Terrorism Financing and Specified Entities

Terrorism Financing and Specified Entities: Malaysia’s Obligations Under the UN Security Council Framework

When a person or group is listed as a terrorist entity, the effect reaches far beyond the police. Banks, businesses, charities, professionals and ordinary individuals all have legal duties, and serious penalties apply to anyone who deals with listed property.

Introduction

Money laundering law is mainly concerned with where money comes from. Terrorism financing law is concerned with where money is going. A modest donation from a salary, the profits of a small business or funds collected for what appears to be a charitable cause can all end up supporting violence. Because of this, the law does not wait until a terrorist act has been committed. It tries to cut off the flow of money, property and services before they can be used.

In Malaysia, the main tools are found in Part VIA of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (Act 613), commonly known as AMLA, read together with the terrorism financing offences in the Penal Code. Part VIA allows the Minister of Home Affairs to declare persons and groups to be specified entities, gives domestic effect to sanctions decided by the United Nations Security Council, and requires financial institutions and others to freeze assets, stop transactions and report what they hold.

This article explains in plain language how the framework operates, what obligations it places on institutions and the public, what safeguards exist for those affected, and how Malaysia’s system has been assessed internationally. It also looks briefly at the related regime against the financing of weapons of mass destruction.

How terrorism financing differs from money laundering

Terrorism financing is the provision of financial support, from lawful or unlawful sources, to terrorists or terrorist organisations to enable them to carry out terrorist acts, or in a way that benefits a terrorist organisation. Much of that money comes from crime, but it can equally come from lawful sources such as wages, business income and donations.

That is the key difference from money laundering. In a money laundering case, the question is usually whether the money is the proceeds of unlawful activity. In a terrorism financing case, the money may be entirely clean. The legal question shifts to its intended use, its destination and its connection with a terrorist act or a terrorist group. Amounts are often small, and the channels may include informal remittances, charitable fronts, nominee accounts, digital platforms and cross-border transfers.

This is why terrorism financing law relies heavily on prevention. It is not enough to trace criminal proceeds after the event. The aim is to identify the people and groups involved in advance and to stop anyone from making funds, property or services available to them.

The international framework

Malaysia’s obligations in this area come largely from the United Nations. Under Article 41 of the Charter of the United Nations, the Security Council may decide on measures not involving the use of armed force, such as financial sanctions, and call on member States to apply them. Such decisions are binding on Malaysia as a member of the United Nations.

Two broad types of measure are relevant. Under some resolutions, the Security Council itself names individuals and groups whose assets must be frozen. These include the sanctions regimes on Al-Qaida, the Taliban and ISIL (Da’esh), reflected in resolutions such as 1267, 1988, 1989 and 2253. Under resolution 1373, States are also required to identify and freeze the assets of terrorists on their own initiative, which is why countries maintain their own national lists alongside the United Nations lists.

The Financial Action Task Force (FATF), established in 1989, sets the international standards for combating money laundering and terrorism financing, drawing on these United Nations resolutions and conventions. Malaysia is a member of the Asia/Pacific Group on Money Laundering, the FATF-style regional body, having joined in May 2000. Countries are periodically evaluated against the FATF standards, and one of the key questions is whether they can implement targeted financial sanctions against terrorists quickly and effectively.

Where the law is found in Malaysia

The terrorism financing offences themselves are in the Penal Code. AMLA defines a terrorism financing offence as an offence under sections 130N, 130O, 130P or 130Q of the Penal Code, which deal broadly with providing or collecting property, providing services, and dealing with or controlling property, for terrorist purposes. The term terrorist act, and the term terrorist property, both take their meaning from section 130B of the Penal Code.

AMLA then builds a financial framework around those offences. The general reporting obligations, investigation powers and freezing, seizure and forfeiture powers in the earlier Parts of the Act apply to terrorism financing offences and terrorist property as well as to money laundering. Part VIA, in sections 66A to 66G, adds a specialised regime for specified entities and for giving effect to decisions of the Security Council.

Declaring a specified entity: section 66B

Section 66B is Malaysia’s domestic designation mechanism. The Minister of Home Affairs may, by order published in the Gazette, declare an entity to be a specified entity if satisfied, on information given by a police officer, of either of two things. The first is that the entity has knowingly committed, attempted to commit, participated in or facilitated a terrorist act. The second is that the entity is knowingly acting on behalf of, at the direction of, or in association with such an entity.

In making the order, the Minister may consult the competent authority, which is Bank Negara Malaysia, the relevant regulatory or supervisory authorities such as the Securities Commission and the Labuan Financial Services Authority, or any other appropriate body, to help implement it. The Minister must also direct those authorities to issue orders, directives or circulars to the institutions they supervise so that the declaration is put into effect.

The Gazette publication matters because the list is public. The declaration turns police intelligence and ministerial satisfaction into legal consequences that bind everyone, not only the police and the banks.

Giving effect to Security Council decisions: section 66C

Section 66C is the provision that brings United Nations measures into Malaysian law. Where the Security Council decides on measures under Article 41 and calls on Malaysia to apply them, the Minister of Home Affairs may make, by order in the Gazette, whatever provision appears necessary or expedient for those measures to be effectively applied.

Where such an order states that there are reasonable grounds to believe that an entity named in it is engaged in terrorist acts, the order is treated from its date as a declaration under section 66B. In other words, a United Nations listing can be converted into a domestic specified entity listing in a single step, avoiding delay between the international decision and its effect in Malaysia.

Section 66F preserves older orders made for the same purpose under the Exchange Control Act 1953 and the Labuan offshore financial services legislation. Those orders are treated as having been made under section 66C and remain in force until revoked or replaced. After Part VIA came into force, the older powers can no longer be used where sections 66B or 66C apply.

What a designation means for everyone

Once an entity is specified, section 66B(3) imposes a set of prohibitions and duties on every person, and they apply both within and outside Malaysia. They are summarised below.

Prohibitions and duties that apply once an entity is specified under section 66B

Three features stand out. First, the prohibitions are wide. They cover indirect as well as direct dealings, and financial or other related services, which can include the work of lawyers, accountants, company service providers and technology platforms. Second, most of the prohibitions require the person to act knowingly. In practice, however, a person or institution that fails to screen, ignores obvious warning signs or does not escalate a possible match may find it difficult to show that it did not know. Third, the duty to disclose to the Inspector-General of Police arises where a person merely has reason to believe that property belongs to a specified entity, and it must be complied with immediately.

The same penalties apply to anyone who breaches these prohibitions, whether an individual or a company. Because the prohibitions apply outside Malaysia as well, Malaysian individuals and businesses operating abroad remain bound by them.

Safeguards for those affected

Designation has severe consequences, and Part VIA contains several safeguards. How well they work in practice depends heavily on how they are administered.

Basic and extraordinary expenses

A designation order does not apply to funds that the Minister determines are needed for basic expenses. These include food, rent or mortgage payments, medicines and medical treatment, taxes, insurance premiums, public utility charges, reasonable legal fees and expenses, and charges for maintaining the frozen assets. The Minister may also approve access for extraordinary expenses. In either case, the Minister may vary the order and allow access on conditions. The same exemptions apply to orders made to give effect to Security Council measures.

Rights of creditors

Freezing does not wipe out the rights of innocent creditors. Secured and unsecured rights held by anyone other than the specified entity or its agent keep the same ranking they would have had if the property had not been frozen. A bank that holds a charge over a property, for example, does not lose its priority merely because the owner has been specified.

Revocation and review

A specified entity may apply in writing to the Minister for the order to be revoked within 60 days of its publication in the Gazette. This applies both to domestic declarations and to orders deemed to be declarations because they implement Security Council measures. If the Minister finds reasonable grounds for revocation, he must revoke the order and publish the revocation in the Gazette. If not, he must refuse the application and inform the applicant within 60 days of receiving it. The Act states that his decision is final.

In addition, the Minister must review every domestic designation every six months to decide whether there are still reasonable grounds for it to continue. If there are not, the order must be revoked immediately.

Although the Act says the Minister’s decision on revocation is final, provisions of this kind are generally interpreted narrowly by Malaysian courts, which usually retain a supervisory role where there is illegality, irrationality, procedural impropriety or bad faith. At the same time, courts tend to give considerable weight to the executive’s assessment in matters of national security. There is as yet little Malaysian case law on challenges to designations, so the extent of judicial scrutiny remains an open question.

Mistaken identity

Screening against sanctions lists inevitably produces name matches that turn out to be the wrong person. A customer whose transaction is held up because of a similar name should ask the institution to review the match and provide identification documents to show that he is not the listed person. Institutions, for their part, need clear procedures for resolving false positives quickly, so that innocent customers are not left without access to their money for longer than necessary.

Obligations on financial institutions and regulators

Orders to check and report holdings: section 66D

The Minister of Home Affairs may, by order in the Gazette, require any person or class of persons to determine within a set period whether they hold or control terrorist property or property of a specified entity. The order may require them to report regularly to Bank Negara Malaysia or the relevant regulator, stating whether they hold such property and, if so, the number of persons, contracts or accounts involved, the total value, how the property came into their hands and any other details required. The regulator must report immediately to the Minister if any institution it supervises is found to hold such property.

A person who reports in good faith is protected from criminal, civil or disciplinary proceedings. The duty applies despite any secrecy obligation under any written law or otherwise, so banking secrecy is not a reason to withhold the information. Breaching an order is an offence punishable by a fine of up to RM3 million, imprisonment of up to five years, or both.

Binding directions: section 66E

Bank Negara Malaysia and the other regulators may issue directions, guidelines, circulars, notices or conditions to the institutions they supervise, where necessary to discharge any obligation binding on Malaysia under a decision of the Security Council. The institutions must comply despite any other duty under any law or contract, and an institution that complies is not to be treated as being in breach of those other duties.

This means that an institution which freezes an account or refuses a transaction in line with such a direction cannot be sued by the customer for breach of contract. The regulator may also require the institution to keep the direction confidential if disclosure would be against the public interest, which helps prevent designated persons from moving their assets before they are frozen. Failing to comply, or disclosing a confidential direction, is an offence punishable by a fine of up to RM100,000. The regulators must report on the action taken to the Minister of Home Affairs and the Minister of Finance every six months, or as required.

Supervisory examinations: section 66G

The regulators may examine institutions regularly to check their compliance with Part VIA. Examiners may inspect records, reports and the systems used to keep them, ask questions, take notes and copies, and question current and former directors, officers, agents and customers of the institution.

What this means in practice

Bank Negara Malaysia’s guidelines to financial institutions, issued in February 2024, set out what is expected. Institutions must keep up to date with the relevant Security Council resolutions and keep a sanctions database that includes the names on the United Nations lists as well as the Minister of Home Affairs’ own list, and leave each name in place until it is formally removed. Every customer, beneficial owner and beneficiary must be checked against that database. Institutions must freeze the funds and assets of listed persons immediately, and prevent any funds or assets from being made available to or for them. Positive name matches and related transactions must be reported to Bank Negara Malaysia without delay, and institutions must continue monitoring to detect attempts to evade the sanctions.

A related regime: financing of weapons of mass destruction

The Security Council also imposes sanctions to prevent the spread of nuclear, chemical and biological weapons, and AMLA now contains a parallel framework in Part VIB. Section 66H makes it an offence to provide or make available financial services or property, directly or indirectly, intending or knowing, or having reasonable grounds to believe, that they will be used to commit or facilitate a restricted activity, or to benefit a proliferator. Restricted activity takes its meaning from the Strategic Trade Act 2010.

The penalty is severe. A person convicted faces imprisonment of up to 15 years and a fine of at least five times the value involved or RM5 million, whichever is higher. The inclusion of reasonable grounds to believe means that a person cannot escape liability simply by avoiding definite knowledge of where the money or goods will end up. As with Part VIA, the regulators may issue binding directions to implement Security Council decisions under section 66I and examine institutions for compliance under section 66J. Bank Negara Malaysia’s 2024 guidelines similarly require institutions to identify and freeze, without delay, the assets of persons and entities designated under the relevant resolutions.

Sectors most exposed to this risk include trade finance, shipping, logistics, freight forwarding and businesses dealing in dual-use goods, which have both civilian and military applications.

How Malaysia has been assessed

In 2025, the FATF and the Asia/Pacific Group on Money Laundering published a Mutual Evaluation Report on Malaysia. The report found that Malaysia’s laws and institutions provide a solid basis for tackling terrorism financing and applying targeted sanctions, noting that its domestic listing process works well and that Security Council sanctions are put into effect promptly. For both the preventive measures against terrorism financing and the sanctions against proliferation financing, Malaysia received a rating of substantial effectiveness.

The report also identified areas for further work. It recommended continued outreach by supervisors, better understanding among reporting institutions of how to identify assets controlled indirectly by designated persons, and more effective implementation of targeted financial sanctions across all reporting sectors, not only the banks.

A practical checklist

For banks, insurers, securities firms and other reporting institutions

Keep your lists current. Update screening databases promptly with both the United Nations lists and the domestic list, and remove names only when they are formally delisted.

Screen beyond the customer. Check beneficial owners, beneficiaries and counterparties, and look for assets owned or controlled indirectly through companies, nominees or relatives.

Freeze first, then report. Freeze immediately on a confirmed match and report to Bank Negara Malaysia and, where required, the Inspector-General of Police, without delay.

Resolve name matches properly. Have a documented process for false positives, so that innocent customers are released quickly and genuine matches are escalated.

Keep directions confidential where required. Do not disclose a direction if told that disclosure would be against the public interest, and avoid tipping off the customer.

Record your decisions. Documented screening, escalation and decisions are the best evidence that the institution did not act knowingly in breach of the law.

For businesses, professionals and charities

Know who you are dealing with. Lawyers, accountants, company service providers, dealers in high-value goods and platforms can all fall within the prohibition on providing related services.

Check before you pay or accept funds. Charities and community organisations should know who their partners and beneficiaries are, particularly for overseas projects.

Report what you hold. If you have reason to believe that you hold property belonging to a specified entity, disclose it immediately to the Inspector-General of Police.

Watch for proliferation risks. Businesses in trade, shipping and dual-use goods should check end users and destinations.

For individuals

If your transaction is blocked because of a name match, provide identification promptly and ask the institution to review the match.

If you or your organisation are specified, seek legal advice immediately, note the 60-day deadline for applying for revocation, and apply to the Minister for access to funds for basic or extraordinary expenses where needed.

Conclusion

Part VIA gives Malaysia a framework that is preventive, fast and international in outlook. It allows the Minister of Home Affairs to list terrorist entities, brings Security Council sanctions into domestic law in a single step, and places clear duties on institutions to freeze, report and comply with binding directions. The prohibitions reach every person, inside and outside Malaysia, and breaches carry serious penalties.

At the same time, the power to cut a person or group off from the financial system must be exercised with care. The Act provides for access to funds for basic needs, protection for creditors, a 60-day revocation process and six-monthly reviews. How these safeguards operate in practice, and how the courts approach challenges to designations, will shape whether the framework maintains public confidence. For institutions and businesses, the practical message is to screen carefully, act promptly on genuine matches and keep proper records of every decision.