Watchdog Upgrades Malaysia’s Illicit Finance Rating, Urges More Laundering Prosecutions

KUALA LUMPUR, Dec 11 (Bernama) -- Global financial crime watchdog, the Financial Action Task Force (FATF) and Asia/Pacific Group on Money Laundering (APG) in a report published today, revealed that Malaysia has further strengthened its defences against illicit finance since 2015, notably by enhancing its legal framework and supervision of financial and non-financial sectors.

The watchdog upgraded Malaysia to the highest category of “Regular Follow-Up” for its anti-money laundering, countering terrorist financing and proliferation financing (AML/CFT/CPF) framework from “Enhanced Measures” in 2015.

It said the country has undertaken initiatives to update and deepen its understanding of illicit finance risks, as well as to strengthen domestic cooperation and coordination mechanisms.

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“However, Malaysia faces significant challenges in translating money laundering investigations into prosecutions and convictions,” it said in the 275-page Mutual Evaluation Report (MER) released today.

The FATF and APG mutual evaluation of Malaysia assessed the effectiveness of the country’s AML/CFT/CPF measures, and their level of compliance with the international FATF Standards, at the time of an on-site visit by an international team of assessors in February 2025.

It is to be noted that Malaysia was one of the first countries to be assessed in the new round of evaluations, FATF president Elisa de Anda Madrazo said in a statement released with the report.

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She said Malaysian authorities were highly committed to the process and had shown notable progress in strengthening the country’s AML/CFT regime, resulting in stronger supervisory frameworks for financial institutions, robust risk understanding and effective coordination among agencies.

“Substantial reforms and a strengthened legal framework have put Malaysia on a stronger footing to deal with major cases, such as 1Malaysia Development Bhd (1MDB), that shake public confidence,” she said.

Malaysia must sustain and build on these reforms, strengthen international cooperation, improve its sanctions framework, and work at pace to demonstrate a sustained increase in money laundering prosecutions and convictions in the next three years, she said.

“By implementing the FATF’s standards and recommendations, countries not only safeguard the integrity of their financial system, but make people and communities safer by stemming the flows of illicit finance that sustain harmful crimes such as human trafficking, drug trafficking, corruption and organised crime,” she added.

Meanwhile, APG co-chair Mitsutoshi Kajikawa said that as a strong voice for AML/CFT in the Asia-Pacific region, the APG welcomes the publication of the Malaysian mutual evaluation report.

“This is the APG’s first mutual evaluation report for the global new round, and I can see much of our region’s risk and context reflected in the report.

“It recognises the scale of our challenge but also the successes we can be assured of achieving with the continuous improvement mindset exemplified by Malaysian authorities,” he said.

He looked forward to working with Malaysia to share the insights gained regarding its strengths with regional partners, build on the findings and implement the report’s astute recommendations.

The MER is the result of a rigorous, in-depth assessment spanning over 16 months.

The assessment team held over 70 meetings with all relevant public authorities and met with 45 private-sector entities, including financial institutions, virtual asset service providers, designated non-financial businesses and professions, and non-profit organisations.

Illicit finance risks

The FATF said Malaysia’s money laundering risks stem from a range of factors, including corruption and fraud, the presence of an informal economy, rapid growth of digital finance, and the country’s strategic location as a transit hub for smuggling, human trafficking, organised crime and piracy.

The country is also exposed to terrorist financing risks due to its geographic proximity to terrorist groups in neighbouring jurisdictions, it said.

“The mutual evaluation found that Malaysia has a sound understanding of its risks, with regular risk assessments, but needs to enrich its understanding in certain areas, including cross-border crimes, third-party money laundering, and trade-based money laundering,” it said.

A significant case study - 1MDB case

The FATF said the assessment team reviewed authorities’ handling of significant criminal cases, including the 1MDB investigation, which found that high-profile figures had misappropriated funds from a sovereign wealth fund.

The report highlights that Malaysia has undertaken significant reforms in response to structural issues uncovered through this case, including amending legislation and developing new national policies and strategies on anti-corruption, adopting legislation on mutual assistance in criminal matters and transparency in public finances and expenditure, enhancing supervision and preventive measures, and establishing the National Anti-Financial Crime Centre to coordinate enforcement of cross-cutting crimes.

“Efforts to trace complex financial flows across multiple jurisdictions resulted in the recovery of approximately eight billion euros (about RM38.35 billion) during the period under review, the majority of which pertained to 1MDB-related assets,” it said.

Investigations and enforcement

The assessment found that Malaysia reallocated resources from other money laundering (ML) investigations to focus on the significant 1MDB case and associated cases.

While this prioritisation was critical for investigating this complex case and restoring public confidence, it has affected law enforcement agencies’ capacity to pursue other ML matters, the watchdog said.

Between 2019 and February 2025, Malaysia convicted 62 individuals and five legal persons for money laundering, and seven individuals for terrorist financing, it said.

“While the number of terrorist financing convictions has increased since the country’s last mutual evaluation, Malaysia’s overall conviction rate remains relatively low given its risk profile,” it said.

The assessment found that Malaysia has a strong understanding of the risks associated with the misuse of corporate structures and has implemented risk-based measures to mitigate the misuse of legal arrangements.

“A multi-pronged approach is used to obtain accurate and up-to-date beneficial ownership information in a timely manner.

“However, further improvements are needed to ensure authorities have timely access to the critical information they need for criminal investigations,” it said.

Domestic and international cooperation

The assessment found that Malaysia demonstrates robust domestic coordination and cooperation at the policy and operational levels, bringing together a broad range of stakeholders, including government agencies, regulatory bodies and competent authorities.

It said that since its last mutual evaluation, Malaysia has strengthened its international cooperation with a new case management system.

“The country has also increased its use of mutual legal assistance; however, improvements are still needed for it to be fully utilised in investigations and prosecutions -- particularly related to high-risk predicate offences such as fraud, drugs trafficking, smuggling and organised crime,” it said.

Private sector

The FATF said Malaysia also has a robust framework in place for the supervision of financial institutions (FIs), virtual asset service providers (VASPs), and designated non-financial businesses and professions (DNFBPs) such as lawyers, real estate agents and accountants.

“While risk understanding is generally sophisticated in larger FIs, VASPs, and DNFBPs, smaller FIs and DNFBPs have less developed risk awareness and mitigation measures,” it said.

It said that, despite achieving a substantial level of effectiveness in the financial sector, major improvements are required to enhance the effectiveness of preventive measures in other designated sectors (DNFBPs).

Further action

Following the assessment, it said Malaysia received a roadmap of “key recommended actions” that the country must complete within three years, namely strengthening international cooperation, improving its sanctions framework and demonstrating a sustained increase in ML prosecutions and convictions.

Malaysia will report back to the FATF and APG on its progress, it said.

-- BERNAMA