BFN2044

Week 2
Financial Regulations

2-2

USA Banking System: The Federal

Reserve System (The FED)
Fundamental Functions
Conduct monetary policy
Provide and maintain the payments system
Supervise and regulate banking operations

Organization

Board of Governors
Federal Open Market Committee
12 Federal Reserve Banks
Member Banks

2-3

The Federal Reserve Policy Tools

Monetary Policy Tools
Open Market Operations (OMO)
Discount Rate
Reserve Requirements
(Refer to Chapter 2 Textbook)

Malaysian Banks Regulatory

Structure
History of Commercial Banks in Malaysia
Colonial days : The commercial banks were
commonly called exchange banks since they
mainly dealt with foreign exchange transactions
for remitting and receiving funds to and from
foreign countries.
All commercial banks in Malaysia today are
authorised to deal in foreign exchange.

 1950s : Foreign banks dominated the banking

industry in Malaysia. However, since
Independence and particularly in the 1970s,
Domestic banks have expanded their network
tremendously in line with the Government and
Central bank policy.
1980s : The central bank has introduced
various legal and financial requirements which
the commercial banks have to comply with to
further strengthen the banking system.

Malaysian Banking System

The banking system is made up of the:
Central Bank (Bank Negara Malaysia)
Commercial banks
Representative Offices of Foreign Banks
Finance Companies
Merchant banks / Investment Banks
Discount Houses
Foreign Exchange
Money Market.

The Central Bank (Bank Negara

Malaysia)
BNM was officially opened on 24 January 1959. Its
objectives as spelt out in the Central Bank Ordinance
1958 includes:
to issue currency and keep reserves to safeguard the
value of currency,
to act as banker and financial adviser to the government,
to promote monetary stability and a sound financial
structure
to influence the credit situation to the advantage of the
country.

BNM is vested with these power:

Central Bank of Malaysia Act 1958 (Revised 1994).

Banking and Financial Institutions Act 1989 (BAFIA).
Exchange Control Act 1953.
Islamic Banking Act 1983.
Insurance Act 1996.
Takaful Act 1984.
Emergency (Essential) Powers Act, 1979 and Essential (Protection of Depositors)
Regulations 1986.
Loan (Local) Ordinance, 1959.
Treasury Bills (Local) Act 1946 (Revised 1977).
Government Investment Act 1983
Anti-Money Laundering Act 2001
Development Financial Institutions Act 2002
Payment System Act 2003
Money-Changing Act 1998

How BAFIA came about

The Banking Act 1973 and Finance Companies
Act 1969 have since been repealed by the
Banking and Financial Institutions Act 1989
which came into effect on 1 October 1989.
The BAFIA 1989 is very comprehensive and
giving wide powers to Bank negara Malaysia to
ensure orderly conduct of the banking, finance
company, merchant banking, discount house, and
money broking business.

BAFIA 1989
A bank is a person which carries on banking
business.
Banking business is defined as :
a) the business of:
i) receiving deposits.
ii) paying / collecting cheques drawn
by(paid in) by customers.
iii) provision of finance.
b) other business as BNM with the approval
of Minister of Finance.

Several types of Financial

Institutions

Bank Negara Malaysia (BNM)

Finance companies
Bank Simpanan Nasional
Commercial Banks
Merchant Banks

BANK NEGARA MALAYSIA

Issues and manages local currency.
Acts as the Govts banker and advisor.
Regulates the liquidity in financial markets
to promote stable monetary and financial
structure.
Acts as banker to all banks and lender of
last resort.

FINANCE COMPANIES
A person which carries on finance company
business.
Finance Company business:
a) receiving deposits
b) lending of money, leasing business, hire
purchase.
c) other business as BNM, with the approval of
Minister of Finance.

BANK SIMPANAN NASIONAL

(BSN)
BSN was created through the reorganisation of the Post Office Savings
Bank.
Main function: to mobilise funds esp. in
rural areas.
Introduce Premium Savings certificate.
Offers limited services and credit facilities.

COMMERCIAL BANKS
Difference: Commercial banks provide current
account facilities (cheques).
Banks accept savings account deposit, fixed
deposits and negotiable instruments of deposits.
Banks offer credit facilities (loans), remittances,
letter of credit etc.

MERCHANT BANKS
A person which carries on merchant banking
business.
Merchant banking business is the business of:
a) receiving deposits on deposits account
b) provision of finance
c) consultancy and advisory services
d) making / managing investment
e) other business as the BNM with approval
of the Minister of Finance.

Merchant banks (continue)

They are only allowed to accept fixed deposit account.
The main activities:
a) taking of deposits and money market operations
b) medium-term lending
c) loan syndication and acting as loan managers
d) corporate financial services ( IPO, M&A, rights
issue)
e) fund management

Who can open a bank?

only those who held a valid licence to carry on banking
business can open a bank
Part II, BAFIA , Section 4 : Banking, finance company,
merchant banking, discount house and money broking
businesses to be carried on only under licence.
No person shall carry on:
a) banking, finance company, merchant banking, or
discount house business, unless it is a public company;
or
b) money-broking business, unless it is a corporation,
and holds a valid licence granted under section 6(4) to
carry on such business.

How to submit your application

for bank licence?
Part II, section 5 (1)
- you must send your application in writing to the
MOF by submitting the application to Bank Negara
together with the following:
a) A copy of the Memorandum and Articles of
Association, or other relevant documents under
which the applicant is established;
b) A copy of the latest audited balance sheet of the
applicant;

A statement of:
i) the name, place and date of establishment of the
applicant
ii) the names, places and dates of the establishment of its
related corporations
iii) the sources, purposes and manner of the applicants
funds being used
iv) the principal business and field of operations of the
applicant and its related corporations
v) the names and addresses of the directors and the
substantial shareholders of the applicant and its related
corporations
d) such other information or documents as may be
specified by Bank Negara

Can you withdraw your

application once it is
submitted?
Yes,
-Section 5(4)
An application under this section may be
withdrawn at any time before it is granted or
refused.

Can anybody use the word bank?

No, Section 15 (1) (a)
Except with the written consent of the Minister, no person, not
being a licensed institutions, shall assume or use the words
bank, deposit taking company, finance company,
merchant bank, discount house, money broker, or
foreign exchange broker, as the case may be, or any
derivatives of these words in any language, or any other words
in any language capable of being construed as indicating the
carrying on of such business, in relation to the business or any
part of the business carried on by the person, or make any
representation to such effect in any bill head, letter paper,
notice, advertisement, or in any other manner whatsoever.

How do you know that it is a

licensed bank?
The names to be affixed outside the office
Sect. 16
Every licensed institution shall at all times affix or paint,
and keep affixed or painted, on the outside of each of its
offices in a prominent position and easily legible in the
national language, in such manner as may be approved
by the Bank, its name and the words licensed bank,
licensed finance company, licensed merchant bank,
licensed discount house, licensed money broker,
licensed foreign exchange broker, as the case may be,
or such other words as clearly indicate the business for
which it is licensed.

Can anybody advertise to get

deposits?
No, only licensed bank, finance company, merchant
bank, or discount house can.
Sect. 27
- No person, other than a licensed bank, a licensed
finance company, a licensed merchant bank or a
licensed discount house, shall issue or publish, or
otherwise facilitate any person to issue or publish, an
advertisement containing:
a) an invitation to make a deposit or enter into or offer
to enter into any agreement to make a deposit; or

Can anybody advertise to get

deposits? (continue)
b) information which is intended or might
reasonably be presumed to be intended to
lead directly or indirectly to the making of a
deposit:
Provided that the above prohibition shall not
apply to the publication by any person of
any such advertisement for or on behalf of a
licensed institution as mentioned above.

Who control the advertisement

of a bank?
Bank Negara
- Sect. 35(1)
- If the Bank is of the opinion that any statement made in
an advertisement issued by a licensed institution is false,
deceptive, offensive or misleading, the Bank may by
notice in writing direct the institution to do all or any of
the following:
a) cease the continued issue of the advertisement
b) modify the advertisement in such manner as may be
specified by the Bank
c) cease the issue of any advertisement which is, wholly
or substantially, a repetition of such advertisement;

Who control the advertisement

of a bank?
d ) take all practical steps to withdraw the
advertisement from every and all publication
or display of it; or
e) publish a statement in like manner as the
advertisement issued earlier to retract or
modify such advertisement.

What are the financial

requirements and duties of
licensed institutions?
Maintenance of reserve fund : Sect. 36
- Maintenance of capital funds : Sect. 37
- Maintenance of liquid assets : Sect 38

Who should oversee (double

check) the bank operation?
an auditor
- Sect. 40 (1) A licensed institution shall appoint
each year before a date to be specified by Bank
Negara, an auditor approved by MOF on the
recommendation of Bank Negara.

Obligation of Commercial
bank to Bank Negara?
financial statements to be submitted to Bank
Negara.
- Sect. 41 (1) Within 3 months after the close of
each financial year of a licensed institution, or
such other period as the Bank negara may
approve, the licensed institution shall submit to
the Bank in respect of its entire operations in
Malaysia 2 copies each of the following
document:

Obligation of Commercial
bank to Bank Negara?
a) its latest audited annual balance sheet, profit and
loss account and statement setting out the sources of
its funds, the purposes for which, and the manner in
which, such funds have been utilised; and
b) the report of:
i) the auditor under Sect. 40 (11) (c); and
ii) in the case of a licensed institutions, the directors
under section 169 (5) of the Companies Act 1965.

When does the bank have to publish its annual report?

- within 14 days of the laying of its accounts at its annual
general meeting or other period approved by Bank Negara
- Sect. 42
Every licensed institution shall within 14 days of the laying of
its accounts at its annual general meeting, or within such
further period as the Bank may approve, publish in not less
than 2 daily newspaper published in Malaysia and approved
by the Bank, one of which shall be in the national language and
the other in English, and exhibit thereafter throughout the
year in a conspicuous position at every office in Malaysia of the
institutions, a copy of each of its balance sheet and such other
documents as the Bank may specify; and the Bank may specify
differently in respect of the documents to be published in the
newspapers and the documents to be exhibited.

What is the percentage can a

person hold in the banks
shares?
Individuals = 10%, not individuals = 20%
- Sect. 46 (1)
No person shall hold more than the following percentages
of interests in shares of a licensed institution:
a) in the case of an individuals, 10 per centum; and
b) in the case of a person other than an individual, 20 per
centum

What should you do when you

want to dispose 5 % of
holding?
obtain written approval of the Minister
- Sect. 45 (1)
No person shall enter into an agreement/or
arrangement in which he would acquire or
disposed 5 % (including the % he already held)
of the shares of that institution without
obtaining written approval from the Minister.

Who cannot work in a bank?

- those who are bankrupt, charged with criminal
offence, charged with BAFIA offence,
detention or banishment or deportation, director
or management team of any corporation which
has been/ or being wound up by the court and
its licence has been revoked. Sect. 56 (1)
- Under Sect 56 (2), these offenders can be
accepted if the MOF is satisfied on the
recommendation of the Bank.

What is the criteria of a bank

CEO?
individual and a resident in Malaysia during the period of
his appointment.
- Sect 57 (1) Subject to subsection (2), every licensed
institution shall appoint a chief executive who shall be:
a) an individual; and
b) resident in Malaysia during the period of his
appointment.
Sect 57 (2) before appointing a chief executive, a
licensed institution shall seek and obtain the Banks
written approval for the proposed appointment.

ANTI-MONEY
LAUNDERING & ANTITERRORIST FINANCING

Introduction to Money Laundering

In todays globalized economy, organized crime groups
generate huge sums of money by drug trafficking, illegal arms
sales, smuggling and financial crimes (eg. Yakuza and Mafia).
Also known as Dirty Money.
This illegally obtained money, however, is of little use to
organized crime because it raises suspicions of law
enforcement and leaves a trail of incriminating evidence.
Criminals who wish to benefit from the proceeds of large
scale crime have to disguise their illegal profits without
compromising themselves. This process is knows as Money
Laundering.

Why do we need to know about

Money Laundering?
Banks and some customers have become MAJOR
TARGETS in money laundering activities
Why?
Banks provide a variety of services and instruments
i.e.. ATM machines, traveler's cheque, electronic
funds transfer, foreign exchange services, etc. that
can be used to conceal the source of money

Definition of Money Laundering

Money laundering is the process when the
identify of illegally obtained money is
changed so that it appears to have originated
from a legitimate source
Why?
This is done to avoid prosecution, conviction
and confiscation on the part of the criminals

STAGES OF MONEY LAUNDERING

Although money laundering often involves a
complex series of transactions made by
launderers through banks, it generally
includes 3 basic stages :
Placement
Layering
Integration

PLACEMENT
Placement involves the physical disposal of
cash proceeds derived from illegal
activities.
Objective : To get the illicit cash into the
financial system

PLACEMENT METHODS INCLUDE :

Breaking down of cash deposits below certain
cash transaction reporting thresholds before
banking them into designated account (s)
Depositing large amounts of cash in less
conspicuous small sums directly into
designated bank account (s)
Using shell companies incorporated in tax
haven countries.

LAYERING
Layering means creating complex layers of
financial transactions to separate the illicit
proceeds from their source and disguise the
audit trail.
Objective : To make detection as difficult as
possible by attempting to break the linkage
between the criminal and the proceeds of
crime.

LAYERING METHODS INCLUDE :

Electronic fund transfers
Using existing customers account where
account holder and account user are no
longer the same person
Using shell companies from tax haven
countries

INTEGRATION
Integration involves the turning of
criminally derived wealth into legitimate
funds
Objective : To place the laundered funds
back into the economy so that they re-enter
the financial system appearing as legitimate
business funds

INTEGRATION METHODS INCLUDE :

Buying assets eg. Land, house, cars
Buying existing legitimate businesses eg.
Restaurants, supermarkets
Investing in share, unit trust, derivatives

OFFENCES UNDER AMLA

The offence of money laundering is defined under
Section 4 AMLA as the act of any person who :
a) Engages directly or indirectly, in a transaction
that involves the proceeds of any unlawful activity;
b) Acquires, receives, possesses, disguises,
transfers, converts, exchanges, carries, disposes, uses,
removes from or brings into Malaysia proceeds of any
unlawful activity; or

TERRORIST FINANCING HOW ARE FUNDS

TRANSFERRED?
conceals, disguises or impedes the establishment of the true
nature, origin, location, movement, disposition, title of, rights
with respect to, or ownership of proceeds of any unlawful
activity; where :
Based on objective factual circumstances, the person knows
or has reason to believe that the property are proceeds from
any unlawful activity; or
The person without reasonable excuse fails to take
reasonable steps to ascertain whether or not the property are
proceeds from any unlawful activity

PENALTY FOR MONEY

LAUNDERING (AMLA)

An offender may be liable to a fine not

exceeding RM5,000,000 or imprisonment
for a term not exceeding 5 years or both,
upon conviction

Tutorial Week 2
Please find a newspaper or magazine articles regarding your
assigned bank/ persons/ organisation activities that has violated
any of the regulations or Act discussed in this chapter.
Write a 3 pages report and a member of the group shall present/
discussed during Tutorial class.
The article should include the following:
a) The name of the person/ organisations involved.
b) The location it takes place.
c) The amount of money involved.
d) Which regulation or Act it has violated and the punishment.
e) How the event occurred and the aftermath.