Shariah Governance Framework

Islamic Accounting and Financial Criminology Conference (IAFCC 2013), 23rd March 2013, Shah Alam

Shariah Governance Framework: A Mitigating Mechanism against Money Laundering and Terrorism Financing in Islamic Financial Institutions Normah Omar Rashidah Abdul Rahman Masetah Tarmizi Accounting Research Institute, Universiti Teknologi MARA

ABSTRACT1 One of the greatest challenges that Islamic Financial Institutions (IFIs) have to overcome as a result of the 9/11 aftermath was the negative perceptions shown by the Western communities implicating them (IFIs) with terrorism financing activities. To counter such negative perceptions, Malaysia has established its own legislation, the Anti Money Laundering and Anti Terrorism Financing Act (AMLATFA) in 2001. Shortly after, the Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) Regime was enforced on all financial institutions. The regime introduces among others, the need for banks to ―know their customers‖ as well as to mandate them to file ―Suspicious Transaction Reports‖ (STR) when they are suspicious of the possibility that some transactions may be implicated with money laundering or terrorism financing activities. For Islamic financial institutions, the Shariah Governance framework provides an additional layer to mitigate money laundering and terrorism financing. Some of the key features of Shariah Governance framework include an o verall accountability of board; accountability of Shariah committee on Shariah decisions; whistle blowing provision; Shariah Committee‘s ―fit and proper criteria‖ and restrictions of Shariah Committee to sit in another Islamic Financial Institution within same industry. The stricter Shariah Governance framework implicates better measure in mitigating money laundering and terrorism financing. This is evidenced by the much lower number (and percentage) of STR reported by Islamic Financial Institutions compared to their conventional bank counterparts as reported by the last APG Mutual Evaluation Report for Malaysia.

Keywords: Shariah Governance framework, money laundering, terrorism financing, AML/CFT 1

The authors thank and acknowledge the assistance rendered by Mr Mohd Fuad Arshad from Bank Negara Malaysia and ASP Mohd Noor Firdauz Abdullah of the Royal Malaysian Police to facilitate completion of the research project.

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Introduction The 9/11 tragedy in the US has brought about many challenges to the Islamic Finance industry. One of the greatest challenges that Islamic Financial Institutions (IFIs) have to overcome as a result of the 9/11 aftermath was the negative perceptions shown by the Western communities linking them (IFIs) with terrorism financing activities (e.g. Ali and Syed, 2010; Rahman, 2005; Mennai, 2004). Following the legislation of the US PATRIOT Act 2001 in the United States, Malaysia establishes its own law to fight against money laundering and terrorism financing offences. The Anti-Money Laundering Act (AMLA) was introduced towards the end of 2001 and effectively enforced in January 2002. It was amended in 2003 to include measures to combat against terrorism financing. Following the amendment, AMLA was renamed AntiMoney Laundering and Anti-Terrorism Financing Act 2001 (AMLATFA). The new AMLATFA not only criminalizes money laundering and terrorism financing, but more importantly, it imposes various obligations on ―reporting institutions‖. This includes measures for the investigation of money laundering and terrorism financing offences and the law allows the freezing, seizure and forfeiture of criminal proceeds. Financial Institutions, including conventional and Islamic banks are the main entities named by AMLATFA as reporting institutions (RIs). As a member of the Asia Pacific Group (APG) on Money Laundering, Malaysia is also subjected to comply with the ―40 + 9 Recommendations‖ standards introduced by the Financial Action Task Force (FATF), an international agency set up during the G7 Summit. Although the earlier ―40 Recommendations‖ were focused on money laundering offences, the later ―9 Special Recommendations‖ are related to terrorism financing offences.

Whilst money laundering

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offences involve proceeds from illegal-gotten gains2, terrorism financing may be generated from some legitimate sources3. As leading RIs, financial institutions in Malaysia must report to the Financial Intelligence Unit (FIU) 4 of Bank Negara Malaysia any suspicious transaction that may implicate money laundering and terrorism financing. Besides having to comply with the strict requirements of AMLATFA, financial institutions must also comply the anti-money laundering and counter financing of terrorism (AML/CFT) regime. One of the requirements of this regime insist that financial institutions such as banks, insurance firms, insurance, remittance agents, money changers, stock brokers are to report suspicious illegal activities. At the same time tougher reforms require banks and financial institutions to be more vigilante and play a bigger role in preventing money laundering and terrorism financing activities especially on cross border transactions. For Islamic financial institutions in Malaysia, there‘s an additional requirement to comply with the shariah governance framework.

This is to be achieved through the two-tier Shariah

governance infrastructure comprising two (2) vital components, which are a centralized Shariah advisory council (SAC) at the Bank Negara level and an internal Shariah Committee formed in each respective Islamic financial institution (IFI).

Based on the above, this paper examines financial institutions in Malaysia and determines their level of compliance with respect AML/CFT requirements. For Islamic financial institutions, we explore the role of the shariah governance framework in mitigating money laundering and terrorism financing offences. Data collection for this study includes (i) reviewing of the Mutual 2

For example corruption and tax evasion For example donations and businesses. 4 The FIU is known as the ―Competent Authority‖ with respect AMLATFA 3

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Evaluation Report for Malaysia (2007) and (ii) focus group interviews with SAC and Shariah Committee of selected Islamic banks in Malaysia. AML/CFT Framework The implementation of the national AML/CFT regime is based on using an ―integrated and consultative approach‖. As depicted by Figure 1, the regime involves strategic collaboration between Bank Negara Malaysia, the competent authority appointed by the Minister of Finance to administer the Anti Money Laundering and Anti Terrorism Financing Act 2001 (AMLATFA), and the relevant government agencies and supervisory authorities. The AML/CFT programme is aimed firstly to develop national policy measures to counter money laundering and terrorism financing (ML/TF). Secondly is to prevent Malaysia‘s financial institutions as well as the designated non-financial businesses and professions (DNFBPs) from being targeted as the conduit for money laundering and financing of terrorism activities. Thirdly is to develop and ensure proper implementation of measures to counter ML/TF based on internationally accepted standards, i.e. the FATF 40 + 9 Recommendations.

National Coordination Committee (NCC) to Counter ML/TF

Supervisory/regulatory: • • • • • •

Bank Negara Malaysia CCM LOFSA ROS SC IRB

Enforcement: • Malaysian Anti Corruption Commission • Royal Malaysia Customs • Royal Malaysia Police • Immigration Department of Malaysia

Policy: • Ministry of Finance • Ministry of Foreign Affairs • Home Ministry • Ministry of Domestic & Consumer Affairs • AG Chambers

Figure 1: Coordination of the AML/Regime 4


In line with the requirements of FATF, Bank Negara Malaysia as a competent authority has proposed to divide the AML/CFT framework into three main categories. The first category is called ―Comprehensive legal and enforcement framework‖. It focuses on four main items: (i) criminalization of ML/TF through the establishment of AMLATFA and the listing of 248 predicate offences. The second category, ―Effective preventive measures‖ requires reporting institutions5 to detect and deter ML/TF by (i) conducting customer due diligence, (ii) submitting AML/CFT reports and conducting compliance programs and (iii) Maintaining related records at least six years.

The third category, ―Domestic and International Cooperation‖ proposes

collaboration through (i) the National Coordination Committee (NCC) comprising fifteen ministries and government agencies, (ii) Foreign FIUs and counterparts and (iii) International/regional bodies (e.g. APG) membership.

Johnston and Nedelescu (2006) in their study to examine the impact of the 9/11 tragedy, concluded that an effective AML/CFT regime should include some forms of risk management policy. They highlight the importance of effective contingency planning by the authorities and financial institutions in mitigating the risks of disruption from terrorist attacks. In another study, Shehu (2010) discusses on the need to establish effective supervisory and regulatory measures in ensuring the stability and integrity of the financial sector, especially financial institutions, such as banks. The aim is to increase awareness about the global Financial Action Task Force (FATF) standards and the efforts at enforcing these standards.

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Reporting institutions comprise all banks, insurance & takaful industry, offshore entities, capital market intermediaries, development financial institutions, money changers and designated non-financial business & Professions (DNFBPs)

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APG “40 + 9 Recommendations” Standard As a member to the Asia Pacific Group on Money Laundering (APG), Malaysia is subjected to comply with the ―40 + 9 Recommendations‖. Researchers globally have discussed extensively on the effectiveness of the standards in mitigating ML/TF.

Koker (2009) for example

investigated FATF's risk-based guidance to combat money laundering and terrorist financing. In fact he concluded that FATF has not defined ―risk‖ for purposes of the risk-based approach. Koker further noted that in the absence of a clear definition of risk, this may complicates the identification of low-risk versus high-risk products. Although FATF do provide an example of a risk matrix that can be used to identify low-risk banks, but the example is based on assumptions and generalisations that may not be sustainable in the long run. Johnston and Carrington (2006) in their study found that financial institutions, especially banks are facing increasing pressure to improve their compliance with AML/CFT related standards.

Although some banks are

responding positively to the need to establish robust AML/CFT regime, others faced the risk of disruption of legitimate business lines. In a study to examine level of country‘s compliance to the AML/CFT framework, Yepes (2011) found that the overall compliance rate is low. In some countries, there is an adverse impact on financial transparency due to poor implementation of standards on customer identification. He further found that the current measurements of compliance do not take into account an analysis of ML/FT risk. As a result, the assessment undermines the countries‘ credibility and integrity. Shahin et. al. (2011) evaluate the impact of regulating banking and financial sectors by FATF on

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non-cooperative countries and territories 6. Their research findings show that unlike some results in the literature, the measures did not seem to have significantly impacted the monetary variables in the NCCTs.

On the same note, Jensen and Png (2011) evaluate the implementation of

AML/CFT standards by developing countries in the Asia-Pacific region. They found that these developing countries have demonstrated positive developments in addressing anti-money laundering and combating the financing of terrorism (AML/CFT) requirements.

In fact, some

countries do have rigorous process of assessment for the mutual evaluation exercise. Nonetheless, the general level of compliance is quite limited, especially when compared with other FATF‘s developed countries. They posit that the difference may be due to ―complexities of the FATF 40+9 Recommendations, challenges in prioritizing AML/CFT development amidst other national priorities and general limited capacity in these countries‖. In another study, Reddington (2011) assesses the ―true effectiveness of AML/CFT controls‖ in developing countries. On the outset, FATF is perceived to have enjoyed a remarkable amount of success in raising awareness about money laundering and terrorist financing. Many countries around the world have shown very high commitment to mitigate these serious threats to international security. For developing countries specifically, they have taken steps to comply with FATF (or Regional FATF) recommendations. It most cases, this has involved the establishment of an AML/CFT regime. Through detailed case study of eight countries, Reddington found that these countries lack the ―effective oversight‖ and ―supervisory systems‖ necessary to ensure that their domestic institutions have robust controls in place.

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Non-Cooperative countries and Territories or NCCTs are countries that have been blacklisted by FATF for failing to comply 23 out of 25 FATF-related standards.

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Martuscello (2011) provides a critical discussion on the effectiveness of the ―9 Special Recommendations‖ that FATF had proposed to counter terrorism financing.

His criticism

includes the fact that counter terrorism financing efforts of the FATF have only had a limited effect on reducing the threat of terrorist financing. He further stated that the main limitations of the ―Special Recommendations‖ are practical ways to improve them. The nine special recommendations are too ―soft‖ and they have not significantly reduced the threat of terrorist financing because its CTF approach has been too similar to its AML program—and thus, ―geared too much towards solving a similar but distinct problem‖.

Islamic banks, just like any other financial institutions in this country are mandated to comply to all 40 + 9 Recommendations. In addition to that, they are also expected to establish the Shariah governance framework. At the central bank level, the Shariah Advisory Council (SAC) plays a very important role. As cited by Shuaib (2011), it is important to note that the Central Bank of Malaysia Act 2009 (replacing the Central Bank of Malaysia Act 1958) requires the courts to refer to the SAC on matters of Islamic banking and the decision of the Council is binding on the courts. Eight out of eleven members of the Council are Islamic banking scholars and jurists. In a nutshell, the SAC is given the power to decide on matters related to the operations of the Islamic banks. At respective Islamic banks levels, the Shariah committee is established to oversee the overall accountability of the Board of Directors. Based on this additional governance alone, it can be perceived that Islamic financial institutions are subjected to stricter governance and monitoring policy. As such, it is expected that ML/TF offences are much lower in Islamic financial institutions. Figure 2 illustrates the Shariah Governance Framework in Malaysia.

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Shariah Governance Framework in Malaysia Guided by two important legislation & guidelines

Central Bank of Malaysia Act 2009

Shariah Governance Framework for IFIs

Key Features:

Key Features:





Overall accountability of board



Accountability of Shariah committee on Shariah decisions



Shariah Committee decision cannot be set aside



W histle blowing provision



Shariah Committee fit & proper criteria



Restrictions of Shariah Committee to sit in another IFI within same industry

An apex authoritative body for the ascertainment of Islamic law for the purposes of Islamic financial business



Advise the Bank (and also IFIs) on any Shariah issue relating to Islamic financial business



Appointed by the King, on the advice of the Minister of Finance after consultation with the Central Bank





The court & arbitrator shall take into consideration any published rulings of the SAC, prior to any proceedings on Shariah matters Rulings made by the SAC shall be binding on IFIs, court or arbitrator

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Figure 2: Shariah Governance Framework in Malaysia AML/CFT Regime and Shariah Governance Framework as Mechanisms to Mitigate ML/TF For the purpose of the current study, data collection involves firstly, an assessment of the Mutual Evaluation Report for Malaysia (2007), where the compliance level of Islamic financial institutions (on related 40 + 9 Recommendations) were compared with those from the conventional banks. Secondly, to understand the role of both SAC and Shariah Committee within the Shariah Governance framework, a focus group interview were carried out with selected members of SAC and Shariah Committee of five Islamic Banks. One of the most common measures implicating possible ML/TF activities is the number of suspicious transaction report being lodged by the financial institutions to the FIU. Table 1 depicts that commercial banks submitted 71.3% of the total STR. This is followed by insurance companies at 12.3%; Pos Malaysia at 7.4% and Islamic banks account to 1.92%.

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Table 1: Summary of Suspicious Transaction Reports (STR) No 1 2 3 4 5 6 7 8 9 10 11

Financial Institutions Commercial Banks Finance Companies Islamic Banks Merchant Banks Insurance Companies Development Financial Institutions Offshore financial Institutions Money Changers Stock brokers Pos Malaysia Others

2002 485 10 7 9 -

2003 973 18 21 54 6 9

2004 2,159 87 24 11 52 13

2005 1,818 23 43 2 39 194

2006 2,034 0 106 4 1,195 116

Number 7,469 138 201 80 1,292 332

% 71.3 1.32 1.92 0.7 12.3 3.1

7

20

9

7

-

70

0.6

1 -

-

8 -

36

16

5

13 73 1

13 703 13

9 26 776 71

0.08 0.2 7.4 0.7

10,464

100%

Total Source: APG Mutual Evaluation Report Malaysia 2007

Section 14 (b) of the AMLATFA requires a reporting institution to report promptly to the FIU ―any transaction where the identity of the persons involved, the transaction itself or any other circumstances concerning that transaction give any officer or employee of the institution reason to suspect that the transaction involves the proceeds of an unlawful activity‖. Another important measure of possible ML/TF activity is the cash transaction report (CTR). Section 14(a) provides for the reporting to the FIU of any transaction (cash or otherwise) that exceed the threshold amount specified by BNM. Since 2006, the threshold set was RM50,000. Again it is noted that the percentage of CTR report for Islamic banks is much lower compared to the conventional banks. Table 2 illustrates the number and percentage of CTRs reports received by the FIU from both the conventional and Islamic banks in Malaysia.

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Table 2: Cash Transaction Report (CTR) Received by FIU No 1

2

Financial Institutions Sept Commercial 4,737 Banks Islamic Banks

866

Total

5,603

Oct

2006 Nov Dec

Number

%

30,646

83,175

95,274

213,832

96.1%

1,599

2,568

3,735

8,768

3.9%

32,245

85,743

99,009

222,600

100%

Source: APG Mutual Evaluation Report Malaysia 2007

Whilst most of FATF‘s 40 Recommendations cover money laundering offences, the nine Special Recommendations are somewhat related to terrorism financing. Table 3 provides a summary of FATF rating for the nine recommendations.

Although the nine special

recommendations are not addressed directly on conventional and Islamic banks, it is important that financial institutions take note on possible mechanisms being used by terrorist organizations to obtain financing for their activities. It is therefore crucial for financial institutions to carry out relevant due diligence on these organizations or when conducting ―know your customer or KYC‖ assessment. It is noted that in many instances, the rating ―LC‖ is given when the assessors are not able to ascertain the effectiveness of the standards.

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Table 3: APG Findings on Special Recommendations Related to Terrorism Financing SR

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Special Recommendations

Rating7

Comments To date Malaysia has not yet acceded to the UN-Terrorist Financing Convention, although laws and measures have recently been put in place to cover its requirements. It is not yet possible to comment on effectiveness of implementation While the new offences meet all the essential criteria of SR II, there is as yet no basis to evaluate the effectiveness of their implementation. While the new legislation comprehensively provides for the freezing of terrorist funds, to a large extent, it is too soon to determine the effectiveness of its implementation. Authorities do not appear to have issued guidelines or directions to entities holding real estate or securities Currently, there is no explicit obligation in law or regulation to report suspicions of terrorist financing. There remains uncertainties about the effectiveness of the current system in certain sectors of the financial industry As with other serious offences, mandatory requirements as to dual criminality and ‗sufficient importance‘ present potential impediments. Malaysia has demonstrated that a flexible approach is taken to the requirement for dual criminality Large scale unregulated remittance channels exist, with a continuing need for structures or strategies to support increased uptake of remittance through formal channels. There‘s limited implementation of CDD, record keeping and compliance provisions of AMLA as not invoked until March 2007 for certain nonbank remittance operators Inspection powers yet to be used with respect to the majority of nonbank remitters Currently, there is no ongoing strategy to identify and mitigate AML/CFT risks within NPO sector. There‘s also inadequate mechanisms for information exchange with foreign counterparts In practice the systems is deficient and does not meet the requirements as set down in the FATF recommendations. While sanctions are available for false disclosure of cross border currency movements, they are rendered ineffective due to deficiencies in the declaration system.

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Implement UN instruments

LC

2

Criminalise terrorist financing

LC

3

Freeze and confiscate terrorist assets

LC

4

Suspicious transaction reporting

PC

5

International cooperation

LC

6

AML requirements for money/value transfer services

PC

7

Wire transfer rules

LC

8

Non-profit organisations

PC

9

Cash couriers

NC

C = Full compliant; LC = Largely compliant; PC = Partial compliant and NC = Non compliant

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As illustrated in Table 4, Malaysia‘s overall performance score for its last Mutual Evaluation8 assessment was at 67%. Although the score is fairly commendable, much still needs to be improved, especially those recommendations that obtained ratings of ―partial compliant PC‖ and ―Non Compliant NC‖. The acceptable benchmark score is 70%. Table 4: APG Mutual Evaluation Score: A Comparison Rating C LC PC NC (Total C & LC)/49 Achieve 70% compliance

Countries Malaysia Australia 12 9 14 24 13 15 10 1

US 15 28 2 4

UK 24 12 10 3

43/49

36/49

33/49

87.76%

73.47%

67.35%

China 8 16 16 9

Thailand 2 4 28 14

26/49

24/49

6/49

53.06%

48.98%

12.24%

Source: Bank Negara Malaysia

Based on the earlier evaluation of FATF standards, Islamic Financial institutions are found to have lower number of STRs and CTRs compared to their conventional bank counterparts. In the next phase of data collection for this study, a focus group interview was conducted with selected members of SAC and Shariah Committee of five Islamic Banks. The main aim of the interview was to gather information on the Shariah Governance framework of Islamic financial institutions. More importantly, the interview was also to establish whether or not the Shariah Governance Framework acts as a filtering mechanism to mitigate money laundering and terrorism financing.

Subsequent section discusses the implementation of the Shariah

Governance Framework in Malaysia.

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APG’s forthcoming Mutual Evaluation is expected to take place in the first quarter of 2014.

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Shariah Governance Framework of Islamic Banks in Malaysia In addition to the stringent FATF‘s ―40 + 9 Recommendations‖ for AML/CFT, Islamic financial institutions are governed by another layer of Shariah Governance Framework (SGF). Typically the Shariah Governance Framework is divided into two tiers. The first tier constitutes the appointment of the Shariah Advisory Council (SAC) at the Bank Negara level. SAC advices the central bank on Shariah issues relating to Islamic financial business. Rulings made by the SAC shall be binding on IFIs, court or arbitrator. The second tier is the appointment of Shariah committee (SC) members at respective IFIs. Among the key features of the Shariah Committee include (i) providing an overall accountability to the board, (ii) ensuring full accountability of Shariah committee on Shariah decisions, (iii) making a whistle blowing provision, (iv) ensuring that the Shariah Committee is fit and fulfills the required criteria and (vi) imposing restrictions on Shariah Committee not to sit in another IFI within same industry. Our interviews with selected SAC and SC members focused on finding out if SGF facilitates in monitoring possible money laundering and terrorism financing activities. The interview sessions revealed some interesting results that could implicate the fact that Shariah Governance Framework acts as an additional ―filtering mechanism‖ to mitigate money laundering and terrorism financing activities by Islamic financial institutions. Our focus group discussions are divided into three sub-headings namely ―The Need for SGF‖, ―SGF Guiding Principles‖ and ―Challenges in Implementing SGF‖. The Need for SGF One of the main business objectives of Islamic financial institutions is to conduct financial business in accordance with the principles of shariah. Nevertheless, the responsibility of shariah 14


compliance is not confined to shariah committee alone. It must be equally shared by the board of directors, management and staff. Very often, ―Muzakarah‖ is held to discuss shariah-related issues. In essence, the basic tenets of Islamic finance place great emphasis on strong corporate governance values and structure; transparency; disclosure of information, instill public confidence; promote financial stability and strict adherence to Shariah principles. SGF Guiding Principles The Shariah Governance Framework is built upon four main guiding principles as illustrated by Figure 3. Firstly, it‘s the duty and responsibility of an IFI to establish a sound and robust SGF with emphasis placed on the roles of key functionalities in ensuring effective implementation of the SGF. In doing that, the IFI shall ensure that aims and operations of its business are in compliance with Shariah at all times. Each key functionary involves in implementing Shariah governance shall perform its function and exercise its duties & responsibilities according to BNM and IFI‘s requirements. To allow reporting on Shariah matters is to be carried out effectively, IFI shall establish a formal reporting channel among key players within the organization.

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Oversight, Accountability & Responsibility

Independence  Aims at safeguarding the independence of the Shariah committee in ensuring sound Shariah decision-making, and emphasis on the role of the board of directors in recognizing the independence of the Shariah Committee

 Clear demarcations on accountability & responsibility  Outlines the level of accountability and responsibility of the board of directors, Shariah Committee and management of the Islamic financial institutions

Guiding Principles Competency  Highlights requirements and expected competencies to ensure key functions are capable of implementing Shariah governance

Confidentiality & Consistency  Minimum set of rules that emphasizes on the importance of observing and preserving confidentiality and improving the level of consistency in decision making by the Shariah committee

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Figure 3: SGF Guiding Principles (Source: Bank Negara Malaysia)

An IFI shall set out the accountability and responsibility of every key functionary (Board, Shariah

Committee and Management) involved in the implementation of SGF. For example, whilst management provides complete and accurate information to SC, the later advises the board and provide input to the IFI on Shariah matters. The board is ultimately accountable and responsible on the overall SGF and Shariah compliance of the IFI. Secondly, it is crucial that SGF ensures the independence of SC at all times in exercising their duties to make objective and informed judgment. In order to make sound decisions, SC is given access to complete information. With respect non-compliance of shariah principles, SC can independently acts as a whistleblower and reports to the board and Bank Negara Malaysia.

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The third guiding principle is related to competency.

Any person bearing responsibilities

outlined in the SGF for an IFI shall possess the necessary competency and continuously enhance their knowledge and understanding in the Shariah as well as keep abreast on the latest developments in Islamic Finance. The fourth principle is related to confidentiality and consistency.

Internal and privileged

information obtained by the SC members in the course of their duties shall be kept confidential at all times and shall not be misused. Similarly, SC must maintain professional ethics, judgment and consistency in ensuring Shariah compliance. Challenges in Implementing SGF We also asked the interviewees about challenges that they often faced when implementing the Shariah Governance Framework. In a nutshell, they raised five main challenges. Firstly is in deciding which ―mode‖ is the best for SGF. Whilst some are in favour of a Centralised Shariah body, others prefer the governance to be decentralised at IFIs. The second issue is related to the competency of Shariah scholars to understand the complexity of Islamic financial instruments and their professionalism.

Whilst some scholars may have good knowledge in shariah, they somewhat lack

competency about business and other technical matters. Third, is the limited supply of experts or pool of Shariah scholars in the required Islamic finance knowledge. Fourth, is the difficulty to provide a ―policy‖ or solution that can accommodate all types of entity or all kind of problems. Finally, the interviewees feels that the Islamic Finance industry really need to enhance its capability to establish other Shariah compliance functions (e.g. Shariah review, shariah audit, risk management and research). Conclusion

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Based on the reviews of the APG Mutual Evaluation Report and the focus group interviews, it is evidenced that the Islamic Finance Institutions have to go through another layer of monitoring money laundering and terrorism financing offences. In addition to the stringent AML/CFT regime that is enforced by Bank Negara, the IFIs are further monitored by the two-tier Shariah Governance Framework. Although it is impossible to eliminate money laundering and terrorism financing in totality, the robust processes makes it difficult for the offences to penetrate the system.

One observation that we noticed when reviewing the APG report was the comments

made on Non Profit Organisations, which include Zakat organizations (one form of Islamic financial institution) in this country that. The APG noted that as far as these organizations are concerned, there are: (i) No specific ongoing strategy to identify and mitigate AML/CFT risks within NPO sector (including Zakat organizations); (ii) Limited outreach program to the NPO sector or focus on CFT risks by NPO sector authorities (including Zakat organizations) to date; and (iii) Inadequate mechanisms for information exchange with foreign counterparts. As a result, the rating for this sector was given as ―partial compliance or PC‖. Therefore it is expected that forthcoming APG Mutual Evaluation exercise will want to see improvements made on these observations. It is therefore recommended that non-bank Islamic financial institutions make a deliberate effort to include AML/CFT initiatives in their strategic planning and strategic implementation.

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