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MONEY LAUNDERING AND TERRORISM FINANCING IN MALAYSIAN BANKING SECTOR: CONTROLLING MECHANISMS AND FRAUD OCCURRENCE Assoc.Prof Dr Zuraidah Mohd Sanusi Wan.

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Presentation on theme: "MONEY LAUNDERING AND TERRORISM FINANCING IN MALAYSIAN BANKING SECTOR: CONTROLLING MECHANISMS AND FRAUD OCCURRENCE Assoc.Prof Dr Zuraidah Mohd Sanusi Wan."— Presentation transcript:

1 MONEY LAUNDERING AND TERRORISM FINANCING IN MALAYSIAN BANKING SECTOR: CONTROLLING MECHANISMS AND FRAUD OCCURRENCE Assoc.Prof Dr Zuraidah Mohd Sanusi Wan Nur Shawatul Aswal binti Zulkefle Prof. Dr Normah Omar Dr Norazida Mohamed Accounting Research Institute & Faculty of Accountancy Universiti Teknologi MARA Dr Hendi Prabowo Faculty of Economics Universitas Islam Indonesia

2 Introduction Money laundering and terrorism financing has a stand out effect on the economy and financial market. The emerging markets attract money launderers and terrorism financer because it has loose regulations with respect to anti-money laundering (McDowell & Novis, 2001). Money laundering and terrorism financing activities are expected to occur in any countries. However, developing countries with relatively small, fragile financial systems or weak economies may have more significant impact due to such activities (McDowell and Novis, 2001). Like any other country, Malaysia has come to realize that financial institutions, particularly banks are the most vulnerable to money laundering and terrorism financing activities. He (2010) argues that banking institutions are the most frequently used mechanism by money launderer. This is due to several factors including multiple services provided by financial institutions including deposits, loans, discounts, foreign exchange, etc. Thus, in many countries, banks have become the focus of AML/CFT efforts due to the significant roles they play in the economy. It is still unclear to what extent the compliance programs and controlling mechanism can deter the occurrences of money laundering and terrorism financing to improve banks’ performance in the banking sector. Hence, this study hopes to assess the effectiveness of the controlling mechanism, as well as the perceived effectiveness of AML/CFT regulations toward money laundering and terrorism financing incidents/occurrences in the context of Malaysian banking system.

3 Objectives The main objective of this study is to identify the elements of controlling mechanisms that might be influenced to reduce the level of money laundering and terrorism financing occurrence in Malaysian banking sector. Thus this study proposes the following hypothesis : H1: There is a significant relationship between client due diligence practice and money laundering and terrorism financing occurrences in Malaysian banking sector. H2: There is a significant relationship between internal control procedures and money laundering and terrorism financing occurrences in Malaysian banking sector. H 3: There is a significant relationship between AML/CFT training and awareness programs toward money laundering and terrorism financing occurrences in Malaysian banking sector. H4: There is a significant relationship between corporate governance and money laundering and terrorism financing occurrences in Malaysian banking sector. H5: There is a significant relationship between perceived effectiveness of AML/CFT regulations and money laundering and terrorism financing occurrences in Malaysian banking sector.

4 LITERATURE REVIEW 6. Perceived Effectiveness of AML/CFT Regulations- (Chong &Lopez-de-Silanes, 2007), (Coase, 1960) and Stigler, 1964) 1. Money Laundering and Terrorism Financing - (Morais, 2002), (FATF, 2008), (Beare & Schneider, 2007) 2. Customer Due Diligence (CDD)- 3. Internal Control Procedures –(Cunninghan, 2004), (Kaplan, 2008; Cunninghan, 2004), (Treba, 2003), (Philippsohn, 2001, and (Vargas & Backhouse, 2003) 5. Corporate Governance – (Shaikh &Talha, 2003) 4. AML/CFT Training and Awareness Program -

5 Methodology  The survey instrument was customized to determine the effectiveness of the mechanism towards bank performances in the Malaysian banking sector to deter money laundering and terrorism financing occurrences.  Thirteen-page questionnaire instrument was designed with seven sections.  The dependent variable of this study is the money laundering and terrorism financing occurrences.  The independent variables refer to the controlling mechanisms that influence money laundering and terrorism financing incidents/occurrences in the banking sector.  The sample for the study was drawn from Malaysian banks’ branches, focusing on Branch Managers, Assistant Branch Managers and Branch Executives. A sample of 150 branches was randomly selected among the banks in Malaysia.  101 usable responses were received.  The data were analysed using descriptive analysis, correlation analysis and regression analysis

6 RESULT / DATA ANALYSIS TypeDescriptionFrequencyPercent (%) Gender Male Female Age years years years and above 44.0 Qualification Master 98.9 Degree Diploma Other Position Manager Assistant manager Executive Other 22.0 Type of Loan Mortgage loan Hire purchase Mortgage & Hire Purchase Loan Other 55.0 Descriptive Analysis of the Respondent’s Demographic Factors

7 Descriptive Statistics for Variables Money Laundering and Terrorism Financing Occurrences RankMeanStd Dev Customer has numerous accounts and deposits cash into each of them, with the total credits being a large amount Customer makes one or more cash deposits to general account of foreign correspondent bank (i.e., flow-through account) Customer gives unrealistic, confusing or inconsistent explanation for transaction or account activity Customer deposits bank notes with a suspicious appearance (very old notes, notes covered in powder, etc) Customer attempts to convince employee not to complete any documentation required for the transaction Representatives of the business avoid contact with the branch as much as possible, even when it would be more convenient for them to have such contact Establishment of multiple accounts, some of which appear to remain dormant for extended periods of time Account that was reactivated from inactive or dormant status suddenly sees significant activities

8 Correlation Analysis CDDICAMLTCGPR CDD1.518**.505**.365**.468** IC 1.644**.623** AMLT 1.651**.689** CG 1.679** PR 1 MLTF_ occurences.353**.446**.341**.387**.400**

9 Multiple Regressions Variables Standardize d CoefficientsStd. Errort-statp-value Constant CDD ** IC ** AMLT CG PR R=0.514 a R 2 (Adjusted R 2 )=0.264 (0.226) F-statistic (p-value)=6.825 (0.000 b ) Coefficient for each variable is shown with t-statistics in parentheses (1-tailed test) *Significant at 10% level (1-tailed test); **Significant at 5% level (1-tailed test); ***Significant at 1% level

10 Conclusion The study focuses on controlling mechanisms to draw conclusions on money laundering and terrorism financing occurrences. This study only focused on the five elements of the controlling mechanism. Thus, future studies should look at other factors that may influence the occurrence of money laundering and terrorism financing, such as the advanced technology used in the banking sector The results of this study have several potential practical implications. Firstly, it helps to create awareness and better understanding regarding the effects and usefulness of controlling mechanisms in the banking sector, particularly by providing such important information to help the management to be endowed with a guideline in planning and reviewing relevant policies and activities in the future. Besides, this study provides insights to bank branches regarding the level of implementation of controlling mechanisms and internal control procedures as perceived by its members in the organization


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