REGULATING NON-PROFIT ORGANIZATIONS (NPOs) AGAINST TERRORIST FINANCING & ITS IMPACTS: THE MALAYSIAN PERSPECTIVES

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1 Asset Stripping: Responses to the Financing of Terrorism and Crime Conference 2015, University of Notre Dame, London, May 2015 REGULATING NON-PROFIT ORGANIZATIONS (NPOs) AGAINST TERRORIST FINANCING & ITS IMPACTS: THE MALAYSIAN PERSPECTIVES Associate Professor Dr. Zaiton Hamin Faculty of Law, Universiti Teknologi MARA, Shah Alam, Selangor, MALAYSIA

2 WHAT IS NON-PROFIT ORGANISATIONS (NPOs)? Nature legal entity or organisation Method of Operation primarily engages in raising or disbursing funds for various purposes Organisational Structure include charitable, religious, cultural, educational, social or fraternal purposes, or for other types of good works

3 NPOs IN MALAYSIA Societies, associations, clubs, organizations, companies & foundations Constitutional basisregistered society or company Charitable corporation formation (company limited by guarantee) Society - regulated by the Registrar of Society (ROS) under Societies Act 1966 Company- regulated by the Company Commission of Malaysia (CCM) under the Companies Act 1965 May apply for income tax exemption - Income Tax Act 1967

4 NPOs REGULATORS IN MALAYSIA Total No of NPOs: 54,811 ROS 96.56% CCM 2.91% LFSA 0.04% PM Dept 0.49%

5 TYPES OF NPOS REGISTERED UNDER ROS Total No : 52,925 Welfare/charity 25% Commerce 7% Social 23% Recreational 14% Religion 20% Arts & Culture 4% Mutual benefit 3% Security 1% Professional 2%

6 FATF TYPOLOGY REPORT 2014 NPOs & RISK OF TERRORIST FINANCING MISUSE Vulnerabilities Types of NPO NPO sector has interconnected vulnerabilities to terrorist financing NPO engaging in service activities are mostly at risk Mitigation strategies Criminal prosecution Administrative enforcement Financial penalties Targeted financial sanctions

7 FATF NPOs Vulnerabilities Diversion of funds NPOs may be used: as a money laundering vehicle or as a means of transporting cash from one jurisdiction to another Affiliate with terrorist entity NPO could maintain an operational affiliation with a terrorist organization or supporter of terrorism Sham NPOs Disguised as charitable activity or organization raising funds and/or supporting terrorism

8 FATF NPOs Vulnerabilities Support for recruitment NPO is abused to misuse assets; and to support recruitment of terrorist entities Facilitate terrorist activities NPOs methods of providing humanitarian aid may lead to their misuse to facilitate terrorist activities

9 METHODS OF TERRORIST FINANCING Raising funds Moving funds Using funds Logistical Support Encouraging Recruitment

10 WHY NPOs ARE VULNERABLE Cash Based Economy Exposure to Underground Economy High Volume of Cross Border transactions Weak Legal, Regulatory & Supervisory framework High Level of Public Trust

11 FATF RECOMMENDATION 8 1. Review adequacy of laws & regulations on entities that can be abused for terrorist financing 2. NPOs are particularly vulnerable to terrorist financing 3. Preventing of misuse by: Terrorist organisations posing as legitimate entities Conduits for TF, including escaping asset-freezing measures Conceal clandestine diversions of funds to terrorist organisations

12 TERRORIST FINANCING UNDER INTERNATIONAL CONVENTION FOR THE SUPPRESSION OF THE FINANCING OF TERRORISM 1999 Providing or collecting funds any person by any means, directly or indirectly, unlawfully and willfully, provides or collects funds Intention & knowledge intention that the funds should be used or in the knowledge that they are to be used, in full or in part, in order to carry out any terrorist act

13 TERRORIST FINANCING OFFENCES UNDER THE MALAYSIAN PENAL CODE S 130 N providing or collecting property for terrorist acts S 130 O providing services for terrorist purposes S 130P arranging for retention or control of terrorist property S 130Q dealing with terrorist property

14 REGULATION OF MALAYSIAN NPOs ROS Ministry of Home Affairs enforces the Societies Act 1966 Maintain records pertaining to registered societies CCM Regulated by the Companies Act 1965 responsible in registering, supervising, and controlling activities of charitable corporations Zakat Regulated by 14 Islamic Religious Council & JAKIM Subjected to State Islamic Enactment

15 IMPACTS OF NON-REGULATION OF NPOs NPOs are not reporting institutions under ML/TF legislation NPOs not bound by Part IV of the AMLATPUAA NPOs have no statutory obligations Not obliged to undertake AML/ATF risk assessments

16 MALAYSIA S RATING BY APG MUTUAL EVALUATION REPORT 2007 Partially Compliant No ongoing strategy to identify & mitigate AML/ CFT risks within NPO sector Limited outreach to NPO sector or focus on CFT risks by NPO regulators Inadequate mechanisms for information exchange with foreign counterparts

17 Malaysia National Risk Assessment Report 2014 Terrorism Financing threat is medium risk because: Insignificant number of terrorism and terrorism financing incidents Primary groups (Jemaah Islamiah (JI) and Kumpulan Mujahidin Malaysia (KMM) have been dismantled self-financing by individual terrorist

18 Malaysia National Risk Assessment Report 2014 Misuse of NPO Information from law enforcement investigation No known NPOs involved in terrorist financing activities Minimum supervision on NPOs as the reason for NPO vulnerability to misuse

19 IMPACTS ON NPOs REGULATION NPOs are being singled out as particularly vulnerable which might not reflect the reality Over-regulation? Under-regulation? Disproportionate restrictions on legitimate activities of NPOs

20 Impact on NPOs Regulation Contradict FATF principles of Risk-based approach, proportionality, effectiveness & protection of legitimate NPO activities Stigmatisation - Sending message that NPOs are risky customers Problems with access to formal banking system leading to financial exclusion

21 THANK YOU FOR YOUR KIND ATTENTION