Malaysia Strengthens Its Financial Crime Defenses, but FATF Finds Enforcement Gaps

Key Takeaways

• Framework Strengthened: Malaysia has significantly upgraded its AML/CFT framework since 2015, particularly in supervision and coordination.
• Enforcement Still Lags: Investigations have increased, but prosecutions and convictions remain limited, especially in complex cases.
• 1MDB’s Lasting Impact: The case drove reform and major asset recovery but strained enforcement capacity.
• Sector Gaps Persist: Preventive controls are stronger in financial institutions than among DNFBPs.
• Three-Year Roadmap: Malaysia now faces clear deadlines to improve cooperation, sanctions and enforcement outcomes.

Deep Dive

Malaysia has made real strides in strengthening its defenses against money laundering, terrorist financing and proliferation financing over the past decade, but enforcement outcomes continue to lag behind the country’s growing investigative capabilities. That is what a new mutual evaluation by the Financial Action Task Force (FATF) and the Asia/Pacific Group on Money Laundering (APG) is saying, based on an on-site assessment carried out in February 2025.

The review found that Malaysia has significantly improved its legal framework, supervisory tools and coordination mechanisms since its last evaluation in 2015. At the same time, assessors flagged persistent challenges in converting investigations into prosecutions and convictions, particularly in complex and cross-border cases.

According to the evaluation, Malaysia now has a sound understanding of its money laundering risks, shaped by regular national risk assessments and stronger inter-agency coordination. Those risks reflect a broad mix of factors, including corruption and fraud, particularly scams and investment fraud, alongside a sizeable informal economy, rapid growth in digital finance and Malaysia’s role as a regional transit hub.

The country’s geographic position also exposes it to terrorist financing risks linked to groups operating in neighboring jurisdictions.

While assessors credited Malaysia for its improved risk awareness, they also found that this understanding remains uneven. Gaps persist when it comes to cross-border crime, third-party risks and trade-based money laundering, areas where the report suggests deeper analysis is still needed.

Coordination at Home, Friction Abroad

Domestically, Malaysia was found to have strong coordination and cooperation at both the policy and operational levels. Since the last review, the country has also updated its legal framework for international cooperation and rolled out a new case management system to support cross-border requests.

In practice, however, international cooperation has not yet translated into consistent enforcement results. The report noted that mutual legal assistance remains underused in most investigations and prosecutions, particularly in serious cases involving fraud, drug trafficking, smuggling and organized crime.

Malaysia’s supervisory framework for financial institutions, virtual asset service providers and designated non-financial businesses and professions (DNFBPs) was assessed as broadly robust. Preventive measures in the financial sector were found to be substantially effective.

That picture becomes less consistent outside core financial institutions. Smaller firms and DNFBPs were found to have weaker risk awareness and less developed mitigation measures, and assessors concluded that significant improvements are still needed to strengthen preventive controls across these sectors.

Transparency Gains, but Law Enforcement Needs More

The evaluation found that Malaysia has a strong grasp of the risks associated with the misuse of corporate structures and has adopted a multi-pronged, risk-based approach to collecting beneficial ownership information.

While this framework allows authorities to access ownership information in a timely manner, the report said further improvements are needed to ensure the data fully meets the needs of law enforcement agencies during investigations.

Malaysia has also invested in improving financial intelligence since 2015, including upgrades to its Financial Intelligence System and the creation of a dedicated platform to facilitate information-sharing between the financial intelligence unit, authorities and reporting institutions.

1MDB Casts a Long Shadow

The assessment devoted significant attention to the 1Malaysia Development Berhad (1MDB) case, which involved the misappropriation of almost billions in funds and exposed structural weaknesses in Malaysia’s AML system.

The investigation demonstrated Malaysia’s ability to manage complex, high-profile cases and drove major reforms. At the same time, the sheer scale of the case strained law enforcement resources and limited the country’s capacity to pursue other money laundering cases during the review period.

During the period under assessment, Malaysia recovered approximately €8 billion, the bulk of it linked to 1MDB-related assets. Most of the remaining recoveries were tied to tax enforcement actions on criminal proceeds.

Terrorist and Proliferation Financing Progress, With Caveats

Malaysia was found to have a reasonably sound understanding of its terrorist financing risks. Since 2015, responsibility for terrorist financing investigations has been centralized within the Special Branch of the Royal Malaysia Police, a move that assessors said has had a positive impact.

Since 2019, seven individuals have been convicted of terrorist financing, receiving prison sentences ranging from 1.5 to 6 years. This marks a clear improvement from the previous evaluation, which recorded no terrorist financing prosecutions or convictions. Even so, assessors raised concerns about whether the sanctions imposed are sufficiently dissuasive.

Malaysia now implements targeted financial sanctions for both terrorist financing and proliferation financing promptly, supported by a sound legal framework and supervisory guidance. However, DNFBPs were found to focus largely on identifying listed individuals, with less attention paid to identifying and freezing assets held by intermediaries acting on behalf of designated persons or entities.

A Three-Year Clock Starts Now

Following the assessment, Malaysia has been issued a roadmap of key recommended actions to be completed within three years. These include strengthening international cooperation, improving the sanctions framework and showing a sustained increase in money laundering prosecutions and convictions.

Malaysia will report back to the FATF and APG on its progress as it works to close the remaining gaps between framework and enforcement.

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