. - Enforcement powers appear adequate though they have not been tested. - Financial sector performance: non-performing loans are relatively high in the banking sector; demand for credit has been soft; average profitability is low; a number of banks and insurance companies maintain only a token presence. - Sector-specific observations: - Banking supervision is relatively well developed; on- and off-site supervision is being intensified. - Insurance supervision is still evolving and “falls well short of IAIS standards.” - Securities and capital markets activities are embryonic; supervisory regime will need development as business grows. - Regime for trust and company service providers sets an orderly legal framework; trust companies have an important role in ensuring compliance. - Common weaknesses identified: supervisory independence, transparency, corporate governance, supervisory practices (organization and resources), and limitations in LOFSA’s access to customer-specific information for prudential supervision. - Key legislative and organizational recommendations: - Separate the promotional and supervisory responsibilities of LOFSA. - Develop memoranda of understanding (MOUs) between LOFSA and MoF and between LOFSA and BNM specifying executive and operational arrangements. - Pending development of LOFSA’s own guidelines, consider adopting Bank Negara Malaysia (BNM) guidelines suitably adapted to Labuan. - Require greater corporate and financial disclosure and define roles and responsibilities of corporate directors and management under the Offshore Companies Act. - Continue to upgrade supervisory practices, increase staff resources and skills, reinforce attention to systems and controls, and exploit synergies with BNM. - Remove constraints on LOFSA’s access to customer-specific information. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - The Anti-Money Laundering Act 2001 (AMLA) came into effect on January 15, 2002; AMLA is federal legislation providing for: - criminalization of the offence of money laundering; - establishment of the financial intelligence unit; - reporting obligations for financial institutions (including offshore financial institutions); - powers for investigation and enforcement. - AMLA is to be read with the Extradition Act 1992 and the Mutual Assistance in Criminal Matters Act 2002 (MACMA). - Part IV of AMLA (required preventive measures for regulated entities) was brought into effect in early 2003 (with Section 14 (a) excepted at an earlier stage). - As of July 2003, MACMA had come into force on May 1, 2002, and Part IV of AMLA had come into force with the exception noted above. - Financing of terrorism: there is currently no specific offence for financing of terrorism; an inter-agency working group led by the Ministry of Foreign Affairs is working on Malaysia’s accession and implementation of the International Convention for the Suppression of the Financing of Terrorism (1999), including passing legislation on financing of terrorism. - LOFSA practice and guidance: - Prior to AMLA, LOFSA required offshore banks to be vigilant and issued enforceable guidelines; supervisory attention to AML increased in anticipation of AMLA. - LOFSA issued guidelines for the offshore insurance sector; activity in offshore securities is low and there are no proposed securities guidelines. - Except for suspicious transaction reporting criteria, no other AML guidelines have been prepared by LOFSA for non-prudentially regulated offshore institutions (offshore companies, offshore trusts, offshore limited partnerships); the Association of Labuan Trust Companies (ALTC) has provided guidelines. - AML/CFT recommendations: - LOFSA should ensure trust company guidelines fully align with AMLA requirements and enforce them. - Review and update all LOFSA guidelines to incorporate AMLA requirements and international AML/CFT standards, including FATF Special Recommendations on CFT. - Legislation to criminalize financing of terrorism (which was subsequently proposed) should be adopted, including adequate provisions for freezing and confiscating proceeds of crime or property used to finance terrorism. - Develop appropriate AML/CFT guidelines for nonbank sectors and devote additional resources to compliance monitoring. ### Cross-Border Information Exchange and Cooperation - The legal regime for access to and exchange of supervisory information is complex and compartmentalized; regulations designed to safeguard confidentiality of customer and institution information inhibit Labuan’s ability to fully satisfy international standards for cross-border supervisor cooperation and complicate consolidated supervision of Malaysian insurance firms. - Specific information access limitations: - LOFSA bank supervisors have routine access to credit information but not customer deposit information; access to deposit information may be gained where fraud or suspicion of fraud exists. - LOFSA’s access to information on offshore companies held by trust companies in Labuan is limited. - LOFSA may share information with home monetary authorities (understood to be the parent banking supervisor) but not with non-monetary home supervisors. - Sharing of information between LOFSA and BNM is restricted if a Labuan company is an affiliate but not a direct subsidiary of a Malaysian insurance company; similar restrictions appear to apply between LOFSA and the Malaysian Securities Commission. - These restrictions are partially mitigated by LOFSA’s ability to appoint other regulatory authorities’ officers as LOFSA’s agent in examination and investigation of such entities. - AMLA overrides confidentiality restrictions to the extent they interfere with reporting requirements of financial institutions. - Cross-border recommendations: - LOFSA should review current legal impediments comprehensively and seek legislative amendments to allow full access to information held by regulated financial institutions and the exchange of such information with domestic and foreign supervisors, subject to safeguards on confidentiality. ### Key recommendations and sectoral priorities (summarized) - Institutional and governance: - Separate LOFSA’s supervisory and promotional functions. - Clarify LOFSA autonomy within the Malaysian government via MOUs with MoF and BNM. - Increase transparency of supervisory practices and corporate governance standards for offshore financial institutions. - Banking: - Revise capital adequacy risk weight rules to conform to Basel standards. - Expand and upgrade compliance staff to support more on-site examination and verification. - Insurance: - Develop prudential rules for assets, liabilities, technical provisions, and market conduct. - Develop monitoring tools, early warning tests, key indicators, and a range of early intervention tools short of breaches of law. - Securities: - Modify legislation to allow LOFSA access to information related to the identity, affairs or accounts of customers and to share such information with domestic and overseas regulators, subject to safeguards. - Increase staff resources for on-site supervision and elaborate prudential standards as the market develops. - AML/CFT (reiterated): - Adopt legislation criminalizing financing of terrorism with provisions for freezing and confiscating proceeds or property used to finance terrorism. - Develop AML/CFT guidelines for nonbank sectors and devote additional resources to compliance monitoring. - Modify legislation to permit LOFSA access to customer identity, affairs or account information and to share such information with domestic and overseas regulators, subject to appropriate safeguards. ### Financial system and IOFC overview — structure and key statistics - Geographic and administrative: - Labuan island covers an area of 92 sq. km. with an estimated population of 75,000. - Labuan is a Federal Territory directly administered by the government of Malaysia; declared an International Offshore Financial Center (IOFC) in 1990; LOFSA was created in 1996. - Incentives and tax regime: - No bank reserve requirements and foreign exchange controls. - Low annual licensing fees. - No withholding tax on income or dividends earned in Malaysia and remitted out. - Option of a 3 percent annual corporate tax or fixed tax of RM 20,000 (approximately $5,300). - No tax on income from “non-trading” activities such as ownership of securities and real estate. - Absence of stamp duties, value-added taxes, death, inheritance or estate duties. - No restriction on foreign ownership limit on Malaysian companies. - Offshore entities declared as non-residents for exchange control purposes may freely buy, borrow, sell or lend foreign currency with any non-resident. - BNM approval allows certain Malaysian companies to invest up to a limit of $5 million in certain foreign exchange denominated products if listed on the Labuan International Financial Exchange (LFX). - Financial institutions and activity (as of September 2002 unless otherwise noted): - Commercial and investment banks: 49. - Insurance companies and insurance related companies: 105. - Trust companies: 18. - Funds Managers: 12. - Leasing companies: 29. - Auditors: 20. - Liquidators: 19. - Labuan International Financial Exchange (LFX). - Offshore trading and non-trading companies registered and operating in Labuan: 2,026. - Banking sector (data): - Of 49 banks, 11 were incorporated as offshore companies in Labuan and 38 operated as branches. - All but one of the 11 offshore banks incorporated in Labuan are wholly-owned subsidiaries of commercial banks licensed and supervised on a consolidated basis in Malaysia by BNM. - LOFSA policy requires offshore banks incorporated in Labuan to have a bank as a parent; individuals are not allowed to own banks. - Total assets of offshore banks at 30 June 2002 were $18.7 billion; loans and advances were $10.5 billion. - Over 80 percent of loans are to Malaysian residents. - Offshore banks had 498 employees as of the end of 2001. - Insurance sector (data): - End-2001: 98 firms licensed to conduct insurance or insurance related business (47 insurers; 36 brokers; 15 managers). - Types of licensed insurers include 2 life, 3 general, 1 composite, 22 reinsurance and 19 captives. - Eight new licenses granted in 2001 (compared to 26 in 2000); 3 ceased operations in 2001. - Ownership: 78 licensees fully owned by non-residents; 17 by Malaysians; 6 jointly owned by Malaysians and non-residents. - At end-2001 total assets of the offshore insurance sector amounted to $513 million; the sector employed 217 individuals. - Foreign-owned insurance firms accounted for 40.6 percent of the paid-in capital of offshore insurance companies at end-2001 compared to 17.6 percent at end-1999. - Securities and capital markets: - LFX lists nine issues; only one trade has been effected on the trading system. - Listings include five open-end mutual funds, three Sukuk (Islamic) instruments, and one secondary listing of a floating rate note. - In 2001 a total of 17 mutual funds were approved with a fund size of $815 million. - Trust companies and trusts: - Trust companies are the principal company service providers; they incorporate and administer offshore companies and keep required books and records. - As of September 2002, 70 public trusts were administered in Labuan with an estimated aggregate asset size of $38 million. - Top five client source countries for trusts: Korea, Canada, Australia, Hong Kong and Philippines. - Leasing and offshore companies: - Leasing is a licensed activity; much of the business appears to be large value equipment leasing. - Many of the 2,026 offshore companies appear to act as asset holding vehicles, vehicles for holding international property rights, or corporate structures for small international service providers. *Source: IMF Module 2 Offshore Financial Center assessment of the Labuan International Offshore Financial Center (Mission: September 30–October 11, 2002; follow-up AML expert mission: July 14–22, 2003).* ### 14. Islamic banking is well developed in Malaysia and institutions in Labuan are ### 14. Islamic banking is well developed in Malaysia and institutions in Labuan are developing a niche business in providing foreign currency Islamic financial products (banking, insurance, and securities) for both the Malaysian market and for the wider international market ### Islamic banking and Labuan's niche foreign-currency business - Islamic banking is well developed in Malaysia and Labuan institutions are developing a niche in providing foreign currency Islamic financial products (banking, insurance, and securities) for both the Malaysian market and the wider international market. - Offshore financial entities in Labuan are not permitted to carry on ringgit business and, in practice, are primarily engaged in providing authorized foreign currency financial services for business involving Malaysian residents. - Banks in Labuan engage primarily in commercial lending. - Tax incentives in Labuan include absence of withholding and stamp tax as well as low income tax, making Labuan an attractive domicile for: - foreign banks extending dollar credits to Malaysian entities or for trade credits to foreign suppliers selling into Malaysia; and - Malaysian banks to book their foreign currency lending to Malaysian firms through Labuan. - Multinational firms operating in Malaysia are important clients of the foreign banks established in Labuan. ### Composition of Labuan activity and regulatory preferences - Offshore players in Labuan have widely diversified origins, but Malaysian related business accounts for the preponderance of business conducted in the IOFC. - This composition reflects the interplay of Malaysian capital and exchange controls, the tax and policy incentives provided in Labuan, and general competitive factors. - In the administration of the Malaysian foreign exchange control regime, preference is accorded to exchange transactions conducted through Labuan. - Regulations require foreign currency borrowers to demonstrate that an effort has been made to arrange the financing through a Labuan bank; according to BNM officials, this requirement is routinely satisfied. ### Insurance, reinsurance, and broking activity in Labuan - The insurance business in Labuan is dominated by transactions with Malaysian residents. - In the reinsurance sector, Malaysian policy aims to optimize national retention capacity through a right of first refusal process. - Under a gentleman’s agreement voluntary reinsurance cessions are made to the national reinsurer, Malaysian National Reinsurance Berhard (MNRB). - Requirements beyond MNRB’s capacity are reallocated to the local or overseas market. - In administering forex approval for non-ringgit reinsurance the authorities expect Malaysian firms to show that an effort has been made to obtain reinsurance through a Labuan firm. - At least half of the insurance broking business appears to be for Malaysian risk, but Labuan brokers are also active in broking international risks in the region. - One company reported success in developing an active regional reinsurance business through its Labuan subsidiary. ### Life insurance investment-linked foreign exchange products and restrictions - Malaysian-owned firms in the small life insurance sector have developed investment linked foreign exchange products marketed to Malaysian high net worth clients. - Bank Negara Malaysia has granted permission to high net-worth Malaysian residents to purchase such products up to RM 100,000 in single or annual premium policies. - These products enjoyed early success; however, apparently in response to the resulting capital outflow, the Malaysian authorities have capped further sales of this product to Malaysian residents. ### Regulatory and supervisory framework of the Labuan Offshore Financial Center - The Labuan Offshore Financial Center was launched in 1990 when Malaysia enacted specific legislation authorizing offshore companies, offshore banking, offshore insurance, and Labuan trust companies. - In 1996 LOFSA was created to be a ‘one-stop’ agency to streamline the supervisory and regulatory arrangements in Labuan IOFC. *Source: IMF Country Report CR04391.* ### Appendix I provides a tabulation of the legislation applicable to the Labuan offshore ### cr04391 - Appendix I provides a tabulation of the legislation applicable to the Labuan offshore ### Labuan Offshore Financial Services Authority (LOFSA): role, structure, and resources - LOFSA established under the Labuan Offshore Financial Services Authority Act 1996 (LOFSAA) with developmental and regulatory objectives: - "to promote and develop Labuan as a center for offshore financial services"; and - "to develop national objectives and priorities for the orderly development and administration of offshore financial services in Labuan, and to make recommendations to the Minister in respect thereof." - Legal/supervisory powers: - Authority to administer, enforce, carry out and give effect to provisions of laws related to offshore financial services in Labuan. - Authority to require financial institutions to submit information deemed necessary for supervisory functions, to conduct examinations of financial institutions and corporations, and to impose levies and collect fees. - Governance: - Governing board appointed by the Minister of Finance for terms not exceeding three years (reappointment permitted) consists of: - A Chairman; - The Director General; - Not less than three and not more than seven other persons, two of whom shall be from the public sector. - Director General is chief executive officer responsible for day-to-day administration. - At time of assessment, Chairman was the Governor of the Bank Negara Malaysia, Dr. Zeti Akhtar Aziz; board included representatives from the Securities Commission, Companies Commission of Malaysia, Labuan Corporation, Ministry of Finance, and the Director-General, plus private-sector appointees. - Organization and staffing: - LOFSA has a staff of approximately 55 and is organized into five departments: policy development, operations, legal and administration, corporate affairs, and the Director-General’s office. - Licensing handled by the Operations Department with 13 staff and one director; Legal and Compliance Division has 7 staff reporting to the director, with plans to add 4 additional staff. - Supervision activities and cooperation: - Initiated on-site visits and examinations of banks and insurance companies; on-site examinations carried out on five subsidiary banks and three insurance subsidiaries with assistance from Bank Negara Malaysia (BNM). - No formal arrangements structuring the working relationship between BNM and LOFSA, but BNM stands ready to assist LOFSA as necessary. - Funding and finances: - Funded largely by revenue from incorporation of companies and annual licensing fees; additional interest-free loans from BNM since 1996. - 2001 operations generated a surplus of RM 500,000. - Planning figures for 2002 expenditure show a rise of RM 15.7 million, which would represent an increase of approximately 40 percent over 2001. - LOFSA officials indicated higher 2002 outlays will be fully covered by prior increases in fees and interest income. ### Strengths and vulnerabilities in regulatory and supervisory arrangements - Supervisory independence and governance: - LOFSA has dual objectives (promotion and supervision); potential conflict exists but no evidence that development priorities inhibited regulatory efforts. - Recommendation to increase separation between promotional and supervisory responsibilities, ideally by modifying legislative objectives or by organizational delineation. - LOFSAA provides broad operational autonomy, but accountability to the Minister of Finance includes: - Board members and Director General appointed by Minister (section 5(1)) with appointments revocable at any time (section 7(1)); - Minister may issue binding directions (section 9(1)) and require information (section 9(2)). - Recommendation to clarify conditions for continuation and removal of board members, and to consider an MOU to spell out operational relationships between LOFSA and BNM. - Transparency: - Supervisory practices need enhancement, particularly in insurance: - Accounting standards not clearly specified for insurance and Islamic financial accounts. - No guidance on internal controls, credit or liability risk management for insurance companies. - Standards for valuing insurance liabilities not yet established. - Recommendation to expand publication of guidance and examination manuals and to use LOFSA website to post rules, regulations and guidelines. - Interim suggestion: provisionally adopt BNM guidelines suitably adapted to Labuan and consider publication of annual financial statements of licensed companies. - Corporate governance: - Offshore Companies Act requires review on corporate governance matters; LOFSA should issue separate guidelines. - Shareholder rights and corporate transparency need specification; roles/responsibilities of company directors (beyond resident director/secretary) should be defined under the Offshore Companies Act. - LOFSA uses fit-and-proper standards and supervisory assessments in on-site examinations; recommendations to adopt BNM "Guidelines for Financial Institutions" and Central Bank Act board standards, adjusted for Labuan. - Supervisory practices, organization, and resources: - Supervision has shifted from reliance on audits/off-site monitoring toward more proactive, risk-based, on-site examinations. - Recruitment underway to expand Legal and Compliance Division; staffing levels should be kept under review as examination experience increases. - Joint examinations with BNM should be systematized; care advised to avoid over-reliance on BNM given unique Labuan business. - Recommendation to reinforce use of internal and external auditors and encourage auditors to focus more on firms' systems and controls to support AMLA implementation. ### Summary assessment against Basel Core Principles (BCP) — main findings and statistics - Scope and methodology: - Assessment of LOFSA with respect to offshore banks in the Labuan International Offshore Financial Centre (IOFC) using the BCP Methodology; prepared by Mr. Peter Dench, Adviser, Banking System Department, Reserve Bank of New Zealand. - Offshore banking sector statistics (as at mid-September 2002 / 30 June 2002 where noted): - Number of offshore banks licensed by LOFSA: 49 (including 11 banks incorporated as offshore companies in Labuan and 38 banks operating as branches). - Nine other offshore banks incorporated in Labuan are wholly-owned subsidiaries of commercial banks or merchant banks licensed and supervised on a consolidated basis in Malaysia by BNM. - Total assets of offshore banks at 30 June 2002: $18.7 billion. - Loans and advances at 30 June 2002: $10.5 billion. - "Over 80 percent of loans are to Malaysian residents." - Customer deposits at same date: $4.5 billion. - Majority of funding: $12.2 billion coming from banks. - Labuan-incorporated banks collectively appear to be adequately capitalized; disregarding special risk weight concessions, banks have a BIS-equivalent capital ratio of around 10 percent. - General preconditions: - Labuan benefits from Malaysia’s stable macro-economic environment post-1997 crisis, government-sponsored development, available competent accounting and auditing services, mixed local and international accounting standards, and a common law legal/judicial system with separate offshore laws applicable in Labuan. - Principle-by-principle highlights: - CP 1 (Objectives, autonomy, powers, and resources): - Responsibilities and objectives are clearly specified in LOFSAA and OBA. - Operational independence adequate, but undesirable constraints on LOFSA’s ability to access and share customer-specific information should be corrected by legislative amendment. - Compliance staff resources currently insufficient for effective on- and off-site supervision across the whole offshore industry. - CPs 2–5 (Licensing and structure): - Permissible activities defined in law; license criteria set out in LOFSA guidelines (fit and proper, track record, credit rating, home-country supervision). - Some criteria less rigorous for investment bank applicants not accepting deposits. - Prior approval required for changes in substantial ownership and to open offices/operate subsidiaries outside Labuan. - CPs 6–15 (Prudential regulations and requirements): - Prudential requirements primarily in LOFSA guidelines; minimum capital requirements diverge from Basel by allowing concessional risk weights. - Detailed internal audit guidelines cover credit policies, asset quality, large exposures, liquidity, treasury operations, information systems and fraud/operational risks; no guidance on country risk. - Quarterly reporting of capital adequacy, asset quality and liquidity mismatches required; limited on-site review to date. - Comprehensive guidelines issued on customer due diligence, record-keeping and suspicious transactions reporting; national anti-money laundering legislation applies though not all provisions invoked yet. - Recommendations: - Revise Capital adequacy framework to be consistent with Basel standards by removing the risk weight concession. - Introduce large exposures reporting. - Strengthen loan classification and provisioning rules to conform with international best practice. - Increase frequency of periodic on-site reviews and provide guidance on interest rate risk monitoring and reporting. - CPs16–20 (Methods of ongoing supervision): - Framework largely in place for on- and off-site supervision; off-site CAMEL analysis used. - Approval of a licensed bank’s external auditor required, but no provisions to require audit review of returns. - Recommendations: - Issue guidelines on corporate governance and role of external auditor. - Make further use of external auditors to complement LOFSA supervision. - Increase on-site examination/verification of guideline implementation, including foreign banks. - CP 21 (Information requirements): - Offshore banks not required to publish audited annual financial statements, but must provide them to LOFSA. - Recommendation to consider issuing guidance on accounting standards for reporting and to consider requiring publication of annual financial statements by Labuan-incorporated banks. - CP 22 (Formal powers of supervisors): - LOFSA has summary procedures and can issue broad-ranging directives; monetary penalties exist for non-compliance. - Recommendation to introduce a prompt corrective action framework. - CPs 23–25 (Cross-border banking): - LOFSA serves as host country supervisor for offshore bank branches/subsidiaries; close cooperation with Malaysian supervisor. - No formal communication channels with home country supervisors of foreign bank branches; constraints on information sharing should be removed urgently. - Recommended Action Plan (summary from Table 2): - CP 1: Clarify criteria for appointment of Board members to avoid conflicts of interest; add compliance staff; remove constraints on access and sharing of customer-specific information (except where crime/fraud committed). - CPs 6–15: Revise capital adequacy risk weight rules to Basel standards; make loan classification and provisioning rules more rigorous; introduce large exposures reporting. - CPs16–20: Issue corporate governance and external auditor guidelines; increase use of external auditors; increase on-site verification of guideline implementation including for foreign banks. - CP 22: Introduce a prompt corrective action framework. - CPs 23–25: Establish arrangements for exchange of information with home supervisory authorities, with legislative amendment to allow uninhibited flow where adequate protection is assured. - Authorities’ response: - LOFSA intends to continue reviewing supervisory and regulatory frameworks in line with international standards and IMF recommendations. - Cited legislation to mitigate money laundering/terrorist financing risk includes Anti Money Laundering Act 2001 (AMLA), Mutual Assistance in Criminal Matters Act 2002 (MACMA), amendment to Section 125A of the Penal Code, and Countering the Financing of Terrorism measures. - With expected increase in manpower for supervision and compliance, LOFSA expects to enhance supervisory functions and facilitate review of the existing framework more effectively and diligently. *Source: IMF assessment of the Labuan International Offshore Financial Centre and the Labuan Offshore Financial Services Authority (LOFSA) (cr04391).* ### Introduction ### Introduction ### Scope and authorship - The Report on the Observance of Standards and Codes for the FATF 40 Recommendations for Anti-Money Laundering and 8 Special Recommendations Combating the Financing of Terrorism was prepared by: - A team composed of staff of the International Monetary Fund and another expert not under the supervision of Fund and Bank staff. - The independent AML expert (IAE) was Ms. Sue Takasu of the Ministry of Justice of Japan and public prosecutor of the Tokyo District Public Prosecutors Office. - The IMF assessors were Mr. John Abbott (Mission Chief, MFD), Mr. Kiyotaka Sasaki (MFD) and Mr. Cheong-Ann Png (LEG). - The roster of experts for the IAE is based on the names of competent persons identified by the FATF, FSRBs, the United Nations, and the Egmont Group. - Sections prepared by the IAE are presented in italics. ### Purpose and content - The report provides: - A summary of the level of observance with the FATF 40+8 Recommendations as of the time of the assessment. - Recommendations to strengthen observance and improve the AML/CFT framework. ### Information and methodology used for the assessment - The IMF team reviewed: - Relevant AML/CFT laws and regulations. - Supervisory and regulatory systems in place to deter money laundering (ML) and financing of terrorism (FT) among prudentially regulated financial institutions. - Regulatory systems in place for non-prudentially regulated sectors that are macro-relevant, specifically offshore companies, trust companies, offshore trusts and offshore limited partnerships. - The IAE reviewed the capacity and implementation of the criminal law enforcement systems. - The AML/CFT assessment was based on the draft Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards (FATF Secretariat Draft of August 26, 2002) (AML/CFT Methodology). - The AML/CFT Methodology was still in draft form at the time of the initial mission to Labuan. - The presentation of the detailed assessment follows the draft template available at the time of the first mission rather than the (slightly revised) final templates. - Minor differences between the draft and final methodologies had no substantive impact on the conclusions of the assessment and this ROSC follows the template introduced in December 2002. - In Malaysia, anti-money laundering is primarily a federal responsibility; for purposes of this assessment it was necessary to consider the laws, regulations and practices at the federal level as well as those applicable only to Labuan. ### Missions and timing - The AML/CFT assessment was carried out during two on-site missions: - The IMF team carried out its evaluation between September 30 and October 11, 2002. - The IAE mission took place July 14–22, 2003. - The conclusions of the IMF portions of the assessment are based largely on information available by the end of the first mission, October 11, 2002, updated to reflect significant legislation that came into effect in early 2003, prior to the IAE mission. - The sections dealing with criminal justice aspects are based on information available as of the time of the IAE mission, July 14–22, 2003. ### Main findings - The legal and institutional framework for addressing money laundering in Labuan, and indeed for Malaysia, was substantially strengthened with enactment of the Anti-Money Laundering Act 2001 (AMLA). - AMLA came into force with effect from January 15, 2002. - Part IV, dealing with preventive measures, was invoked in stages and all of the reporting obligations in Part IV were invoked on offshore entities with effect from April 15, [text ends]. *Report on the Observance of Standards and Codes for the FATF 40 Recommendations for Anti-Money Laundering and 8 Special Recommendations Combating the Financing of Terrorism; prepared by International Monetary Fund staff and an independent AML expert.* ### 2003. AMLA is federal legislation which provides inter alia for: criminalization of the ### 2003. AMLA is federal legislation which provides inter alia for: criminalization of the offence of money laundering; establishment of the financial intelligence unit; reporting obligations for financial institutions (including offshore financial institutions); and powers for investigation and enforcement. ### Overview of AMLA and legislative developments - AMLA criminalizes money laundering, establishes the financial intelligence unit (FIU), imposes reporting obligations for financial institutions (including offshore financial institutions), and grants powers for investigation and enforcement. - All financial institutions operating in the Labuan IOFC are subject to AMLA and required to satisfy the preventive measures in Part IV of the Act. - The Mutual Assistance in Criminal Matters Act 2002 (MACMA) came into effect on May 1, 2003 and allows comprehensive international assistance by Malaysia in criminal matters. - At the time of the assessment an important gap was the lack of explicit legislation criminalizing the financing of terrorism (FT); the mission recommended specific new legislation criminalizing FT with sound and severe punishment. (Legislation addressing FT was adopted after the assessment: in 2003 the Penal Code was amended to criminalize terrorist financing and AMLA was amended effective December 25, 2003 to extend freezing, seizure and forfeiture powers to terrorist property, although enforcement awaited amendments to the Criminal Procedures Code. The analysis and recommendations in the assessment do not reflect those later developments.) ### Criminalization of ML and FT - ML is criminalized broadly consistent with the Vienna Convention (signed and ratified). Malaysia has signed the Palermo convention but had not ratified it pending FT criminalization. - Under AMLA: - “unlawful activity” means any activity related, directly or indirectly, to any serious offence or foreign serious offence. - “proceeds of unlawful activity” means any property derived or obtained, directly or indirectly, by any person as a result of any unlawful activity. - “serious offence” includes specification of 150 specific offences, and attempts or abetment of those offences. - Mental element under AMLA: “knows or has reasonable grounds to believe.” - Standard of proof: questions of fact under AMLA decided on the balance of probabilities; other criminal cases require “Beyond a Reasonable Doubt.” - Punishment for money laundering under AMLA: a fine not exceeding 5 million ringgit or imprisonment for a term not exceeding five years, or both. Punishment for money laundering related to drugs and corruption is much more severe. - Assessment suggestion: Malaysia should consider making punishment for money laundering offences harsher. ### Confiscation, freezing, and legal protections - AMLA powers: - Enforcement agency may issue an order freezing any property where it has reasonable grounds to suspect ML has been or is about to be committed. - Investigating officer, with supervisory approval, may seize movable property suspected to be the subject matter of a money laundering offence. - Public Prosecutors may issue freeze or seizure orders related to both movable and immovable property. - Upon conviction, courts shall make a forfeiture order for any property proved, subject to civil standards, to be the subject matter or used in the commission of an offence. Forfeiture may also be ordered in the absence of conviction if the court is satisfied the accused is not the lawful owner and no other ownership is established. - AMLA includes powers to facilitate identification and tracing of property and protections for bona fide third parties (though exercise of these rights could place a considerable burden on the third party). - Limitations and gaps noted: - No provisions making contracts void or unenforceable where recovery of financial claims under AMLA could be prejudiced. - No provisions for an asset forfeiture fund or for sharing mechanisms (precluded by the Federal Constitution requiring all moneys to be paid into the Federal Consolidated Fund). - The freezing, seizure and forfeiture provisions originally did not apply to assets related to terrorist financing; amendments adopted after the assessment were intended to extend these powers to property used or intended to be used for FT. - The Exchange Control Act of 1953 provides authority to freeze money, gold and securities of terrorists and terrorist organizations in accordance with UN resolutions. ### Keeping statistics and enforcement data - Responsibility for compiling statistics on amounts of property frozen, seized, and confiscated rests with respective law enforcement and prosecutorial agencies. - Concern: tens of specialized investigative agencies make it difficult to obtain clear, unified statistics. - Recommendation: establish a competent unified authority to gather, classify data, and establish explicit statistics. ### The FIU and processing of suspicious transaction reports (STRs) - FIU status and functions: - Bank Negara Malaysia’s FIU has been appointed by the Finance Minister as the competent AML authority, including for Labuan, for receiving and analyzing STRs and for disseminating intelligence reports to enforcement agencies. - The FIU functions autonomously under AMLA and does not require Ministerial approval for day-to-day operations. - Reporting institutions are required, subject to criminal penalties, to report promptly transactions that give reasons to suspect involvement of proceeds of unlawful activity. - In Labuan, STRs are filed with LOFSA, which relays them to the FIU — direct reporting to the FIU was identified as preferable due to integrity risks. - LOFSA has issued STR reporting guidelines to offshore banks and draft guidelines to offshore insurance companies. - AMLA calls for the FIU and enforcement agencies to coordinate with domestic and foreign enforcement agencies; routine information exchanges with foreign authorities are subject to bilateral or multilateral arrangements that were not well developed at the time. - FIU capacity and performance: - FIU staff approximately 18; six financial analysts act like criminal investigators and decide STR dissemination. - Beginning January 2002, the FIU maintained statistics on number and disposition of STRs and instances of information requests; relatively few STRs originated from Labuan. - FIU responded to all domestic and foreign information requests but had not spontaneously referred STRs to foreign agencies in part because formal arrangements were not in place. - Recommendation: increase number of analysts and add criminal investigative experts; require FIU to publish periodic reports. - Recommendation: consider direct STR filing from Labuan reporting institutions to BNM rather than to LOFSA. ### STR dissemination and law enforcement integration - Law enforcement view: more STRs should be disseminated to law enforcement agencies provided confidentiality is secured. - Wider and more timely dissemination of STRs could be fruitful when combined with confidential information held by law enforcement agencies. ### Law enforcement, prosecution authorities, powers, and duties - Agencies authorized to investigate ML and FT (including in Labuan): Police (RMP), Anti-Corruption Agency (ACA), Customs service (RMC), and BNM depending on the offence. - ML related to drug offences: investigated by Police and Customs (when drugs smuggled); only Police have power to forfeit property in drug offences. - ML related to corruption: investigated by Police or ACA; in practice ACA investigates almost all corruption cases. - BNM may investigate ML under AMLA and offences under BAFIA. - FT is investigated by the Police. - Observations and recommendations: - Agencies have skilled staff but should increase personnel to keep pace with more sophisticated crime. Presence and activity in Labuan are small given its size and low incidence of crime. - Power of prosecution: vested in Deputy Public Prosecutors (DPPs) of the AGC or prosecuting officers of law enforcement agencies; some DPPs are seconded to investigative agencies such as ACA or BNM. - Statistics on number of investigations and prosecutions for ML-related offences were not available at the time of the mission. - Malaysian investigative agencies are highly specialized and subdivided; cooperation occurs effectively in task forces. The National Coordination Committee to Counter Money Laundering (NCC) comprises 13 law enforcement agencies and regulator bodies. - Special investigative techniques (controlled delivery, lawful interception, undercover operations) are frequently used in drug trafficking investigations and could be more widely extended to ML investigations. - Recommendation: extend relevant investigative and enforcement powers to proposed CFT legislation and secure a sufficient legal basis for investigative techniques in terrorist cases. - Recommendation: agencies should review typologies and trends in ML and FT methods drawing on domestic and foreign case studies. ### International cooperation - MACMA provides for a wide range of legal assistance but, in principle, requires a treaty or agreement with a foreign country; legal assistance without such an agreement may be available at Ministerial discretion. - As MACMA came into force on May 1, 2003, no treaties or agreements were in place at the time of the assessment; negotiations were underway with 9 ASEAN countries. - No MACMA requests had been received as of July 2003; there was strong political will to act timely on such requests. - AMLA provides that the FIU and LOFSA shall coordinate and cooperate with other enforcement agencies for investigations into serious or foreign serious offences. - A few bilateral MOUs with foreign agencies had been concluded or were under discussion; law enforcement did not provide data on number, source and purpose of information requests and their resolution. - Recommendations: - Conclude bilateral or multilateral treaties or agreements with as many foreign countries as necessary. - Compile statistics to monitor and ensure expeditious responses to mutual assistance requests (e.g., how long it took to fill requests, and types of legal assistance requested). - Current restrictions on LOFSA’s access to customer information impede spontaneous or upon-request international exchanges. ### Preventive measures for financial institutions (including Labuan offshore entities) - AMLA establishes preventive obligations for financial institutions, including offshore entities in Labuan: record keeping, suspicious transactions reporting, identification of account holders, retention of records, compliance programs, overriding secrecy obligations, supervisory enforcement powers, protection for reporting, and examination powers. - LOFSA, as supervisory authority for offshore financial services, is responsible for ensuring compliance in Labuan and has issued guidance to secure compliance. - Assessment findings and recommendations: - Preventive measures generally adhere to FATF 40+8 Recommendations, but gaps include: - Need for stricter guidance for renewal of customer identification. - Requirement to identify beneficiaries of offshore trusts. - Requirement for accurate and meaningful originator information on wire transfers. - AMLA’s ongoing monitoring requirements are limited but supplemented by enforceable BNM guidelines. - Guidelines for monitoring suspicious transactions with jurisdictions with weak AML/CFT regimes should be updated more frequently. - More detailed guidance is needed for insurance companies, securities companies, and trust activities. - LOFSA’s compliance monitoring focuses primarily on offshore banks; monitoring should be augmented for offshore insurance companies, securities companies and trust and company service providers. - A residual secrecy provision in the LOFSA Act restricts LOFSA’s ability to access customer information (limited to clients obtaining credit facilities from banks and when LOFSA is satisfied based on evidence that fraud or criminal offence has been or is likely to be committed). Recommendation: eliminate these restrictions. ### Trust and company service providers - Trust companies in the IOFC carry out essential services: incorporation and registration of offshore companies, registration of offshore trusts, registration of offshore limited partnerships. - All documents required to be filed or lodged with LOFSA must be made through a trust company; trust companies are responsible for due diligence on identities and businesses of customers for AML purposes. - Recommendation: LOFSA should conduct more proactive oversight, including on-site examinations, of trust companies to ensure compliance with AML requirements. ### Summary assessment against FATF 40+8 Recommendations and recommended actions - Labuan formally complies with most FATF 40+8 Recommendations; significant shortcomings primarily arose from absence of FT-specific legislation (an issue authorities were working to correct). - Laws and regulations need extension or amplification in several places and administrative steps should be taken to strengthen implementation. - Highlights of recommended actions (selected from the assessment): - Empower LOFSA to access any information on any customer of offshore firms; increase investigative agency personnel. - Consider making punishment for ML offences harsher in line with predicate offences such as drug and corruption offences. - Consider additional provisions: confiscation of property of primarily criminal organizations; rendering contracts void or unenforceable where recovery would be prejudiced; establishment of an asset forfeiture fund; extend freezing, seizure and forfeiture to property used or intended for FT. - Review rights of bona fide third parties under Section 61 of AMLA to ensure sufficient protection. - Develop and expand guidance for insurance, securities and trust companies and enhance oversight of these firms’ AML/CFT preventive compliance. - Update guidelines for monitoring and reporting transactions with jurisdictions lacking adequate AML/CFT regimes. - Conclude bilateral or multilateral agreements with foreign countries to enable legal assistance; focus improved mutual assistance on money laundering issues. - For FT (Special Recommendations): ratify and implement UN instruments; criminalize FT per International Convention for the Suppression of the Financing of Terrorism; ensure investigative and enforcement powers extend to CFT; introduce provisions for immediate freezing of funds and property of terrorists or those who finance terrorism; require banks to include accurate and meaningful originator information on wire transfers and to apply enhanced due diligence when information is absent; address non-profit organization vulnerabilities and alternative remittance risks. - Table 4 additional recommended actions (selected): - Establish a competent unified authority to gather and classify AML/CFT data and establish explicit statistics. - Increase FIU analysts and add criminal investigative experts. - Disseminate more STRs to law enforcement while protecting confidentiality. - Require FIU to publish periodic reports. - Consider having Labuan reporting institutions send STRs directly to BNM rather than to LOFSA. ### Observations and LOFSA response summary - LOFSA and Malaysian authorities had taken steps prior to AMLA to address money laundering; LOFSA participates in national, regional and international meetings, issues KYC guidance, and included due diligence and AML measures in offshore legislation. - With invocation of Part IV of AMLA early in 2004, regulators/supervisors and enforcement agencies have powerful tools to combat money laundering; the Act is considered comprehensive but evolving. - LOFSA recognizes criminals are shifting away from traditional financial institutions; LOFSA emphasized need for ongoing training, exposure to new ML methodologies, and issuance of new guidelines. - LOFSA planned to expand guidelines beyond banking to insurance, and to consider IMF recommendations for trust companies and securities industry guidance. - Interim measure pending CFT legislation: the act of waging war against any power in alliance with the Head of the Federation was declared a predicate offence in AMLA to bring certain FT acts within AMLA’s ambit. - LOFSA issued directions to offshore banks, insurance and trust companies to freeze accounts of persons associated with Osama Bin Laden, the Taliban and Al-Qaida based on UN Security Council Resolutions. - LOFSA committed to continue issuing and reviewing guidelines and to improve national and international cooperation, consulting industry and relevant government agencies. ### Insurance Core Principles and transparency of insurance regulation (Labuan IOFC) - Assessment scope: compliance with IAIS Insurance Core Principles for LOFSA’s supervision of offshore insurers licensed in Labuan IOFC; prepared by Mr. Lonny McPherson. - Market size and structure (2001 data, US dollars; $1 = RM3.80): - Total gross premiums in 2001: $230 million ($135 million in 2000). - $195 million general; $35 million life. - Total industry assets at end-2001: $513 million (approximately 3.2 percent of total insurance fund assets in Malaysia and approximately 5 percent of total insurance premiums written in Malaysia). - 54 Labuan offshore banks: deposits $3.8 billion; total assets $18.1 billion at end-2001 (for comparison). - Paid up capital in 2001: $298.9 million (59.4 percent held by Malaysians). - Business composition: - Labuan insurance predominantly a reinsurance center: 87 percent of total general premiums are reinsurance. - General risks composition: fire 47 percent; marine 12.5 percent; engineering 9.8 percent; motor 14.3 percent; other risks. - Approximately half general business written inside Malaysia. - Net retention ratio of general insurers: 76.9 percent in 2001 (slight decline); industry underwriting loss increased from $13.9 million (116 percent) in 2000 to $43.1 million (134 percent) in 2001 due to increased claims and commissions. - Life business: primarily offshore investment-linked products to high net worth Malaysians; $35 million life premiums largely written by one life insurer (subsidiary of a domestic banking and insurance group supervised by Bank Negara Malaysia). - Captives: represent small share, $8.3 million premiums (about 2 percent of total gross general premiums). - Industry participants and activity: - Number of firms licensed to do offshore insurance and insurance-related business reached 98 in 2001 (increase from 83 at end-2000): 47 insurers; 36 brokers; 15 managers. - Of licensed insurers in 2001: 2 life, 3 general, 1 composite, 22 reinsurance, 19 captives. - Offshore insurance brokers’ brokerage fees increased by 78.9 percent to $6.8 million in 2001; general insurance accounts for 65.5 percent of brokerage fees. - One large insurance manager performs administrative activities for almost half the insurance licensees in Labuan. - Supervisory framework and weaknesses: - LOFSA responsibilities and objectives specified in LOFSAA and the Offshore Insurance Act; framework covers licensing, supervision, sanctions and legal protection for supervisors. - Legal system operates under common law principles. - LOFSA Chair (Dr. Zeti Akhtar Aziz) is also Governor of BNM. - LOFSA empowered to recommend revocation of licenses and take administrative control of insolvent companies per the Offshore Insurance Act (OIA); legislation provides for monetary penalties and possible imprisonment for violations under OIA. - Major weakness: lack of accounting standards and standards for valuation of liabilities, including technical provisions. Life insurers require an actuary’s report; Offshore Insurance Act provides a list of qualified actuarial associations in foreign jurisdictions in the absence of a professional actuarial association in Malaysia. *Source: IMF assessment of Labuan IOFC AML/CFT and insurance supervisory framework (2003).* ### Section 24 (1)c of the Offshore Insurance Act 1990, every insurer must follow accepted ### Section 24 (1)c of the Offshore Insurance Act 1990, every insurer must follow accepted ### Accounting standards and valuation of liabilities - Section 24 (1)c of the Offshore Insurance Act 1990 requires that every insurer "must follow accepted international accounting standards or such other standards as may be approved by LOFSA." - LOFSA has not issued guidelines on acceptable accounting standards for insurers; consequently, insurers are currently free to adopt any accounting standards. - The International Accounting Standards Board is "currently working on" international standards for insurance accounting. - The Malaysian Accounting Standards Board (MASB) has issued accounting standards on insurance (MASB 17 General Insurance and MASB 18 Life Insurance, as modified by BNM guidelines), which LOFSA "should consider adopting." - Valuation of liabilities (including technical provisions) is a key part of supervision when assessing an insurer's financial condition; LOFSA "should issue requirements" in this area. - In the absence of a professional actuarial association in Malaysia issuing valuation standards, consideration should be given to adopting: - the requirements outlined in the MASB pronouncements, and - the guidance on valuations issued by BNM. ### Main findings on LOFSA's supervisory regime - LOFSA has a regulatory and supervisory structure that has the form of prudential supervision in many aspects and "has the authority and the ability to exercise it" to meet most IAIS core principles. - Strong aspects: Organization of an Insurance Supervisor; Licensing; Change of Ownership; Sanctions; Confidentiality. - Key weaknesses and gaps: - Several IAIS core principles "are not, or not fully, observed" because they "have not yet been implemented and enforced by LOFSA." - Additional staffing and skills are required; on-site examinations commenced in 2001 but only three full examinations have been conducted (largely with resources from BNM). - LOFSA lacks standards on corporate governance and internal controls. - Lack of accounting standards and standards on valuation of liabilities, including technical provisions, weakens observance of core principles on liabilities, reinsurance, financial reporting, and capital adequacy and solvency. - No requirements with respect to reinsurance contracts and the amount of credit taken for reinsurance ceded; this is a weakness in the solvency test. - LOFSA is restricted from accessing customer information under LOFSAA, limiting assessment of market conduct and supervisory effectiveness. - Minimal analysis performed on individual company and industry financial data; monitoring tools are underdeveloped. - Operational notes: - Many LOFSA staff were formerly with BNM; directors and managers interviewed were "quite experienced and knowledgeable." - LOFSA publishes an annual report; not all guidelines and procedures are publicly available. ### Recommended regulatory and supervisory actions (Insurance) - Organization of an Insurance Supervisor (CP 1) - Revise legislation to provide LOFSA with unrestricted access to all company information, including customer accounts. - Increase resources and expertise in insurance supervision and actuarial affairs to enhance on-site examinations. - Licensing and Changes in Control (CPs 2–3) - Two minor recommendations were made (no further detail in the supplied excerpt). - Corporate Governance and Internal Controls (CPs 4–5) - Develop standards on corporate governance and internal controls for the industry. - Prudential Rules (CPs 6–10) - Develop standards addressing essential criteria on assets, including: - prudential investment limits, - safekeeping, - matching of assets and liabilities, - liquidity, - risk management policies in accordance with the IAIS Supervisory Standard on Asset Management by Insurance Companies. - For foreign branches, consider requiring assets or acceptable collateral to be maintained in Labuan to cover liabilities and the solvency margin. - Clarify requirements regarding use of accounting standards to those issued by MASB, as modified by BNM where appropriate. - Issue requirements regarding valuation of liabilities, including technical provisions; in absence of a professional actuarial association, consider adopting MASB pronouncements and BNM valuation guidance. - Issue requirements with respect to reinsurance contracts and the amount of credit taken for reinsurance ceded (including unlicensed reinsurance) and modify the solvency test where appropriate. - Market Conduct (CP 11) - Issue standards with respect to market conduct and evaluate company compliance. - Monitoring, Inspection, and Sanctions (CPs 12–14) - Develop monitoring tools such as early warning tests, key indicators and benchmark studies to enhance continuous monitoring. - Develop a range of supervisory intervention tools for early corrective action and communicate them publicly to enhance transparency and market discipline. - Cross-Border Operations, Supervisory Coordination and Cooperation, Confidentiality (CPs 15–17) - LOFSA should have access to all company information including customer information and be able to share supervisory information with home supervisory authorities. - Revise legislation to permit broader sharing of information with home "supervisory" authorities of institutions. - Enhance market discipline by requiring company information on directors and officers and audited financial statements to be publicly available; consider publishing summary financial data on an individual company basis (as done by BNM). ### Monitoring, inspection, and operational improvements - Financial reporting by insurers can be greatly enhanced by stipulating accounting standards and standards for valuation of liabilities (including technical provisions). - Develop monitoring tools (early warning tests, key indicators, benchmark studies) with assistance from Bank Negara Malaysia to focus limited supervisory resources on problem companies and risk areas. - Consider additional use of BNM examination staff and actuarial experts (or engaging outside actuarial and audit experts) until permanent LOFSA staff can be hired in Labuan. ### Authorities' response (LOFSA) - LOFSA considered the IMF assessment "quite fair and objective" and noted IMF recommendations concentrated on improving regulatory aspects of the offshore insurance industry. - LOFSA observed that some supervisory tool unavailability is due to the industry's small size relative to banking and domestic insurance, thus "the risk is minimum." - LOFSA will further deliberate IMF recommendations; some report points were amended after review to reflect a "fairer view" and to delete "inaccurate or irrelevant material." - LOFSA does not fully share IMF assessors' viewpoints on certain areas, including observations on investment-linked products, conflict of interest in LOFSA's dual role as regulator and promoter, and some corporate governance points. - LOFSA requested IMF cooperation to provide guidance on action plans implemented by other jurisdictions to help assess necessity and impact of implementing recommendations. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr04391.pdf_