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On 22 June 2015, retired Swiss banker Xavier Justo was arrested by armed Thai police at his brand new boutique hotel in Koh Samui, Thailand. Six months later, Justo provided a British journalist with thousands of documents that started a much larger chain reaction. The documents appeared to shed light on the alleged theft of hundreds of millions of dollars from a state-owned Malaysian investment fund known as 1MDB.

The 1Malaysia Development Berhad (1MDB) scheme has been described as “one of the world’s greatest financial scandals”. Just this year, former head of Goldman Sachs in Malaysia, Roger Ng, was convicted of conspiring to launder money and violating anti-corruption laws.

As investigations into the 1MDB scandal continue, so does the tightening of regulation and compliance in Malaysia. There is a new clarity about the zero-tolerance policies of organisations concerning bribery and corruption. The 1MDB case effectively changed Malaysia’s perspective on regulatory compliance. With greater scrutiny over company and individual operations within major firms, we’re also seeing a distinct shift in focus toward insider trading as more instances of this are brought to light.

 

Insider Trading Under the Microscope

Regulatory-Compliance-Rising-Rapidly-in-Malaysia-Insider-TradingThe Malaysian High Court recently ruled that the Securities Commission Malaysia (SC) had successfully proven its claim in a civil suit against former Deputy Chairman of Patimas Computers Berhad (Patimas), Raymond Yap, for insider trading.

The Judicial Commissioner ordered Yap to pay a sum of RM3.28 million, an amount three times the losses avoided by him as a result of the insider trading activity. Yap had disposed of 43,823,600 Patimas shares held by Law Siew Ngoh, former Managing Director of Patimas, from June to July 2012. The breach happened while Yap was in possession of non-public information related to audit queries and issues regarding suspicious transactions between Patimas and its top debtors. 

In addition, Raymond Yap was also ordered to pay the SC a civil penalty of RM1 million and barred from being a director of any publicly-listed company for five years, commencing 7 April 2022. Patimas was also delisted from Bursa Malaysia on 21 March 2014.

The enforcement of severe penalties (as shown in the Patimas case) demonstrates the intense scrutiny of regulators, including the Securities Commission in Malaysia, on insider trading and related activities right now.

 

Regulatory Changes Creating Clear Guidance

Regulatory-Compliance-Rising-Rapidly-in-Malaysia-Risk-AssessmentIn recent developments, the Central Bank of Malaysia (Bank Negara Malaysia) released Regulation and Guidance surrounding conduct risk. In particular, the Code of Conduct for Malaysia Wholesale Financial Markets (December 2021) and subsequent Wholesale Market Conduct Practices Guidance

The market conduct guidance urges wholesale financial market firms to prepare a market conduct risk assessment. This practice involves reviewing the firms’ products on offer, the likelihood and consequence of producing misconduct, and how to mitigate or control the impact. Many risk assessments have found that firms have various surveillance mechanisms but lack a proper risk assessment to gauge overall exposure. 

Bank Negara also describes ways in which your organisation can mitigate or manage potential misconduct risk once their risk assessment is completed, including:

Trade Surveillance

By monitoring dealers’ trading activities, you can detect patterns that warrant further scrutiny more effectively.

Technology solutions such as MyCompliance Office (MCO) Trade Surveillance Software can significantly help your firm, even without large volumes of trading activity, if you wish to move away from manual spreadsheets and processes to maintain and monitor internal activity. 

Communications Surveillance

This particularly involves monitoring dealers’ written and verbal communications to detect collusion (for example, what was seen globally with benchmark rigging) or the disclosure of confidential information. 

Guidance for Detective and Preventive Controls

Bank Negara continues its guidance by highlighting the importance of your internal control environment, including the usage of both detective and preventive controls. Bank Negara talks to:

Gifts and Entertainment

  • Robust policies and procedures should be implemented to identify and collate any gifts received or given by employees to clients or counterparties.
  • A central register should exist for ease of declaring all gift activities.
  • Perform periodic reviews of gifts and entertainment records to detect any irregularities or breaches of policy.

The MCO Gifts and Entertainment Manager module allows firms to record and detect risk within declared gifts and entertainment. It will enable your firm’s policies to be embedded with a rules-based approach to identifying potential misconduct and bribery risk.

Handling of Material Non-Public Information (MNPI) and Chinese Wall Policy

  • Regulatory-Compliance-Rising-Rapidly-in-Malaysia-Chinese-Wall-PolicyFirms often come across inside information that could be used to derive financial gain, particularly in capital markets, advisory, corporate lending and research departments. 
  • Your company needs suitable systems in place to handle the receipt of inside information, wall-crossings (Chinese wall management), and insider lists.
  • Further, these insiders must be tracked and monitored for any proprietary trading risk and personal account dealing management.
  • You need a distinct physical separation between insiders and other departments.

The MCO Material Non-Public Information and Inside Information module can give your firm confidence that you have documented receipt of inside information, wall crossings, and approval processes and can automate your insider list generation and restricted list management.

Personal Account Dealing

  • Your organisation needs the appropriate policies and procedures to deter employees from acting on inside information. 
  • Implement processes for pre-clearance for requests to trade, in particular for equities.
  • Ensure you can perform checks against restricted lists.

The MCO Personal Account Dealing module will help your firm automate the pre-clearance and post-trade review process to make monitoring personal trading activity much more efficient. This includes automatically checking against any internal restricted and watch lists, applying rules based on a user’s group (e.g. a ‘Has Inside Information’ group) and reconciling against trades after execution.

Conflicts of Interest

  • Your organisation should maintain a ‘Conflicts of Interest Register’ to identify potential conflicts in your business activities.
  • These registers should allow your business units to quickly assess the impact and likelihood of potential conflicts - and what the mitigating actions should be if a conflict occurred. Your register should be reviewed regularly, and when introducing new products, business activities, or changes in business. 

The MCO Know Your Risk Module will help your firm prepare a Conflicts of Interest register and facilitate regular reviews of business unit conflicts.

 

Compliance Rising in Malaysia

Regulatory-Compliance-Rising-Rapidly-in-Malaysia-MCO-SolutionAt MyComplianceOffice (MCO), we have seen increasing interest from Malaysia-based firms with regard to our Personal Trading and Control Room functionality.

It’s never been more vital for organisations to ensure material non-public information (MNPI) remains in compliance with securities laws and regulations within Malaysia. Unfortunately, many investment and compliance professionals are still using inefficient and error-prone methods to track insider lists, such as static spreadsheets and local files. The critical data contained often does not comply with standardised data management formats in line with regulatory guidelines.

MCO automates and standardises insider trading list management. Our solution identifies people who present potential conflicts due to the nature of their roles. Those with temporary NMPI visibility due to specific deals, corporate events, or publication of financial statements and profit warnings are also included. Compliance professionals can build and manage insider lists quickly and efficiently with our Insider & MNPI Management module.

As compliance continues rising in Malaysia, firms need to ensure they have the right processes and technologies to mitigate risk and avoid the severe penalties imposed for compliance breaches.

Request your demonstration of MCO to see how we can help you automate your compliance management, stay ahead of evolving regulations, and gain complete confidence in your risk reduction strategy.

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