This article first appeared in The Edge Malaysia Weekly on September 4, 2023 - September 10, 2023

AWARE of the widely held perception that offshore financial centres are potential breeding grounds for financial crime, Labuan Financial Services Authority (Labuan FSA) director-general Nik Mohamed Din Nik Musa is keen to set the record straight on Labuan.

“One thing I can say for sure is that Labuan is not a port of entry for money laundering,” he tells The Edge in an interview.

According to him, Labuan International Business and Financial Centre (Labuan IBFC) has a strong onboarding policy for companies, as well as robust laws and Anti-Money Laundering/Countering Financing of Terrorism (AML/CFT) guidelines that comply with international standards.

Nik Din (as he is better known) took on the DG role in May 2021 as a secondee from Bank Negara Malaysia, replacing Datuk Daniel Mah Abdullah, who resigned in April that year before the end of his second term at Labuan FSA. Previously the director of money services business regulation at Bank Negara since 2016, Nik Din had been responsible for the regulation, supervision, policymaking and development of cross-border remittance, currency exchange and currency wholesale business in Malaysia.

Below are excerpts from the interview.

The Edge: Increasingly, offshore financial centres are seen to be breeding grounds for financial crime...

Nik Din: That’s the perception of many. That’s why, when Labuan IBFC was set up, it was always at the back of the mind of those in government that Labuan has to be clean and well regulated. For that purpose, Labuan IBFC has a strong onboarding policy so that we only admit the good ones. And, we have all the laws as well as AML/CFT guidelines that comply with international standards.

The FATF (Financial Action Task Force) came up with more than 40 recommendations that we have to comply with in order for us to be in their good books. And, I am glad to say, when APG (Asia/Pacific Group on Money Laundering) — a body associated with FATF — did the assessment on us in 2007, and again in 2015, they deemed us a ‘low-risk jurisdiction’ because we have the controls, the enforcement and so on.

You’ve mentioned that so far, you’ve only attracted good-quality companies, no shady ones. But how do you assess that they are of good quality?

We have a stringent entry requirement. For example, with banks, the applicant must already be a bank elsewhere, and it must be regulated and supervised by a competent home authority and comply with other entry criteria to qualify for conduct of banking business in Labuan IBFC. It must have the skills and expertise when seeking a banking licence. It must provide us the name of the principal officer and [have] directors with the relevant number of years of experience. We will then conduct thorough due diligence, such as through World-Check, security and financial vetting [as to] whether they have any negative or adverse report. We will also briefly check with the home authorities for adverse news and financial health.

Does it matter to you whether the company is loss-making?

It’s not that we’ll totally reject it, we will have to see why it is making a loss. Has it been loss-making for the longest time? Or, in just a particular year? So, we’ll be very reasonable in that sense.

That said, have there been any incidents of money laundering or suspicious activity in Labuan that you have come across?

One thing I can say for sure is that Labuan is not a [port] of entry for money laundering. Money laundering will not begin from Labuan, and why I said that is: one, we don’t accept cash deposits; and two, we have a very strict know-your-customer [process]. But, in terms of flow-through, there could have been, because many centres are involved in this flow-through.

To date, while Labuan FSA has detected a few wrongdoings by Labuan entities related to money-laundering offences, no case has been prosecuted in court thus far. Nonetheless, stern action has been taken against these entities, which includes forfeiture of criminal proceeds to the government of Malaysia, imposition of monetary compounds and directives for the entities to cease and desist activity in Labuan IBFC.

Why do we need an offshore centre? Apart from the tax contribution, how does having one benefit Malaysia? Many countries don’t have it.

Apart from tax revenue, it is a launching pad for local companies to go abroad. Take Petronas and other big conglomerates, for example. They will need to use international centres. If they don’t have Labuan, they will use Singapore, Bermuda or Jersey for their international operations. They need funding for their international operations. And, also, for them to set up investment holding companies, they must set up in a foreign jurisdiction. So, where is best for them to go? Labuan.

Some of the structures are not available in Malaysia — and Labuan provides such structures to complement Malaysia and as much as possible to retain outflows of funds.

For new companies, we also encourage them to use Labuan for you to branch out. If you want to go to Thailand, use Labuan as your regional holding company. That’s more for our own benefit. And, they can also borrow from Labuan banks.

Carriers like Malaysia Airlines and AirAsia will always look at IFCs (international financial centres) to set up SPVs (special purpose vehicles) to do their leasing. Sometimes, they don’t want to own their aircraft [because] if it is in their books, accounting-wise, it is not beneficial. So they park the assets — in this case, in Labuan — and they will lease back the aircraft as part of their funding option. Malaysia Airlines has done it, so has AirAsia. They benefit by setting up a lease SPV in Labuan.

We also have local companies setting up captives in Labuan in order for them to benefit from doing self-insurance.

How does Labuan FSA make money?

We are self-funded. Our income is mainly from licence fees. It’s a big chunk. For banks, no matter what size, they pay US$30,000 (RM140,000) a year. Insurance, slightly lower, and there are a few categories of insurance.

The second-biggest [source] of our income is from annual fees. Each company will have to pay certain fees, [such as] registration fees — one-off — and every year, they pay an annual fee. The third [source] is from other fees such as licence processing. 

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