A Study of Terrorist Financing in Malaysia

Among the countries in Southeast Asia, Malaysia could be considered an example of multicultural success. More than 60 percent of the population are Muslim, 50 percent of whom are Malay in origin. [1] The rest of the population is comprised of 23.7 percent Chinese, 11 percent indigenous groups, 11 percent Indian and 7.1 percent of other ethnic origins. [2] Christians, Hindus and Buddhists make up a small segment of the population. The Malaysian government has dealt with a communist insurgency during the early years of its history. It has had confrontations with its closest neighbor, Indonesia, in the 1960’s as well as with the Philippines over the ownership of Sabah, which is located on the northern part of the island of Borneo. In 1965, Singapore seceded from Malaysia to form an island city-state. Nonetheless, Malaysia was successful in enriching its economy through the production of raw materials, exports, particularly electronics, and the expansion of its manufacturing, services, and tourism industries.

In terms of security, the country has in place the Internal Security Act (ISA) which was enacted after Malaysia gained independence from Britain in 1957. The law has been heavily criticized by human rights groups for allowing detentions without trial and calls have been made to the Malaysian government to repeal the law or subject it to review. [3] The ISA is seen to have served its purpose for the Malaysian government with regards to Islamic extremists and terrorist groups. The government is firmly opposed to the presence of extremists in the country although there have been reports that Al Qaeda linked individuals and front organizations have used Malaysia as a staging ground for attacks carried out elsewhere and as a conduit for terrorist financing activities.

This report would illustrate how terrorist groups used Malaysia as one of its bases for terrorist financing and what has been its impact on terrorist activities in the region. It should be borne in mind that any analyses made in this report are based on information from publicly available and unclassified sources. It would draw its findings from academic and investigative papers written about terrorist financing infrastructures in Southeast Asia before and after Malaysia enacted measures against money laundering, terrorist financing and other financial crimes. To this end, interviews with relevant authorities are also included in this report. Finally, it will undertake a review of the countermeasures implemented by the Malaysian government against terrorist financing activities and come up with some recommendations to strengthen them.

Review of Terrorist Financing Methods

To understand the way terrorist groups used Malaysia as a transit point to generate funds it is necessary to look at the funding mechanisms of groups such as the Al Qaeda and its affiliate in Southeast Asia. The funding mechanism of the Al Qaeda relied mainly on the network of Non-Governmental Organizations (NGOs) and charities that were established at the height of the Soviet invasion of Afghanistan in the 1980’s. [4] These organizations were used to channel funds, resources, supplies and recruits to the mujahideen movement. The money for these organizations would usually come from donations and zakat (obligatory charity) from Muslims all over the world. The Al Qaeda exploited these NGOs and charities and relied on them as critical sources of funds and other means of support by using them as fronts or legitimate covers for their activities.

It was in the late 1980’s to early 1990’s that the Al Qaeda sought to expand its networks in Southeast Asia. The Muslim population is quite extensive in the region and although the majority of them are classified as moderates, social and economic hardships, as well as thwarted political and developmental expectations have left many Muslims frustrated and angry. [5] The Al Qaeda manipulated these frustrations to establish its network in Southeast Asia which was also selected for having a number of lawless areas that terrorist organizers could use as secure staging areas for attacks and as havens for regrouping. [6] More importantly, the region is deemed vital for Al Qaeda’s logistical and financial requirements. [7]

Terrorist groups present in Southeast Asia such as the Abu Sayyaf Group (ASG) and Moro Islamic Liberation Front (MILF) in the Philippines and the Jemaah Islamiyah (JI) in Indonesia have benefited from the logistical and financial support of the Al Qaeda. While terrorist funding in the region may come from different sources there are three major local and international sources which have been identified: (1) criminal activity; (2) charities or non-governmental organizations; (3) and front companies. The ASG and MILF are notorious for their use of criminal activities such as kidnapping, robbery, and extortion but at the same time they also benefited from funds coming from charities and front companies established by the Al Qaeda in the Philippines in the early 1990’s. Meanwhile, JI’s primary sources of funds were identified as the following: [8]

Bags of cash or money brought in by cash couriers

Funds skimmed from Islamic charities

Front companies and businesses

Hawala

Gold and gem smuggling

Zakat and contributions from JI members and supporters

Al Qaeda investments and accounts already established in the region

Criminal activities

Terrorist Financing in Malaysia- 1990’s- early 2000

Much of the information about terrorism financing in Malaysia are centered on the so-called jihadi groups. Many regional and international terrorism exerts and academic studies believe that Malaysia did have a connection with the Al Qaeda terrorist network, especially in the early 1990’s. This was the time that the influence of the Al Qaeda terrorist network was expanding across Southeast Asia in countries such as Malaysia, Indonesia, Singapore, and the Philippines. The Al Qaeda terrorist network provided Islamic militants, especially members of the Jemaah Islamiyah (JI) with financial support and military training.

Al Qaeda’s presence in Southeast Asia has resulted in the inclusion of groups such as the JI and the Abu Sayyaf Group (ASG) within the global terrorist network. It has already been established that between the 1990’s and early 2000, the Al Qaeda terrorist network has made use of Malaysia and the Philippines as their safe havens, to plan and launch massive terrorist attacks against the United States.

Figure 1 Southeast Asia Regional Al Qaeda networks of front businesses and infiltrated corporation as of 1994-1995. (Image credit: Philippine National Police)

The JI has set up a five country Regional Advisory Committee called the “Shura” or consultative council which supervises the operations of active JI branches in Malaysia, Singapore, the Philippines, Indonesia and other Southeast Asian countries. It was in 1999 that the JI network set up a regional alliance called the Rabitatul Mujahideen. The main objective of this regional alliance was to discuss cooperation at the operational level and the training, education, and financing of jihadi activities. Hambali was reportedly responsible for organizing the first Rabitatul Mujahideen meeting in December 1999 in Kuala Lumpur. The next two meetings were held in Kuala Lumpur and Sungkai, Perak in 2000.

Since the 1990’s, the Jemaah Islamiyah (JI) developed territory-based administrative structures throughout Southeast Asia which were called Mantiqis. The mantiqis were equivalent to regions which are further broken down into wakalahs or districts, which are subdivided into fiahs or cells. The divisions were as follows:

Mantiqi I – mainland Malaysia, Singapore, Southern Thailand

Mantiqi II – Java, Sumatra, other islands of Indonesia

Mantiqi III- Philippines, Borneo, Sulawesi

Mantiqi IV- Australia

Figure 2 The JI Mantiqi structures in Southeast Asia

(Image Credit: Philippine National Police, 2006)

Mantiqi I is said to have provided the economic support for the operations of the JI. Mantiqi I was based in Malaysia and had Riduan Isamuddin alias Hambali as its leader until 2001 when he had to transfer the leadership to Ustadz Muklas as he was being sought for his connection with the Kumpulan Militan Malaysia (KMM).

The JI has developed a sophisticated structure to handle their funds and to set up front companies and businesses. The JI cell in Malaysia is said to have fulfilled that function since it was started by Abdussalam Abu Thalaibi and had Abu Hanafih and Abu Bakar Bafana as leaders. The cell actively recruited both Indonesians and Malaysians and at one point had an estimated 200 members. Its major responsibilities are as follows:

To serve as the conduit between the Al Qaeda and the JI

To serve as liaison with the KMM in Malaysia

To establish front companies that could be used to channel funds

To take charge in recruitment and education

To help in the establishment of the Mantiqi 4 in Australia which was to have a major role in fundraising operations of the group

The most significant terrorist financing activity in Malaysia was the establishment of front companies and businesses. From the late 1980’s to the mid 1990’s, the Malaysian government channeled its efforts towards making the country more viable for businesses. Foreign business investments, trade, and tourism were encouraged. It was also during this time that the country started to emerge as one of the centers for Islamic banking. [9] Setting up front companies and businesses is seen to be the most significant move of the JI in Malaysia at that time. The front organizations were used as conduits to channel Al Qaeda funds as well as procure weapons and explosive materials. According to the Singapore government white paper on the JI, there were also cases wherein JI members set up legitimate businesses, conducted deals and contracts, and channeled all the earnings back to the organization. It was said that all JI-run businesses and front companies are required to contribute ten percent of their total earnings to the group. The money was channeled into the JI’s special fund, infaq fisbillah, which means contributions for the Islamic cause or in other words, jihad fund. [10] Some of the more significant front companies and businesses established by the JI are the following:

Green Laboratory Medicine

This company was established in October 1993 by Yazid Sufaat [11] , a former captain for the Malaysian Army. Sufaat had a degree in biochemistry from the California State University. The company is said to be the conduit for the purchase of 21 tons of ammonium nitrate which were to be used in terrorist attacks in Singapore. It was also revealed that the company was selected by the Al Qaeda to have a leading role in the development of chemical and biological weapons.

Konsonjaya Trading Company

It is a trading company established in 1994 for the purposes of exporting Malaysian palm oil to Afghanistan and importing honey from Sudan and Yemen. Some of the more notorious members of the company’s board of directors were Wail Khan Amen Shah, Riduan Isammudin alias Hambali, and his wife Noralwizah Lee Binti Abdullah. Authorities said that the company was used as a front for moving money and purchasing chemicals and equipment for bomb-making. The company allegedly provided funds to Khalid Sheik Mohammed and Ramsey Yousef while they were conceptualizing and planning the Bojinka plot [12] in the Philippines in 1994.

Figure 3 Clockwise from left: Wali Khan Amin Shah, Khalid Sheikh Mohammed, Abdulhakim Murad and Ramsey Yousef. Members of the Al Qaeda cell based in the Philippines which received funding from the Konsonjaya for terrorist plots. (Image credit: Philippine National Police)

Infocus Technology

This was another front company set up by Yazid Sufaat. The alleged 20th hijacker for the 9/11 attacks, Zacarias Moussaoui, was hired by the company as a marketing consultant and even provided him with the necessary recommendations to apply for a visa to the United States. The company is said to have paid Moussaoui a lump sum of US$35,000 along with a monthly stipend of US$2,500 which was believed to have gone into the payment of his flight training classes while in the USA.

Secure Valley

There is little information to be had about this company which was set up as general trading company in October 1996. What is significant to note is that its board of directors had the same members as that of the other three JI-linked firms.

MNZ Associates (MNZ Management Services)

This company, which was owned by a certain Zulkifli Marzuki, was based in Kuala Lumpur. It handled most of the auditing requirements for most of the JI/Al Qaeda front companies, including Infocus Technology and Green Laboratory Medicine.

By establishing these front companies, the Al Qaeda was able to hide and generate funds to finance terrorist activities and operations. Aside from the above-mentioned front companies, the Jemaah Islamiyah (JI) also established legitimate businesses to generate income. An example would be the Al Risalah Trading Company which was set up by Feri Muchlis bin Abdul Halim, the son-in-law of Abdullah Sungkar. It has been reported that the company was awarded a government contract to install water pipes, supply school stationery and build two schools in Selangor. [13] The JI also set up legitimate general trading companies and a number of construction firms, as well as private kindergarten schools. [14]

With the unraveling of the Al Qaeda network in Southeast Asia and the subsequent discovery of the terrorist financing activities of the group as well as that of the Jemaah Islamiyah, the Malaysian government has cooperated fully with the investigations. Most, if not all, of the front companies and businesses set up in Malaysia in the 1990’s have been dismantled and a number of individuals were arrested and detained.

Terrorist Financing in Malaysia- 2000 onwards

Malaysian authorities are seen to have made some substantial efforts to curb terrorist financing activities in the country. With the disruption and closing down of terrorism-linked companies and businesses from the late 1990’s onwards, most law enforcement authorities are inclined to say that the country is more likely used as a “transit point” for terrorist financing [15] and not the “hub” as it was before. Poor customs and border checks and patrols and loose operations of financial institutions are seen as possible reasons why the country would be used as a transit point for terrorist financing activities. A case in point would be the financing of the first Bali bombing in Indonesia. In that case, Malaysia was alleged to be use as the transit point to transfer the money from Thailand going to Indonesia. Wan Min Wan Mat [16] , a Malaysian national who was a member of the JI has admitted to providing about US$30,500 to Jemaah Islamiyah (JI) members who used the cash for the 12 October 2002 bombings in Bali. [17] The JI made use of its extensive network of contacts to carry out the movement of the funds.

Nonetheless, the changing nature of terrorist groups entails that their means of acquiring and moving funds have also evolved. Terrorist groups could now utilize mobile banking, internet banking, cash couriers, wire transfers and digital cash for terrorist financing. In 2007, the Malaysian Defense Minister acknowledged that terrorist groups are increasingly turning to the Internet to communicate, recruit new members, and transfer funds. [18] Furthermore in Malaysia, alternative remittance systems like the hawala remains popular and police estimate that eight out of ten money remittance agents or money changers are utilizing this method which does not entail the physical movement of cash. There are no systems in place that would regulate the hawalas in Malaysia and this renders it vulnerable for exploitation by nefarious individuals and groups.

Non-Government Organizations (NGO) and charities remain to be of some concern for Malaysian authorities as while there is a system in place which would entail such organizations to divulge their sources and end-users of the funds, there is not much enforcement. The Registrar of Societies in Malaysia supervises and controls charitable organizations and mandates that every registered charity submit their annual returns. This is said to ensure that financial transactions are recorded and reviewed. The issue is that many of these organizations are unregistered and do not implement proper auditing procedures. It should be made clear at this point that in Islam, donors are not encouraged to reveal their identity and would often remain anonymous.

There are questions as to whether there are evidence that genuine zakat donations collected in Malaysia are being redirected to Indonesia as a source of funding for the JI. Malaysia currently has legislation which allows local Muslim employees to donate 100 percent of their income tax as zakat through multiple collecting organizations. This would mean a 100 percent tax deduction benefit for the donor so instead of paying income tax to the Malaysian government the money may instead be given to the locally appointed collectors at the mosques who in turn, would distribute this money to multiple non-government organizations and a myriad of Islamic societies and charities. Interestingly enough, Malaysia has been cited as a prime example for having made extensive efforts to regulate charities.

To date, Malaysia does not have any active terrorist groups operating within its borders- the Kumpulan Militan Malaysia (KMM) was successfully contained through the arrests of its members and preemption and disruption of their activities. Malaysia’s anti-terrorism law, the Internal Security Act, which allows for the indefinite detention of suspects without trial, is largely credited for keeping terrorist groups at bay. Malaysian authorities believe that terrorism and its related challenges would continue to persist but that the threat to the country would not come from internal forces, rather it would come from neighboring countries such as Indonesia and the Philippines. [19]

Malaysia is a key ally of the United States in the Global War on Terror after the 2001 September 11 attacks. It came out during the course of the investigations into the attacks that Malaysia was used as a planning center and dispatch point for the 9/11 perpetrators. [20] It was earlier mentioned that the alleged 20th bomber, Zacarias Moussaoui, received funds from a JI/Al Qaeda front company and that several key meetings took place in Kuala Lumpur in the months leading to the attacks. At any rate, from 2000 onwards, there have been significant developments in the campaign against terrorist financing, arrests were made in Malaysia of individuals involved in terrorist financing. Between the year 2000 and 2003, more than 100 suspected members of the Jemaah Islamiyah were arrested in Malaysia and were held by the authorities without trial. [21]

Figure 4 Some of the key figures of the Jemaah Islamiyah in Malaysia

(Image credit: Mohd Mizan Aslam and Dr. Jim Veitch School of Government, Victoria University of Wellington)

Other significant developments in the realm of terrorist financing are the following:

Malaysian national Noordin Top, along with Azahari bin Hussin, was named as among the suspects in the 2002 Bali bombings. Azahari helped prepare the explosives while Noordin allegedly donated an unspecified amount of money to finance the attack. [22]

In September 2003, the United States government froze the financial assets of 10 Malaysians considered to be terrorists. They were identified as: Sulaiman bin Abas, Azahari bin Husin, Amran bin Mansour, Zulkilfi bin Abdul Hir, Abdul Manaf Kasmuri, Zulkifli Marzuki, Yazid Sufaat, Noordin Mohamed Top, Wan Min Wan Mat, and Zaini Zakaria. [23]

In September 2003, Noralwizah Lee Abdullah, the Malaysian wife of Riduan Isamuddin alias Hambali, was handed over to the Malaysian authorities and was said to be cooperative during her interrogation about the activities of the JI. [24]

Amran Mansor, a Malaysian national was arrested by Indonesian authorities on 26 February 2004 and he allegedly admitted that he took orders from Hambali, Imam Samudra and Mukhlas, but did not know any operational details. He was accused of transporting TNT and bomb-making chemicals to Java island where it was allegedly used by Azahari bin Husin and Noordin Mohammed Top to make the bombs for the attack at the JW Marriot Hotel in Jakarta, Indonesia. He allegedly admitted that he smuggled weapons from an area on the Malaysia-Thailand border to Indonesia although it was not made clear if these were materials used in the 2003 JW Marriot bombing. [25]

In 2009, a Turkish and German national went on trial on charges of violation of export laws, membership in the Al Qaeda and procurement of equipment and funds for the group. Omer Ozdemir claimed innocence and said that he has been unemployed since February 2008 after stints selling cars and mobile phones. Sermet Ilgen said that he was employed at a Mercedes factory in Malaysia before his arrest on 6 February 2009. [26]

Mohammad Hatta Haipe, a Filipino national who was one of the founders of the Abu Sayyaf Group (ASG) and had served as its treasurer, was arrested in Malaysia for non-terrorist offense (violation of immigration laws) and was deported to the Philippines in May 2009. [27] He was repatriated to the United States to stand trial for kidnapping charges.

Arrests of Filipino nationals Mohammad Hatta Haipe, Borhan Mundos, Gulam Mundos, Suffian Salih and Hasim Talib for violation of Malaysia’s immigration laws. Suspects were deported back to the Philippines where they were arrested for involvement in high profile bombings and kidnappings as members of the Abu Sayyaf Group (ASG). Borhan Mundos was the ASG finance officer with links to the JI.

On 4 May 2009, the Bank Negara Malaysia released a public statement titled “Malaysia’s Financial System not linked to terrorist financing”. The statement was issued to deny media reports about terrorism financing activities in Malaysia. It was alleged that an individual with suspected connections with the Al Qaeda has transferred funds from Malaysia to the terrorist network. The BNM denied any such transactions and stressed that “there is no evidence to suggest that there are people transferring funds to terrorist organizations through Malaysia’s banking system which has monitored the situation closely and has not discovered such illegal fund transfer activities”

Also in 2009, the BNM suspended the license to operate of at least 41 money changers throughout Malaysia. The suspension was brought about when the United Nations identified the hawala money changer system within the global money changer market to be one of the pipelines which supports the transfer of money to support global terrorism and other crimes.

Beginning 2010, the BNM and the Customs and Excise Department have implemented a new currency reporting mechanism which requires all travelers coming in and out of Malaysia to declare if they carry US$10,000 or its equivalent. This action is seen to curb global money laundering and terrorism financing operations.

There are also media reports about secular terrorist groups such as the Liberation Tigers of Tamil Eelam (LTTE) setting up their charities and NGO’s in Malaysia. The country could be considered attractive to the LTTE because a portion of Malaysia’s population is of Indian origin, majority of which are Tamils. In fact, Tamil is one of the recognized languages in Malaysia. The Tamil community in Malaysia are said to be advocating for their civil rights- the Malaysian government is said to be notorious for favoring Malays over other races. This could actually help breed fertile ground for the LTTE to set up a base in Malaysia. The Malaysian government has maintained good relations with Sri Lanka and after the defeat of the LTTE in May 2009, efforts have been made to ensure that there would be no spillover effects of LTTE activities in the country. The Malaysian police said that several key members of the LTTE have been arrested and deported between August 2009 and March 2010. [28] However, authorities did not give any more information about these reports, probably due to the ongoing investigations that the LTTE has set up charities and funding networks in the country.

There are also allegations that militants from Southern Thailand have been hiding in Malaysia and are receiving funds from local sympathizers. However, these claims have been rejected outright by the Malaysian government. [29]

Countering the Financing of Terrorism in Malaysia

It was in the 1990’s that Malaysia, along with Singapore and Thailand, started to institute laws to combat money laundering- they were among the fist countries in Southeast Asia to do so. Malaysia has fully developed its formal financial sectors and offshore financial centers and as such the country has a strong interest in protecting itself from money laundering and other financial crimes. The Anti-Money Laundering Act of 2001 (AMLA) is Malaysia’s premiere response to money laundering activities and it should be duly noted that it was not until 2007 that the AMLA was expanded to include authority over terrorist financing- including allowing the law to freeze assets of terrorist groups and their members and to prosecute individuals who support terrorism. The law is now known as the Anti-Money Laundering Act and Anti-Terrorism Financing Act of 2001.

Essentially, Malaysia’s AMLA has well-established legal and regulatory mechanisms and frameworks to deal with money laundering and terrorist financing. At the same time, the Malaysian government also works with cooperation partners at bilateral, multilateral, and international levels to combat financial crimes. The Financial Investigation Unit (FIU) of the Bank Negara Malaysia (Central Bank of Malaysia) has signed agreements with other countries and FIU’s for a mutual exchange of financial information during the course of investigations. Among these countries are Australia, Indonesia, Thailand and the Philippines.

Malaysia’s AML/CFT regime is implemented based on a strategic collaboration between the Bank Negara Malaysia and the relevant government agencies and supervisory authorities. There are fifteen enforcement agencies for AML/CFT and the most active, aside from the Central Bank, are the Royal Malaysian Police (RMP) and the Malaysian Anti-Corruption Commission (MACC). An official from the RMP said that since the inclusion of CFT with the AMLA, there were two individuals who were investigated for terrorist financing but that the investigation was stopped midway for undisclosed reasons. [30] At present, the Malaysian police are involved in extensive profiling and background checks on organizations or individuals suspected of involvement in terrorist financing. [31] One of the problems of this initiative however is that religious schools, charities and NGOs are very sensitive to investigation and there are no existing measures in place to audit their funds and make them account for how it was spent.

At the regional and international level, Malaysia plays an active role in fostering efforts to enhance regional capacity building of personnel involved in efforts to counter money laundering and the financing of terrorism. There have also been ongoing initiatives to extend the implementation of the AMLA to other categories of reporting institutions. These are complemented by outreach initiatives to raise the awareness on AML/CFT. It was in 2006 that the AMLA regulations was extended to include moneylenders, pawnbrokers, registered real estate agents, unit trust management companies, fund managers, futures fund managers, trust companies, the Malaysian Building Society Berhad, non-bank remittance service providers, and non-bank affiliated issuers of charge cards and credit cards. [32]

In majority of banks and financial institutions, there is a system in place to generate Sus